10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

OR

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

For the transition period from ___________to ___________

Commission File No. 0-19842

PolyMedica Corporation

(Exact name of registrant as specified in its charter)

Massachusetts	04-3033368
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
11 State Street, Woburn, Massachusetts	01801
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (781)933-2020

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

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of November 4, 2005, there were 24,190,295 shares of the registrant’s Common Stock outstanding and an additional 3,932,448 shares held in treasury.

POLYMEDICA CORPORATION
TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30 and March 31, 2005		3
	Consolidated Statements of Income for the three and six months ended September 30, 2005 and 2004		5
	Consolidated Statements of Cash Flows for the six months ended September 30, 2005 and 2004		7
	Notes to Consolidated Financial Statements		9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		39
	PART II
Item 1.	Legal Proceedings		40
Item 2(c).	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		40
Item 4.	Submission of Matters to a Vote of Security Holders		41
Item 6.	Exhibits		42
Signatures			43
Exhibit Index			44
Ex-10.53 Form of Option Agreement
Ex-10.54 Form of Restricted Stock Agreement
Ex-10.55 Equity Purchase Agreement
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO & CFO

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

POLYMEDICA CORPORATION

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	Sept. 30,		March 31,
	2005		2005
ASSETS
Current assets:
Cash and cash equivalents	$	60,322	$	72,246
Marketable securities		—		6,804
Accounts receivable (net of allowances of $30,031 and $25,827 as of September 30 and March 31, 2005, respectively)		72,091		62,054
Inventories		37,293		25,730
Deferred income taxes		14,477		14,477
Income tax receivable		—		1,085
Prepaid expenses and other current assets		9,711		7,327
Current assets of discontinued operations		1,544		6,651
Total current assets		195,438		196,374
Property, plant and equipment, net		60,108		59,984
Goodwill		52,099		10,498
Intangible assets, net		27,949		14,954
Direct response advertising, net		87,311		78,499
Other assets		8,131		438
Long-term assets of discontinued operations		—		8,316
Total assets	$	431,036	$	369,063

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

POLYMEDICA CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)

	Sept. 30,			March 31,
	2005			2005
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	39,358		$	13,545
Accrued expenses		30,394			15,574
Current portion, capital lease obligations		570			559
Current liabilities of discontinued operations		2,224			3,588
Total current liabilities		72,546			33,266
Capital lease, note payable and other obligations		3,261			3,113
Long term credit facility		135,000			—
Deferred income taxes		31,659			31,659
Total liabilities		242,466			68,038
Shareholders’ equity:
Preferred stock, $0.01 par value; 2,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $0.01 par value; 50,000,000 shares authorized, 28,122,743 and 27,923,712 shares issued and outstanding as of September 30 and March 31, 2005, respectively		281			279
Treasury stock, at cost; 3,936,948 shares issued as of September 30, 2005 and no shares issued as of March 31, 2005		(148,848	)		—
Deferred compensation		(5,568	)		(476	)
Additional paid-in capital		166,058			162,837
Retained earnings		176,647			138,385
Total shareholders’ equity		188,570			301,025
Total liabilities and shareholders’ equity	$	431,036		$	369,063

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

PolyMedica Corporation

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2005			2004			2005			2004
Net revenues	$	116,427		$	92,096		$	218,955		$	183,652
Cost of sales		53,453			40,418			98,527			80,388
Gross margin		62,974			51,678			120,428			103,264
Selling, general and administrative expenses		46,285			41,485			88,322			78,618
Settlement charge		—			29,987			—			29,987
Income (loss) from continuing operations		16,689			(19,794	)		32,106			(5,341	)
Other income and expense:
Investment income		218			316			699			501
Interest expense		(1,106	)		(15	)		(1,274	)		(32	)
		(888	)		301			(575	)		469
Income (loss) from continuing operations before income taxes		15,801			(19,493	)		31,531			(4,872	)
Income tax provision/(benefit)		5,735			(7,716	)		11,516			(2,306	)
Income (loss) from continuing operations, net of income taxes		10,066			(11,777	)		20,015			(2,566	)
Discontinued operations:
Income from discontinued operations, net of income taxes		1,626			4,630			3,837			9,192
Gain on disposal of discontinued operations, net of income taxes of $15,379		22,243			—			22,243			—
Income from discontinued operations, net of income taxes		23,869			4,630			26,080			9,192
Net income (loss)	$	33,935		$	(7,147	)	$	46,095		$	6,626

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

PolyMedica Corporation
Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended					Six Months Ended
	Sept. 30,		Sept. 30,			Sept. 30,		Sept. 30,
	2005		2004			2005		2004
Income from continuing operations per weighted average share, basic	$	0.41	$	(0.43	)	$	0.76	$	(0.09	)
Income from discontinued operations per weighted average share, basic		0.07		0.17			0.15		0.33
Gain on disposal of discontinued operations per weighted average share, basic		0.91		—			0.85		—
Net income (loss) per weighted average share, basic		1.39		(0.26	)		1.76		0.24
Income from continuing operations per weighted average share, diluted		0.40		(0.43	)		0.75		(0.09	)
Income from discontinued operations per weighted average share, diluted		0.07		0.17			0.14		0.33
Gain on disposal of discontinued operations per weighted average share, diluted		0.89		—			0.83		—
Net income (loss) per weighted average share, diluted	$	1.36	$	(0.26	)	$	1.72	$	0.24
Weighted average shares, basic		24,473		27,275			26,224		27,073
Weighted average shares, diluted		25,053		27,832			26,748		27,680
Weighted average shares, diluted, used in the calculation of net loss per weighted average share		—		27,275			—		27,073

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

PolyMedica Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended
	September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	46,095		$	6,626
(Income) from discontinued operations		(3,837	)		(9,192	)
Gain on disposal of discontinued operations		(22,243	)		—
Adjustments to reconcile income from continuing operations to net cash flows:
Depreciation and amortization		6,657			3,877
Amortization of direct-response advertising		20,418			15,693
Direct-response advertising expenditures		(29,612	)		(22,229	)
Provision for bad debts		9,525			9,205
Provision for sales allowances/returns		7,946			7,031
(Gain)/loss on sale of equipment		(151	)		567
Stock-based compensation		579			—
Loss on impairment of direct-response advertising		382			—
Loss on impairment of customer list		—			152
Imputed interest on note payable		74			—
Changes in assets and liabilities excluding effects of acquisitions and dispositions:
Accounts receivable		(24,165	)		(3,230	)
Income tax receivable		1,085			(289	)
Inventories		(7,582	)		(10,011	)
Prepaid expenses and other assets		(2,848	)		(1,791	)
Accounts payable		19,443			(4,085	)
Accrued expenses and other liabilities		(1,278	)		30,497
Net cash flows provided by continuing operations		20,488			22,821
Net cash flows provided by discontinued operations		9,468			14,347
Net cash flows provided by operating activities		29,956			37,168
Cash flows from investing activities:
Purchase of marketable securities		(2,288	)		(7,954	)
Proceeds from maturing marketable securities		9,092			8,741
Proceeds from sale of businesses		42,269			—
Purchase of business		(55,335	)		—
Issuance of note receivable		(5,000	)		—
Purchase of property, plant and equipment		(4,082	)		(4,639	)
Purchase of patient lists		(5,210	)		(5,692	)
Proceeds from sale of equipment		545			—
Net cash flows (used for) continuing operations		(20,009	)		(9,544	)
Net cash flows (used for) discontinued operations		(101	)		(81	)
Net cash flows (used for) investing activities		(20,110	)		(9,625	)

7

PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

	Six Months Ended
	September 30,
	2005			2004
Cash flows from financing activities:
Proceeds from issuance of common and restricted stock		4,069			9,505
Proceeds from line of credit		135,000	)		—
Contributions to deferred compensation plans		(342	)		(95	)
Payment of costs for stock repurchase		(1,233	)		—
Repurchase of common stock		(150,000	)		—
Payment of dividends declared on common stock		(7,833	)		(8,107	)
Payment of debt issuance costs		(1,155	)		—
Payment of capital lease and note payable obligations		(276	)		(167	)
Net cash flows provided by (used for) continuing operations		(21,770	)		1,136
Net cash flows provided by discontinued operations		—			—
Net cash flows provided by (used for) financing activities		(21,770	)		1,136
Net change in cash and cash equivalents		(11,924	)		28,679
Cash and cash equivalents at beginning of period		72,246			69,229
Cash and cash equivalents at end of period	$	60,322		$	97,908
Supplemental disclosure of cash flow information:
Assets purchased under capital lease	$	—		$	979
Disposal of equipment		1,844			1,107

The accompanying notes are an integral part of these unaudited consolidated financial statements.

8

PolyMedica Corporation

Notes to Consolidated Financial Statements

1. Basis of Presentation

     Company

     PolyMedica Corporation was organized in 1988. Today, through our largest segment, Diabetes, we are a leading provider of direct-to-consumer diabetes testing supplies, primarily to seniors. We provide a simple and reliable way for our patients to obtain their supplies and medications. We communicate directly with our patients and their physicians on a regular basis and we bill Medicare and third-party insurers on their behalf. Through our Pharmacy segment, we sell prescription medications directly to existing Diabetes patients and their spouses. In September 2005, we sold the Women’s Health Products Division of our Pharmacy segment, which manufactured and sold prescription and over-the-counter urology products to distributors and retailers. On July 22, 2005, our Board of Directors voted to dispose of the Liberty Respiratory segment and we have therefore reclassified the operating results, cash flows and applicable assets and liabilities of these businesses into discontinued operations.

     We market our diabetes products directly to consumers primarily through targeted direct-response television advertising. Our patient service representatives are specifically trained to communicate with seniors, helping them to follow their doctors’ orders and manage their chronic disease. Our operating platforms enable us to efficiently collect and process required documents from physicians and patients and bill and collect amounts due from Medicare, other third party payers and directly from patients. We believe that our proactive approach to diabetes management helps reduce the long-term complications and cost of the disease. Our innovative and effective means of servicing these patients by putting their needs first has generated a loyal patient base and resulted in strong brand recognition of the Liberty name and significant revenue growth since our acquisition of Liberty Medical Supply, Inc. (“Liberty”) in 1996.

     Accounting

     The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. These consolidated financial statements include the accounts of PolyMedica and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the results as of and for the periods ended September 30, 2005 and 2004.

     The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended March 31, 2005 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 13, 2005 and our unaudited consolidated financial statements included in our Quarterly Report on Form 10-Q for the period ended June 30, 2005 filed with the SEC on August 9, 2005. Consequently, the interim consolidated financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America for annual audited financial statements. As a result of the sale of our Women’s Health Products Division to Amerifit Nutrition, Inc. on September 30, 2005 and our Board of Director’s vote in the quarter ended September 30, 2005 to dispose of our Liberty Respiratory business, we have reclassified the operating results and applicable cash flows, assets and liabilities of our Liberty Respiratory segment and Women’s Health Products Division as discontinued operations for all periods presented in the accompanying financial statements.

9

PolyMedica Corporation
Notes to Consolidated Financial Statements

     Revenue Recognition and Accounts Receivable

     We recognize revenue related to product sales to patients who have placed orders upon shipment of such orders, provided that risk of loss has passed to the patient and we have received and verified any written documentation required to bill Medicare, other third-party payers, and patients. We record revenue at the amounts expected to be collected from Medicare, other third-party payers, and directly from patients. Our billing system generates contractual adjustments for all but one reporting unit based on government and third-party fee schedules for each product shipment; as a result, estimates of contractual adjustments are not required. For the reporting unit whose billing system is unable to record revenue equal to the government or third-party fee schedules, we record a contractual adjustment equal to the difference between the reimbursement amounts defined in the fee schedule and the revenue recorded per the billing system. This adjustment is recorded as a reduction of both gross revenues and accounts receivable. Revenue recognition is delayed for product shipments for which we have not yet received the required written documentation until the period in which those documents are collected and verified.

     Revenue related to Medicare reimbursement is calculated based on government-determined reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined prices for reimbursable supplies, and we bill the remaining balance to either third-party payers or directly to patients.

     Approximately $68.22 million and $58.17 million, or 58.6% and 63.2% of consolidated net revenues for continuing operations for the three months ended September 30, 2005 and 2004, respectively, were reimbursable by Medicare for products provided to Medicare beneficiaries. For the six months ended September 30, 2005 and 2004, approximately $131.08 million and $118.05 million, or 59.9% and 64.3% of consolidated net revenues, respectively, were reimbursable by Medicare for products provided to Medicare beneficiaries.

     Accounts receivable allowances consist of an allowance for doubtful accounts, an allowance for product returns, and other sales allowances. As of September 30 and March 31, 2005, accounts receivable allowances were $30.03 million and $25.83 million, respectively, or 29.4% of gross accounts receivable as of September 30 and March 31, 2005.

     The valuation of accounts receivable is based upon the credit-worthiness of patients and third-party payers as well as our historical collection experience. Allowances for doubtful accounts are recorded as a selling, general and administrative expense for estimated amounts expected to be uncollectible from third-party payers and patients. We base our estimates on our historical collection and write-off experience, current trends, credit policy, and on our analysis of accounts receivable by aging category.

     Our accounts receivable are generally due from Medicare, private insurance companies, Medicaid and our patients. The collection process is time consuming, complex and typically involves the submission of claims to multiple payers whose payment of claims may be contingent upon the payment of another payer. As a result, our collection efforts may be active up to 18 months from the initial billing date. Balances that are determined to be uncollectible prior to the passage of 18 months from the last billing date are written off as soon as administratively possible after that determination has been made. In accordance with applicable regulatory requirements, we make reasonable and appropriate efforts to collect our accounts receivable, including deductible and copayment amounts, in a consistent manner for all payer classes. During the three months ended September 30, 2005 and 2004, we provided for allowances for doubtful accounts at a rate of approximately 4.3% and 5.0% of net revenues, respectively, comparable to the 4.4% and 5.0% of net revenues provided for in the six months ended September 30, 2005 and 2004, respectively.

     Sales allowances are recorded for estimated product returns, as well as estimated claim denials, as a reduction of revenue. We analyze sales allowances using historical data adjusted for significant changes in volume, patient demographics, and business conditions. The reserve for sales allowances and the rate at which we provide for such allowances are periodically adjusted to reflect actual returns and claim denials. During the three months ended September 30, 2005 and 2004, we provided for sales allowances at a rate of approximately 3.5% and 3.8% of gross revenues, respectively. During the six months ended September 30, 2005 and 2004, we provided for sales allowances at a rate of approximately 3.5% and 3.7% of gross revenues, respectively.

10

PolyMedica Corporation
Notes to Consolidated Financial Statements

     Accounting for Stock-Based Compensation

     Currently, PolyMedica accounts for its stock-based compensation plan under the recognition and measurement principles of APB 25, “Accounting for Stock Issued to Employees” and related Interpretations. We have adopted the disclosure-only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure”, an amendment of SFAS 123. Therefore, no stock-based employee compensation cost is reflected in net income for stock option issuances, as all options granted under our existing stock options plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

	Three months ended						Six months ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
(in thousands, except per share data)	2005			2004			2005			2004
Income (loss) from continuing operations, net of income taxes	$	10,066		$	(11,777	)	$	20,015		$	(2,566	)
Add back: Stock compensation costs, net of tax, on restricted stock granted below fair market value		259			—			367			—
Less: Stock compensation costs, net of tax, had all employee options and restricted stock been recorded at fair value		(2,321	)		(1,781	)		(3,926	)		(2,668	)
Adjusted income (loss) from continuing operations, net of income taxes	$	8,004		$	(13,558	)	$	16,456		$	(5,234	)
Income (loss) from continuing operations, per weighted average share, basic, as reported	$	0.41		$	(0.43	)	$	0.76		$	(0.09	)
Income (loss) from continuing operations per weighted average share, diluted, as reported	$	0.40		$	(0.43	)	$	0.75		$	(0.09	)
Adjusted income (loss) from continuing operations per weighted average share, basic	$	0.33		$	(0.50	)	$	0.63		$	(0.19	)
Adjusted income (loss) from continuing operations per weighted average share, diluted	$	0.32		$	(0.50	)	$	0.62		$	(0.19	)

     Effective October 1, 2004, we changed our assumptions for the expected volatility and expected life. The decline in the expected life in the first quarter of fiscal 2006 to 3.75 years compared to the prior year was due to a change in current exercise patterns. Correspondingly, the drop in our volatility assumption from approximately 86% effective for the quarter ended September 30, 2004, to approximately 39% in the quarter ended September 30, 2005, was due to a change in the market valuation of our stock, which in recent periods has been substantially less volatile. We expect that our volatility and expected life assumptions in the remainder of fiscal 2006 will be comparable to our results reported for the six months ended September 30, 2005.

11

PolyMedica Corporation
Notes to Consolidated Financial Statements

     The fair value of each option granted during the three and six months ended September 30, 2005 and 2004 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three months ended						Six months ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2005			2004			2005			2004
Dividend yield		1.67	%		2.01	%		1.70	%		1.99	%
Expected volatility		38.67	%		86.13	%		42.65	%		86.44	%
Risk-free interest rate		3.91	%		3.33	%		3.83	%		3.41	%
Expected life		3.75			5.0			3.75			5.0

	Three months ended				Six months ended
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
	2005		2004		2005		2004
Weighted average fair value of options granted	$	35.93	$	18.28	$	35.23	$	18.46
Weighted average fair value of Employee Stock Purchase Plan rights granted below fair value		—		—	$	6.43	$	9.67

2. Business Acquisitions

     On August 26, 2005 we acquired all of the equity interests of National Diabetic Pharmacies, Inc. (“NDP”) for an aggregate purchase price of $56.06 million including transaction costs, or $55.34 million excluding the $723,000 of NDP cash acquired through the transaction. NDP is a market-leading provider of diabetes products and disease management services to over 113,000 patients and more than half of their patients came from programs they established with managed care organizations and employers. NDP operates a call center and distribution facility in Salem, VA and employs approximately 275 employees. The results of NDP’s operations since the August 26, 2005 acquisition have been included in the consolidated financial statements as part of the Diabetes segment.

     The transaction was accounted for under the purchase method of accounting and accordingly, the assets and liabilities acquired were recorded at their estimated fair values as of the effective date of the acquisition. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $41.66 million has been allocated to goodwill, all of which is amortizable for tax purposes. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (table in thousands):

Cash and cash equivalents	$	723
Accounts receivable, net		4,924
Prepaid expenses and other assets		653
Inventory		3,980
Property, plant and equipment, net		898
Intangible assets, net		10,650
Goodwill		41,660
Total assets acquired	$	63,488

12

PolyMedica Corporation
Notes to Consolidated Financial Statements

Accounts payable	$	6,370
Accrued expenses		1,060
Total liabilities assumed		7,430
Net assets acquired	$	56,058

     Of the $10.65 million allocated to intangible assets, $6.23 million is attributable to contracts with managed care organizations and $4.42 million is attributable to patient lists. The value of the contracts with managed care organizations will be amortized over the estimated life of the contracts, ranging from 5 to 9 years. The patient lists will be amortized on an accelerated basis over a four-year period. The amortization rate is such that 32% is expensed over the first year with the remaining 68% expensed on a straight-line basis over the following 3 years.

     The following table presents the consolidated results of continuing operations on an unaudited pro forma basis as if the acquisition of NDP had taken place at the beginning of the periods presented. The following table has been prepared on the basis of estimates and assumptions available at the time of this filing that we believe are reasonable.

	Three months ended					Six months ended
	Sept. 30,		Sept. 30,			Sept. 30,		Sept. 30,
(in thousands)	2005		2004			2005		2004
Net revenues	$	126,035	$	109,442		$	245,817	$	217,340
Income (loss) from continuing operations, net of income taxes	$	9,614	$	(11,338	)	$	19,822	$	(2,168	)
Income (loss) from continuing operations per weighted average share, diluted	$	0.38	$	(0.42	)	$	0.74	$	(0.08	)

     The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the periods presented or the results which may occur in the future.

3. Discontinued Operations

     In the quarter ended September 30, 2005, we reclassified the results of our Women’s Health Products Division and Liberty Respiratory segment to discontinued operations. On September 30, 2005, we announced the sale of our Woburn-based Women’s Health Products Division, which manufactured and sold prescription and over-the-counter urology products to distributors and retailers, to Amerifit Nutrition, Inc. (“Amerifit”) for a purchase price, net of transaction costs, of $42.27 million. Net of the assets and liabilities assumed by Amerifit in the transaction, we recorded a gain on the sale, net of income taxes, of $22.24 million. On July 22, 2005, our Board of Directors voted to dispose of the Liberty Respiratory segment. As a result, we have reclassified the operating results, including the gain recognized on the sale of the Women’s Health Products Division, net of income taxes, cash flows and applicable assets and liabilities of both our Liberty Respiratory segment and Women’s Health Products Division to discontinued operations for all periods presented.

     We recorded the following activity related to our discontinued operations excluding the gain recognized on the sale for the periods presented.

	Three months ended				Six months ended
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
	2005		2004		2005		2004
Income from discontinued operations, before income taxes	$	2,676	$	7,457	$	6,247	$	14,767
Income tax provision		1,050		2,827		2,410		5,575
Income from discontinued operations, net of income taxes	$	1,626	$	4,630	$	3,837	$	9,192

     We currently expect to sell the inventory and patient list of our Liberty Respiratory segment by March 31, 2006, the end of our fiscal year. This segment generated the following operating results for the periods presented:

	Three months ended				Six months ended
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
(in thousands)	2005		2004		2005		2004
Net revenues	$	9,426	$	14,702	$	20,185	$	30,484
Income before income taxes	$	1,059	$	5,642	$	3,565	$	11,568

13

PolyMedica Corporation
Notes to Consolidated Financial Statements

4. Inventories

     Inventories consist of the following:

	Sept. 30,		March 31,
(in thousands)	2005		2005
Raw materials	$	496	$	345
Work in process		55		29
Finished goods		36,742		25,356
	$	37,293	$	25,730

     Due to the medical nature of the products we provide, patients frequently request supplies before we have received all required written documents, if applicable, to bill Medicare, other third-party payers and patients. Because we do not recognize revenue until we have received and verified such documents, included in inventories as of September 30 and March 31, 2005, is $3.74 million and $3.23 million, respectively, of inventory shipped to patients for which we have received an order but have not yet received and verified the required documentation, if applicable, to bill Medicare, other third-party payers and patients, and to recognize revenue.

5. Goodwill and Other Intangible Assets

     The carrying amounts of goodwill and intangible assets, excluding direct-response advertising, as of September 30 and March 31, 2005, by reportable segment, were as follows:

	Sept. 30,			March 31,
(in thousands)	2005			2005
Goodwill:
Diabetes	$	52,099		$	10,498
Intangible assets:
Diabetes patient lists	$	28,620		$	18,990
Diabetes managed care contracts		6,230			—
Accumulated amortization		(6,901	)		(4,036	)
Total consolidated intangible assets, net	$	27,949		$	14,954

     Of the total $9.63 million of patient lists acquired in the six months ended September 30, 2005, $4.42 million represents the fair value assigned to patient lists in the acquisition of NDP and $5.21 million represents the value of patient lists purchased from other diabetes supply companies. The patient lists are amortized on an accelerated basis over a four-year period. The amortization rate is such that 32% is expensed over the first year and the remaining 68% is expensed on a straight-line basis over the following 3 years.

     The remaining $6.23 million of intangible assets as of September 30, 2005 represents the fair value assigned to managed care contracts acquired in connection with the purchase of NDP. The value of the contracts with managed care organizations is amortized over the estimated life of the contracts, ranging from 5 to 9 years.

14

PolyMedica Corporation
Notes to Consolidated Financial Statements

     Amortization expense for intangible assets was approximately $1.52 million and $336,000 for the three months ended September 30, 2005 and 2004, respectively, and approximately $2.87 million and $390,000 for the six months ended September 30, 2005 and 2004, respectively. As of September 30, 2005, amortization expense on existing intangible assets for the remainder of fiscal 2006 and the next four fiscal years is as follows (table in thousands):

2006	$	4,114
2007		7,423
2008		7,043
2009		5,476
2010 and thereafter		3,893
Total	$	27,949

6. Direct-Response Advertising

     In accordance with Statement of Position 93-7 (“SOP 93-7”), direct-response advertising and associated costs for our diabetes supplies and related products, included in the Diabetes segment for the periods presented are capitalized and amortized to selling, general and administrative expenses on an accelerated basis. The amortization rate is such that 32% is expensed over the first year with the remaining 68% expensed on a straight-line basis over the following 3 years. Management assesses the realizability of the amounts of direct-response advertising costs reported as assets at each balance sheet date by comparing the carrying amounts of such assets to the probable remaining future net cash flows expected to result directly from such advertising. Advertising that does not meet the capitalization requirements of SOP 93-7 is expensed in the current period.

     Any change in existing accounting rules or a business change that impacts expected net cash flows or that shortens the period over which such net cash flows are estimated to be realized, currently four years, could result in accelerated charges against our earnings. In addition, new or different marketing initiatives that may not qualify for direct-response advertising could result in accelerated charges against our earnings.

     We perform net realizable value tests of our direct-response advertising asset at each reporting period and whenever events or circumstance suggest that the carrying value may not be recoverable and record any impairment as a cost of continuing operations. Net realizable value is determined by comparing the carrying amounts of direct-response advertising costs capitalized as assets at each balance sheet date to the probable remaining future net cash flows expected to result directly from such advertising. If the carrying amount of the assets exceeds the probable remaining future net cash flows expected to result directly from such assets, an impairment loss is recognized in an amount equal to that excess.

15

PolyMedica Corporation
Notes to Consolidated Financial Statements

     In accordance with SOP 93-7, we recorded the following activity related to our direct-response advertising asset for the periods presented:

	Three months ended						Six months ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
(in thousands)	2005			2004			2005			2004
Capitalized direct-response advertising	$	14,345		$	11,676		$	29,612		$	22,229
Direct-response advertising amortization		(10,487	)		(9,059	)		(20,418	)		(18,097	)
Impairment of direct-response advertising		(324	)		—			(382	)		—
Increase in direct-response advertising asset, net		3,534			2,617			8,812			4,132
Beginning direct-response advertising asset, net		83,777			66,468			78,499			64,953
Ending direct-response advertising asset, net	$	87,311		$	69,085		$	87,311		$	69,085

     There is $963,000 and $2.41 million of direct-response advertising amortization included in the three and six months ended September 30, 2004, respectively, related to discontinued operations.

7. Accrued Expenses

     Accrued expenses consist of the following:

	Sept. 30,		March 31,
(In thousands)	2005		2005
Compensation and benefits	$	6,133	$	7,972
Income tax payable		17,609		—
Overpayments by Medicare and others		91		1,720
Other		6,561		5,882
	$	30,394	$	15,574

     As of September 30 and March 31, 2005, amounts accrued for compensation and benefits consisted primarily of earned, but unpaid employee compensation, severance accruals, and estimated bonus payments.

     As of September 30, 2005, income tax payable included an income tax provision of $15.38 million recorded on the gain recognized on the sale of the Women’s Health Products Division in the quarter ended September 30, 2005. As of September 30, 2005, there were also amounts accrued for audit and tax services, legal services, advertising and marketing, outside consulting and amounts due to Medicare.

     The government’s Medicare regulations are complex and sometimes subjective and therefore may require management’s interpretation. Accruals for overpayments by Medicare and others also occur in the normal course of business when, based on our assessment of the facts and circumstances, we believe that the amounts due are probable and reasonable.

16

PolyMedica Corporation
Notes to Consolidated Financial Statements

8. Commitments and Contingencies

Contingencies

     Class Action Lawsuit

     On November 27, 2000, Richard Bowe SEP-IRA filed a purported class action lawsuit in the United States District Court for the District of Massachusetts against PolyMedica and Steven J. Lee, PolyMedica’s former Chief Executive Officer and Chairman of the Board, on behalf of himself and purchasers of common stock. The lawsuit seeks an unspecified amount of damages, attorneys’ fees and costs and claims violations of Sections 10(b), 10b-5, and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), alleging various statements were misleading with respect to our revenue and earnings based on an alleged scheme to produce fictitious sales. Several virtually identical lawsuits were subsequently filed in the United States District Court for the District of Massachusetts against PolyMedica. On July 30, 2001, the Court granted the plaintiffs’ motion to consolidate the complaints under the caption In re: PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK.

     Plaintiffs filed a consolidated amended complaint on October 9, 2001. The consolidated amended complaint extended the class period to October 26, 1998 through August 21, 2001, and named as defendants PolyMedica, Liberty, and certain former officers of PolyMedica. Defendants moved to dismiss the consolidated amended complaint on December 10, 2001. Plaintiffs filed their opposition to this motion on February 11, 2002, and defendants filed a reply memorandum on March 11, 2002. The Court denied the motion without a hearing on May 10, 2002. On June 20, 2002, defendants filed answers to the consolidated amended complaint.

     On January 28, 2004, plaintiffs filed a motion for class certification to which defendants filed an opposition on February 27, 2004. Plaintiffs filed a reply memorandum on April 12, 2004 followed by additional briefing by the parties. The Court heard oral argument on the motion on June 2, 2004. On September 8, 2004, the court allowed the plaintiffs’ motion and certified the class. On September 21, 2004, the defendants filed a petition requesting that they be permitted to appeal the decision to the First Circuit Court of Appeals. The plaintiffs filed a response to the defendants’ petition on October 7, 2004 opposing defendants’ request to appeal the class certification. Also on October 7, 2004, the Court stayed sending notice of the class action pending a ruling on defendants’ appeal of class certification. On February 15, 2005, the First Circuit Court of Appeals granted defendants’ petition for leave to appeal the class certification decision. Defendants-appellants filed their brief on March 15, 2005, and plaintiffs-appellees filed an opposition on April 15, 2005. Defendants-appellants filed a reply brief on April 25, 2005. The First Circuit Court of Appeals heard oral argument on May 4, 2005 and took the matter under advisement. Discovery is ongoing in the underlying suit.

     We believe that we have meritorious defenses to the claims made in the consolidated amended complaint and intend to contest the claims vigorously. We are unable to express an opinion as to the likely outcome of this litigation. An unfavorable outcome that exceeds amounts recoverable through our director and officer insurance coverage could have a material adverse effect on our financial position and results of operations.

Commitments

     Our contractual obligations and off-balance sheet arrangements as set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the SEC on June 13, 2005, remained materially the same with the exception of a $1.38 million contract entered into with outside legal counsel in exchange for providing legal advice on healthcare compliance and regulatory matters over the next two years and a convertible note agreement entered into with a third-party diabetes product supplier. As stipulated in this convertible note agreement, which was signed along with a product supply agreement in August 2005, we agreed to fund $5.0 million to the supplier on the date of the agreement with future payment commitments totaling $10.0 million to be paid upon the supplier successfully completing the milestones set forth in the agreement.

17

PolyMedica Corporation
Notes to Consolidated Financial Statements

9. Note Payable and Credit Facility

Note payable

     In connection with the purchase of the assets of National Diabetic Assistance Corporation in January 2005, we issued a note payable of $2.25 million with a net present value of $2.03 million. In the three and six months ended September 30, 2005, approximately $28,000 and $74,000, respectively, of imputed interest expense was recorded, resulting in a net present value as of September 30, 2005 of $2.10 million. The expected term of the note is two years from the issuance date.

Credit facility

     On April 12, 2005, PolyMedica entered into an agreement with Bank of America, N.A., (“Bank of America”) as administrative agent, and several lenders, as subsequently amended on May 24, 2005 (“Credit Facility”). The Credit Facility permits PolyMedica to borrow up to $195 million under a five-year revolving credit facility. We must pay an annual commitment fee on the average daily unutilized commitment in the amount of .15% — .20%, determined by our consolidated leverage ratio (“Applicable Rate”). Borrowings under the Credit Facility are subject to interest at PolyMedica’s option, at either (1) the higher of Bank of America’s prime rate or the Federal Funds Rate plus .50%, payable quarterly, or (2) the one, two, three, or six-month period LIBOR rate, adjusted by the Applicable Rate, payable at contract termination, but not to exceed three months. The weighted average interest rate was 4.3% at September 30, 2005. A total origination fee of $1.10 million was paid and is being amortized to interest expense on a straight-line basis over the life of the Credit Facility. The revolving Credit Facility has a maturity date of April 11, 2010. As of September 30, 2005, we had $135 million in borrowings outstanding under the Credit Facility and had recorded $1.21 million of interest expense in the three and six months ended September 30, 2005. The Credit Facility contains several financial and other covenants and is secured by a pledge of the stock of PolyMedica’s wholly-owned subsidiaries. The Credit Facility limits the amount of indebtedness we may incur, requires us to maintain certain levels of net worth, leverage ratio and fixed charge coverage ratio, and restricts our ability to materially alter the character of the business. We continue to be in compliance with all of the covenants required by the Credit Facility.

10. Segment Information

     Our reportable segments are strategic business units or divisions that offer different products. These units have separate financial information that is evaluated by senior management. In the quarter ended September 30, 2005, we changed the titles of our existing reportable segments from Liberty Diabetes and Pharmaceuticals to Diabetes and Pharmacy, respectively. The reporting units within each reporting segment have not changed, with the exception of NDP, acquired on August 26, 2005, which we have added to our Diabetes segment. Our segments are as follows:

     Diabetes – Through our Diabetes segment, we provide diabetes testing supplies and related products to patients suffering from diabetes and related chronic diseases. We offer a wide array of diabetes supplies from a broad range of manufacturers.

     Pharmacy – Through our Pharmacy segment, we provide prescription medications directly to existing Diabetes patients and their spouses.

     Selling, general and administrative expenses attributable to PolyMedica’s corporate headquarters are allocated to each operating segment according to the segment’s relative percentage of total net revenues. Selling, general and administrative expenses incurred by Liberty Healthcare Group, Inc., part of the Diabetes segment, that were incurred on behalf of all of our businesses located in Florida for shared services, are allocated to each Liberty reporting unit primarily in accordance with the reporting unit’s relative percentage of total Liberty net revenues, employees and square footage in addition to management estimates. Segment assets belonging to PolyMedica’s corporate headquarters, which included $60.32 million and $79.05 million of cash, cash equivalents and marketable securities as of September 30 and March 31, 2005, respectively, are not allocated as they are considered separately for management evaluation purposes.

     As a result of these allocations, the segment information may not be indicative of the financial position or results of operations that would have been achieved had these segments operated as unaffiliated entities. The depreciation and amortization amounts below include amortization of direct-response advertising. We do not organize our units

18

PolyMedica Corporation
Notes to Consolidated Financial Statements

geographically, as our products are sold throughout the United States only. There are no intersegment sales for the periods presented. Information concerning the operations in these reportable segments is as follows:

	Three months ended					Six months ended
	Sept. 30,		Sept. 30,			Sept. 30,		Sept. 30,
(in thousands)	2005		2004			2005		2004
Net revenues:
Diabetes	$	95,346	$	76,581		$	178,516	$	155,031
Pharmacy		21,081		15,515			40,439		28,621
Total	$	116,427	$	92,096		$	218,955	$	183,652
Depreciation and amortization expense:
Diabetes	$	13,818	$	10,136		$	26,884	$	19,424
Pharmacy		97		83			191		146
Total	$	13,915	$	10,219		$	27,075	$	19,570
Income (loss) from continuing operations before income taxes:
Diabetes	$	13,596	$	11,291		$	27,429	$	26,031
Pharmacy		2,205		(797	)		4,102		(916	)
Settlement Charge		—		(29,987	)		—		(29,987	)
Total	$	15,801	$	(19,493	)	$	31,531	$	(4,872	)
						Sept. 30,		March 31,
							2005		2005
Segment assets:
Diabetes						$	338,894	$	240,739
Pharmacy							11,691		17,234
Corporate Headquarters							78,907		96,122
Discontinued Operations							1,544		14,968
Total						$	431,036	$	369,063

11. Shareholders’ Equity

     In the quarter ended September 30, 2005, we repurchased 4,000,000 shares at $37.50 per share for a total cost of $150 million plus transaction costs of $1.23 million related to the modified “Dutch Auction” tender offer, which closed on July 8, 2005. In the quarter ended September 30, 2005, we also paid a $0.15 per share cash dividend on 24,254,923 common shares outstanding for a total payment of $3.64 million to our common shareholders of record as of the close of business on August 5, 2005, as compared to a $0.15 per share cash dividend on 27,278,467 common shares outstanding for a total payment of $4.09 million to our common shareholders of record as of the close of business on August 5, 2004. In the six months ended September 30, 2005 and 2004, we paid total cash dividends of $7.83 million and $8.11 million, respectively to our common shareholders of record.

     At our Annual Meeting of Stockholders, held on September 23, 2005, our shareholders approved an amendment to our 2000 Stock Incentive Plan, increasing from 6,400,000 to 7,900,000 the number of shares available for issuance under the 2000 Stock Incentive Plan and limiting the aggregate number of shares of common stock that may be issued as restricted stock awards to 1,287,613.

     In the quarter ended September 30, 2005, 25,218 restricted shares of common stock were granted at a fair value of $35.70 per share and a par value of $0.01 per share under restricted stock agreements. In the six months ended September 30, 2005, a total of 162,718 restricted shares of common stock were granted. As of September 30, 2005, 4,687 shares from restricted stock grants issued in the fiscal year ended March 31, 2005 and in the six months ended

19

PolyMedica Corporation
Notes to Consolidated Financial Statements

September 30, 2005, had vested and were considered issued and outstanding as of September 30, 2005. Restricted stock amortization of $406,000 and $579,000 was recorded in the three and six months ended September 30, 2005, respectively, with a remaining deferred compensation value of $5.57 million to be amortized over the remainder of fiscal 2006 and the next four fiscal years as follows (table in thousands):

2006	$	1,103
2007		1,744
2008		1,316
2009		1,222
2010		183
Total	$	5,568

12. Calculations of Earnings Per Share

Calculations of earnings per share are as follows:

	Three months ended					Six months ended
	Sept. 30,		Sept. 30,			Sept. 30,		Sept. 30,
(In thousands, except per share data)	2005		2004			2005		2004
Income (loss) from continuing operations, net of income taxes	$	10,066	$	(11,777	)	$	20,015	$	(2,566	)
BASIC:
Weighted average common stock outstanding, net of treasury stock, end of period		24,473		27,275			26,224		27,073
Net income (loss) from continuing operations per weighted average share, basic	$	0.41	$	(0.43	)	$	0.76	$	(0.09	)
DILUTED:
Weighted average common stock outstanding, net of treasury stock, end of period		24,473		27,275			26,224		27,073
Weighted average dilutive common stock equivalents		580		—			524		—
Weighted average common stock and dilutive common stock equivalents outstanding, net of treasury stock		25,053		27,275			26,748		27,073
Income (loss) from continuing operations, net of income taxes, per weighted average share, diluted	$	0.40	$	(0.43	)	$	0.75	$	(0.09	)

     Potentially Dilutive Stock Options

     Options to purchase shares of common stock with exercise prices in excess of the average market price of the common shares are not included in the computation of diluted earnings per share. There were 72,300 and 236,000 options not included in the diluted earnings per share computation as of September 30, 2005 and 2004, respectively. During the six months ended September 30, 2005 and 2004, options to purchase 1.22 million and 756,000 shares of common stock, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

13. Comprehensive Income

     Our total comprehensive income is equal to our net income for the three and six months ended September 30, 2005 and 2004. Unrealized gains (losses) on investments were not material for any periods presented.

20

PolyMedica Corporation
Notes to Consolidated Financial Statements

14. Subsequent Events

     On October 26, 2005, we announced that our Board declared a $0.15 per share cash dividend to PolyMedica common shareholders of record as of the close of business on November 7, 2005, payable on November 15, 2005.

     On October 28, 2005, PolyMedica’s Board of Directors increased the number of shares of common stock included in our Share Repurchase Program (the “Program”) by 742,000 shares such that the aggregate number of shares available under the Program for repurchase by PolyMedica is 2,000,000. Such shares are to be repurchased in the open market in accordance with SEC Rule 10b-18.

21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Future Operating Results

     Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including those detailed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Future Operating Results.”

     In addition, any forward-looking statements represent our view only as of the day this Quarterly Report on Form 10-Q was first filed with the SEC and should not be relied upon as representing our view as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

Overview

     PolyMedica Corporation was organized in 1988. Today, through our largest segment, Diabetes, we are a leading provider of direct-to-consumer diabetes testing supplies, primarily to seniors. We provide a simple and reliable way for our patients to obtain their supplies and medications. We communicate directly with our patients and their physicians regarding patients’ prescriptions and testing regiment on a regular basis and we bill Medicare and third-party insurers on behalf of our patients. Through our Pharmacy segment, we sell prescription medications directly to existing Diabetes patients and their spouses. On September 30, 2005, we sold our Women’s Health Products Division, which manufactured and sold prescription and over-the-counter urology products to distributors and retailers.

     Diabetes

     Through our Diabetes segment we provide diabetes testing supplies and related products to our patients suffering from diabetes. During the quarter ended September 30, 2005 we acquired NDP. NDP is a market-leading provider of diabetes products and disease management services to over 113,000 patients and more than half of NDP’s patients derived from programs it established with managed care organizations and employers. As of September 30, 2005, we served approximately 852,000 active diabetes patients, compared to approximately 654,000 active patients as of September 30, 2004. Approximately 90.0% of our Diabetes patients are covered by Medicare. We meet the needs of our diabetes patients by:

— providing mail order delivery of supplies directly to our patients’ homes;

— billing Medicare and/or private insurance companies directly for those diabetes related supplies that are reimbursable;

— providing 24-hour telephone support to patients; and

— using sophisticated software and advanced order fulfillment systems to provide diabetes related products.

     Sales from this segment represented 81.9% and 83.2% of total net revenues for the quarters ended September 30, 2005 and 2004. Sales from this segment represented 81.5% and 84.4% of total net revenues for the six months ended September 30, 2005 and 2004, respectively, making it our largest operating segment.

     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”), which was signed into law on December 8, 2003, froze for the 2004 calendar year the reimbursement rates for diabetes testing supplies at the rates that were in effect for the 2003 calendar year. As of January 1, 2005, reimbursement rates for diabetes test strips and lancets were reduced by the percentage difference between the median amounts paid by the Federal Employees Health Benefit Program in the 2002 calendar year and the amount reimbursed by the Medicare

22

program in the 2002 calendar year. The maximum downward adjustment for test strips and lancets for calendar year 2005 is 4.1% for diabetes test strips and 5.36% for lancets, but the actual percentage decrease in payment amounts for any particular provider will depend on the geographic distribution of its patients. During the six months ended September 30, 2005, we experienced a 2.7% reduction in Medicare reimbursement for diabetes test strips and lancets, resulting in a decrease in net revenues of approximately $3.90 million as a result of this legislation. We expect the 2.7% reimbursement reduction percentage to remain comparable for the remainder of fiscal 2006. No further adjustments in reimbursement rates for test strips and lancets are expected through the end of calendar year 2006.

     The Medicare Modernization Act also contains provisions that may have a positive effect on the future performance of our Diabetes segment. Beginning January 1, 2005, Medicare coverage has been provided for an initial physical examination and for regular diabetes screening tests. This coverage may increase the incidence of diagnosis of diabetes and potentially expand the Medicare market for testing supplies and other diabetes products. While the benefit resulting from Medicare reimbursement for the costs of regular diabetes screening tests and initial physical examinations is difficult to quantify, we do not believe it materially benefited our results of operations in the six months ended September 30, 2005, but expect that it will contribute toward the expansion of our patient base going forward as the population of diagnosed diabetics will likely increase as a result of Medicare reimbursement for such testing.

     In addition, the Medicare Modernization Act provides for coverage of insulin and syringes beginning January 1, 2006. The Medicare Modernization Act further establishes a program for competitive bidding of certain durable medical equipment items, expected to include diabetes test strips, beginning January 1, 2007. The program is expected to be implemented in the ten largest metropolitan areas in 2007 and then gradually implemented in less concentrated areas of the United States. If the Diabetes segment is excluded from the bid award or the bid does not place value on Liberty’s patient service model, the operating results of the Diabetes segment could be negatively affected.

     Pharmacy

     Through our Pharmacy segment, we market and sell prescription medications primarily to existing Diabetes patients and their spouses.

     The Medicare Modernization Act also provides for a voluntary prescription drug benefit, the Medicare Prescription Drug program (“Part D”), which gives beneficiaries access to prescription drug coverage. Currently patients that are not covered by the Federal Employee Program, which we refer to as FEP, or another commercial insurance plan, pay in cash at the time of purchase. Beginning January 1, 2006, coverage will be available through both prescription drug plans and Medicare advantage-prescription drug plans. This new benefit will include coverage for prescription drugs, as well as insulin and syringes. Our strategy is to expand our Pharmacy business by focusing our efforts to increase revenues to our over 852,000 patients that currently order diabetes and pharmacy supplies from us.

     In December 2003, the service benefit administrator of FEP notified our Pharmacy business and other durable medical equipment suppliers that as of February 1, 2004 certain supplies and medications would only be reimbursable through FEP’s pharmacy benefit administrator. The service benefit administrator subsequently notified us that any reimbursement change, if one were to be implemented, would be subsequent to January 1, 2005. A change in reimbursement, such as processing these supplies and medications as a pharmacy benefit, would result in increased costs to some of our FEP patients as well as lower reimbursement rates to us. We have not as yet experienced a cut in FEP reimbursement. We are unable to assess the impact of the reimbursement cuts FEP has alluded to until the nature and magnitude of the cuts have been clearly defined. The FEP program comprised approximately 58% and 59% of the Pharmacy segment’s net revenues for the three and six months ended September 30, 2005.

23

Critical Accounting Policies

     There have been no material changes in our critical accounting policies from those set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the SEC on June 13, 2005.

Other

     Advertising rates may fluctuate during the year, which may affect our acquisition of new patients. We may purchase less advertising when rates are higher, which generally occurs in November and December. As a result, our acquisition of new patients during this period is generally reduced and our net revenues may fluctuate accordingly.

     We operate from distribution facilities located in Florida and Virginia, while our Corporate headquarters are located in Massachusetts. Virtually all of our product sales are denominated in U.S. dollars.

     Period-to-period comparisons of changes in net revenues are not necessarily indicative of results to be expected for any future period.

24

Results of Operations

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

     Net Revenues

     The following table presents segment net revenues expressed as a percentage of net revenues for the three months ended September 30, 2005 and 2004.

	Three Months Ended September 30,
	2005					2004
	Net		% Net			Net		% Net
(in thousands)	Revenues		Revenues			Revenues		Revenues			% Change
Diabetes	$	95,346		81.9	%	$	76,581		83.1	%		24.5	%
Pharmacy		21,081		18.1			15,515		16.9			35.9
Total net revenues	$	116,427		100.0	%	$	92,096		100.0	%		26.4	%

     The increase in Diabetes net revenues was due primarily to the 30.3% net growth in our patient base to approximately 852,000 active diabetes patients, as compared with approximately 654,000 active diabetes patients as of September 30, 2004. In the twelve months ended September 30, 2005, we added approximately 337,000 new patients from acquisitions and direct-response advertising, less attrition of approximately 139,000 patients or 21.3% of the active patient base as of September 30, 2004. In addition, net revenues reported in the quarter ended September 30, 2004 were adversely impacted by the disruption caused by the two hurricanes sustained by our Florida-based facilities. Management estimates that the adverse net revenue impact from the hurricanes in the three months ended September 30, 2004 was approximately $3.60 million.

     Net revenue growth generated from the patient growth was reduced by a 2.7% cut in Medicare reimbursement for diabetes test strips and lancets effective January 1, 2005, which reduced net revenues by approximately $2.0 million in the quarter ended September 30, 2005. The lower reimbursement rates for diabetes test strips and lancets, effective January 1, 2005 as implemented through the Medicare Modernization Act, are expected to remain in effect through the end of calendar 2006.

     The increase in Pharmacy net revenues was due primarily to an increase in orders from 99,675 to 113,000, an increase of 13.3% from a year ago, coupled with a 19.9% increase in the average revenue per order. The primary sources of reimbursement in the Pharmacy segment are currently FEP and patient self-pay. Patients without insurance coverage are required to pay for their medications at the time of purchase. Commencing January 1, 2006, Medicare coverage of prescription drugs will be available under the Medicare Modernization Act through both prescription drug plans and Medicare advantage prescription plans. Our strategy is to expand our Pharmacy business by focusing our efforts to increase revenues to our over 852,000 patients that currently order diabetes and pharmacy supplies from us.

25

     Gross Margin

     The following table presents segment gross margins and gross margin percentages for the three months ended September 30, 2005 and 2004.

	Three Months Ended September 30,
	2005					2004
	Gross		Gross			Gross		Gross
(in thousands)	Margin		Margin %			Margin		Margin %			% Change
Gross margin:
Diabetes	$	55,644		58.4	%	$	47,130		61.5	%		18.1	%
Pharmacy		7,330		34.8			4,548		29.3			61.2
Total gross margin	$	62,974		54.1	%	$	51,678		56.1	%		21.9	%

     Gross margin in the three months ended September 30, 2005, as compared with the three months ended September 30, 2004, decreased primarily as a result of our acquisition of NDP. NDP has historically recognized gross margins lower than the other reporting units of the Diabetes segment due primarily to higher supply costs and lower reimbursement levels. We are currently transitioning NDP contract pricing to Liberty’s more favorable pricing, however, we would expect to report gross margins for the Diabetes segment in the 55% to 57% range in the future. Although gross margins from NDP are lower than the other reporting units of the Diabetes segment, operating margins are similar, as NDP reports significantly lower advertising and bad debt expense. The increase in our Pharmacy gross margin was due primarily to a shift in product mix in the quarter ended September 30, 2005. The 35.9% increase in net revenues generated from our Pharmacy segment for which we have historically reported gross margin in the 30% range, lower than the consolidated average, also served to lower the overall gross margin.

     Selling, General and Administrative Expenses

	Three Months Ended September 30,
			% Net					% Net
(in thousands)	2005		Revenues			2004		Revenues
Reported selling, general and administrative expenses	$	46,285		39.8	%	$	41,485		45.1	%
Primary components of selling, general and administrative expenses:
Direct-response advertising amortization	$	10,487		9.0	%	$	8,097		8.8	%
Provision for doubtful accounts	$	4,953		4.3	%	$	4,602		5.0	%
Employee compensation	$	17,010		14.6	%	$	13,554		14.7	%

     Selling, general and administrative expenses as a percentage of net revenues decreased in the quarter ended September 30, 2005, as compared with the quarter ended September 30, 2004, primarily as a result of the acquisition of NDP, which reports significantly lower advertising and bad debt expense than our other businesses. In addition, during the quarter ended September 30, 2004, we recorded a one-time retirement compensation charge and hurricane-related expenses.

     Settlement Charge

     On November 3, 2004, we announced that we had entered into a civil settlement agreement with the United States Department of Justice and the OIG regarding those agencies’ investigations of Liberty and Liberty Home Pharmacy. Under the terms of the settlement agreement, we made a one-time payment of $35 million and admitted no wrongdoing. We accrued a charge of $29.99 million during the quarter ended September 30, 2004 to provide for the settlement amount and related costs, which was in addition to $5.71 million that was previously accrued for estimated overpayments by Medicare and others in the fiscal year ended March 31, 2004.

26

     Other income and expense

          The following table presents investment income earned on our cash, equivalents, restricted cash, marketable securities and deferred compensation plan balances as well as interest expense incurred in connection with debt borrowings for the periods presented.

	Three Months Ended September 30,
(in thousands)	2005			2004			$ Change			% Change
Investment income	$	218		$	316		$	(98	)		(31.0	)%
Interest expense	$	(1,106	)	$	(15	)	$	(1,091	)		(7273.3	)%

     The increase in interest expense incurred in the three months ended September 30, 2005, as compared with the three months ended September 30, 2004, related to interest incurred on $135 million in borrowings under the credit facility in the quarter ended September 30, 2005. We borrowed $80 million in connection with our $150 million stock repurchase that closed on July 8, 2005 and $55 million in connection with our acquisition of NDP on August 26, 2005.

     Income Taxes

     The following table presents the income tax provision and effective tax rates for the three months ended September 30, 2005 and 2004 for continuing operations.

	Three Months Ended September 30,
(in thousands)	2005			2004
Income tax provision (benefit)	$	5,735		$	(7,716	)
Effective tax rate		36.3	%		39.6	%

     The effective tax rates in the three months ended September 30, 2005 and 2004 were higher than the Federal U.S. statutory rates due primarily to state taxes. In the three months ended September 30, 2004, we recorded a pretax settlement charge of $29.99 million for which we recorded an income tax benefit at the full statutory federal and state rates. The effective tax rate for that quarter excluding the settlement charge was 36.7%, which is comparable to the effective tax rate in the current year. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to federal or state tax laws, future expansion into areas with varying state or local income tax rates, and the deductibility of certain costs and expenses by jurisdiction.

Six Months Ended September 30, 2005 Compared to Six Months Ended September 30, 2004

     Net Revenues

     The following table presents segment net revenues from continuing operations expressed as a percentage of net revenues for the six months ended September 30, 2005 and 2004.

	Six Months Ended September 30,
	2005					2004
	Net		% Net			Net		% Net
(in thousands)	Revenues		Revenues			Revenues		Revenues			% Change
Diabetes	$	178,516		81.5	%	$	155,031		84.4	%		15.2	%
Pharmacy		40,439		18.5			28,621		15.6			41.3
Total net revenues	$	218.955		100.0	%	$	183,652		100.0	%		19.2	%

27

     The increase in Diabetes net revenues was due primarily to the 30.3% net growth in our patient base to approximately 852,000 active diabetes patients, as compared with approximately 654,000 active diabetes patients as of September 30, 2004. In the twelve months ended September 30, 2005, we added approximately 337,000 new patients from acquisitions and direct-response advertising, less attrition of approximately 139,000 patients or 21.3% of the active patient base as of September 30, 2004. In addition, net revenues reported in the six months ended September 30, 2004 were adversely impacted by the disruption caused by the two hurricanes sustained by our Florida-based facilities. Management estimates that the adverse net revenue impact from the hurricanes in the six months ended September 30, 2004 was approximately $3.60 million.

     Net revenue growth generated from growth in the patient base in the six months ended September 30, 2005 was reduced by a 2.7% cut in Medicare reimbursement for diabetes test strips and lancets effective January 1, 2005, which reduced net revenues by approximately $3.90 million in the six months ended September 30, 2005. The lower reimbursement rates for diabetes test strips and lancets, effective January 1, 2005 as implemented through the Medicare Modernization Act, are expected to remain in effect through the end of calendar 2006.

     The increase in Pharmacy net revenues was due primarily to an increase in orders from 188,000 to 223,000, an increase of 18.6% from a year ago, coupled with a 19.3% increase in the average revenue per order. The primary sources of reimbursement in the Pharmacy segment are currently FEP and patient self-pay. Patients without insurance coverage are required to pay for their medications at the time of purchase. Commencing January 1, 2006, Medicare coverage of prescription drugs will be available under the Medicare Modernization Act through both prescription drug plans and Medicare advantage prescription plans. Our strategy is to expand our Pharmacy business by focusing our efforts to increase revenues to our over 852,000 patients that currently order diabetes and pharmacy supplies from us.

     Gross Margin

     The following table presents segment gross margins and gross margin percentages for the six months ended September 30, 2005 and 2004 for continuing operations.

	Six Months Ended September 30,
	2005					2004
	Gross		Gross			Gross		Gross
(in thousands)	Margin		Margin %			Margin		Margin %			% Change
Gross margin:
Diabetes	$	106,617		59.7	%	$	94,794		61.2	%		12.5	%
Pharmacy		13,811		34.2			8,470		29.6			63.1
Total gross margin	$	120,428		55.0	%	$	103,264		56.2	%		16.6	%

     Gross margin in the six months ended September 30, 2005, as compared with the six months ended September 30, 2004, decreased primarily as a result of our acquisition of NDP. NDP has historically recognized gross margins lower than the other reporting units of the Diabetes segment due primarily to higher supply costs and lower reimbursement levels. We are currently transitioning NDP contract pricing to Liberty’s more favorable pricing, however, we would expect to report gross margins for the Diabetes segment in the 55% to 57% range in the future. Although gross margins from NDP are lower than the other reporting units of the Diabetes segment, operating margins are similar, as NDP reports significantly lower advertising and bad debt expense. The increase in our Pharmacy gross margin was due primarily to a shift in product mix in the six months ended September 30, 2005. The 41.3% increase in net revenues generated from our Pharmacy segment for which we have historically reported gross margin in the 30% range, lower than the consolidated average, also served to lower the overall gross margin.

28

     Selling, General and Administrative Expenses

	Six Months Ended September 30,
			% Net					% Net
(in thousands)	2005		Revenues			2004		Revenues
Reported selling, general and administrative expenses	$	88,322		40.3	%	$	78,618		42.8	%
Primary components of selling, general and administrative expenses:
Direct-response advertising amortization	$	20,418		9.3	%	$	15,693		8.5	%
Provision for doubtful accounts	$	9,525		4.4	%	$	9,205		5.0	%
Employee compensation	$	31,714		14.5	%	$	27,202		14.8	%

     Selling, general and administrative expenses as a percentage of net revenues decreased in the six months ended September 30, 2005, as compared with the six months ended September 30, 2004, primarily as a result of the acquisition of NDP, which reports significantly lower advertising and bad debt expense than our other businesses. In addition, during the six months ended September 30, 2004, we recorded a one-time retirement compensation charge and hurricane-related expenses.

     Other income and expense

     The following table presents investment income earned on our cash, equivalents, restricted cash, marketable securities and deferred compensation plan balances as well as interest expense incurred in connection with debt borrowings for the periods presented.

	Six Months Ended September 30,
(in thousands)	2005			2004			$ Change			% Change
Investment income	$	699		$	501		$	198			39.5	%
Interest expense	$	(1,274	)	$	(32	)	$	(1,242	)		(3881.3	)%

     The increase in interest expense incurred in the six months ended September 30, 2005, as compared with the six months ended September 30, 2004, related to interest incurred on $135 million in borrowings under the credit facility in the quarter ended September 30, 2005. We borrowed $80 million in connection with our $150 million stock repurchase that closed on July 8, 2005 and $55 million in connection with our acquisition of NDP on August 26, 2005.

29

     Income Taxes

     The following table presents the income tax provision and effective tax rates for the six months ended September 30, 2005 and 2004 for continuing operations.

	Six Months Ended September 30,
(in thousands)	2005			2004
Income tax provision (benefit)	$	11,516		$	(2,306	)
Effective tax rate		36.5	%		47.3	%

     The effective tax rates in the six months ended September 30, 2005 and 2004 were higher than the Federal U.S. statutory rates due primarily to state taxes. In the six months ended September 30, 2004 we recorded a pretax settlement charge of $29.99 million for which we recorded an income tax benefit at the full statutory federal and state rates. The effective rate for the prior year excluding the settlement charge was 36.9%, which is comparable to the effective tax rate for the current year. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to federal or state tax laws, future expansion into areas with varying state or local income tax rates, and the deductibility of certain costs and expenses by jurisdiction.

Liquidity and Capital Resources

     The following table summarizes our sources and uses of cash during the six months ended September 30, 2005 and 2004.

	Six Months Ended September 30,
(in thousands)	2005			2004
Net cash provided by operating activities	$	29,956		$	37,168
Net cash used for investing activities		(20,110	)		(9,625	)
Net cash provided by (used for) financing activities		(21,770	)		1,136
Net change in cash and cash equivalents	$	(11,924	)	$	28,679

     Our cash and cash equivalents balance decreased $11.92 million from $72.25 million as of March 31, 2005 to $60.32 million as of September 30, 2005. The net decrease in cash and cash equivalents in the six months ended September 30, 2005, was largely driven by the repurchase of treasury stock for $150 million, for which we paid $70 million in cash and borrowed $80 million from the credit facility. This cash outflow was partially offset by $42.27 million in proceeds recognized from the sale of our Women’s Health Products Division.

     The growth of our business is currently funded through cash flow generated from operations as well as borrowings under our $195 million credit facility. The $7.21 million decrease in cash flow provided by operating activities was primarily driven by a $4.88 million decrease in cash flow generated from discontinued operations. In addition, cash flow provided by operating activities in the six months ended September 30, 2005 was adversely impacted by a $24.17 million increase in accounts receivable, which was partially offset by a $19.44 million increase in accounts payable. The increase in accounts receivable was primarily driven by the increase in consolidated net revenues of approximately 16.0% comparing the fourth quarter of fiscal 2005 with the quarter ended September 30, 2005. Days sales outstanding for the quarters ended March 31, 2005 and September 30, 2005 remained consistent at 56 days.

     Net cash flows used for investing activities increased by $10.49 million to $(20.11) million during the six months ended September 30, 2005 from $(9.62) million for the six months ended September 30, 2004. The increase in cash outflow was primarily due to the $55.34 million purchase of NDP, which was funded through borrowings from the credit facility. This cash outflow was partially offset by $42.27 million of net proceeds recognized from the sale of our Women’s Health Products Division on September 30, 2005. Other investing cash outflows consisted of a $5 million note

30

issued during the period ended September 30, 2005 to a third-party diabetes product supplier to assist in their product development.

     Net cash flows provided by financing activities decreased $22.91 million from a $1.14 million inflow in the six months ended September 30, 2004, to a $21.77 million outflow in the six months ended September 30, 2005. This decrease was due primarily to the $151.23 million incurred for the repurchase of 4,000,000 shares at $37.50 per share for a total cost of $150 million plus transaction costs related to the modified “Dutch Auction” tender offer, which closed on July 8, 2005. To fund the tender offer and the acquisition of NDP and certain patient lists, we borrowed $135 million under our $195 million five-year revolving credit facility during the quarter ended September 30, 2005. Subsequent to quarter end, we repaid $40 million of those borrowings. We also spent $1.16 million for the payment of debt issuance costs incurred to secure the $195 million credit facility. Other financing activities included a decrease in proceeds from the issuance of common and restricted stock and an increase in amounts set aside for executive deferred compensation plans in the six months ended September 30, 2005, as compared with the six months ended September 30, 2004.

     We believe that our ending cash, cash equivalents and marketable securities balance as of September 30, 2005 of approximately $60 million and cash flow generated by operations, will be sufficient to meet working capital, capital expenditure and financing needs, including the payment of dividends to shareholders. In the event that we undertake to make other acquisitions of complementary businesses, products or technologies, we may require substantial additional funding beyond currently available working capital, available credit facility funds, and funds generated from operations. Other factors, which could negatively affect our liquidity include, among other things, a reduction in the demand for our products, an unfavorable outcome of pending litigation, or additional reductions in Medicare reimbursement for our products.

     Our contractual obligations and off-balance sheet arrangements as set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the SEC on June 13, 2005, remained materially the same with the exception of a $1.38 million contract entered into with outside legal counsel in exchange for providing legal advice on healthcare compliance and regulatory matters over the next two years and a convertible note agreement entered into with a third-party diabetes product supplier. As stipulated in this convertible note agreement, which was signed along with a product supply agreement in August 2005, we agreed to fund $5.0 million to the supplier on the date of the agreement with future payment commitments totaling $10.0 million to be paid upon the supplier successfully completing the milestones set forth in the agreement.

New Accounting Pronouncements

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005, or our fiscal year commencing on April 1, 2006. The adoption of SFAS No. 151 is not expected to have a material impact on our consolidated financial statements.

     In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 123R requires that the cost of share-based compensation (including those with employees and non-employees) be recognized in the financial statements. SFAS 123R applies to all share-based compensation including shares, share options, and other equity instruments or that require settlement by the issuance of an entity’s shares or other equity instruments. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including the grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative.

     Statement 123R must be adopted for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not been issued. We will adopt SFAS 123R on April 1, 2006, the beginning of our 2007 fiscal year.

     As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123R cannot be predicted at this

31

time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to the consolidated financial statements. We currently use the Black-Scholes option-pricing model for the valuation of options under SFAS 123. We are currently assessing valuation model options to be used under SFAS 123R and have not yet determined which valuation model to apply to new option grants after the adoption of SFAS 123R. SFAS 123 also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows commencing in the quarter ending June 30, 2006. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $7.52 million, $9.18 million, and $1.56 million in fiscal 2005, 2004 and 2003, respectively.

     In December 2004, the FASB issued FAS No. 153, “Exchange of Nonmonetary Assets”, which is an amendment to APB Opinion No. 29. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of FAS No. 153, effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005, or our fiscal year commencing on April 1, 2006, is not expected to have a material impact on our financial position or results of operations.

32

Factors Affecting Future Operating Results

     Our future operating results remain difficult to predict. We continue to face many risks and uncertainties, which could affect our operating results, including without limitation, those described below.

We could experience significantly reduced revenues and profits if Medicare or other government programs change, delay or deny reimbursement

     Sales of a significant portion of our operating segments depend on the continued availability of reimbursement of our patients by government and private insurance plans. Any reduction in Medicare or other government program or private plan reimbursements currently available for our products would reduce our revenues. Certain significant reimbursement reductions that became effective January 1, 2005 under the Medicare Modernization Act are discussed in Item 2 of Part I “Overview.” Other future reimbursement reductions are possible. Without a corresponding reduction in the cost of such products, the result would be a reduction in our overall profit margin. Similarly, any increase in the cost of such products would reduce our overall profit margin unless there was a corresponding increase in Medicare or other government program reimbursement. Our profits also could be affected by the imposition of more stringent regulatory requirements for Medicare or other government program reimbursement or adjustments to previously reimbursed amounts.

     The Medicare Modernization Act also provides for a voluntary prescription drug benefit, the Medicare Prescription Drug program (“Part D”), which gives beneficiaries access to prescription drug coverage. The implementation of this benefit has yet to be clearly defined. Depending on the terms of the program’s implementation, the outcome could negatively impact the operating results of our Pharmacy segment.

     The Medicare Modernization Act further provides for a program for competitive bidding of certain durable medical equipment items, which could include diabetes test strips, beginning January 1, 2007 in the top ten metropolitan statistical areas. If the Diabetes segment is excluded from the bid award or the bid does not place value on Liberty’s patient service model, the operating results of the Diabetes segment could be negatively affected.

     As part of the civil settlement, on November 8, 2004 we entered into a five-year corporate integrity agreement. This agreement provides for an annual review of a sample of our Medicare claims by an independent review organization for a 5-year period, which could be reduced to a shorter period at the discretion of the OIG, and obligates us to continue our compliance program and the measures we have implemented to promote our compliance with Medicare regulations. Should the financial error rate of the sample reviewed by the independent review organization for any given period, exceed the acceptable error rate, we could be subject to a potentially material overpayment assessment for that period.

     The government’s Medicare regulations are complex and sometimes subjective and therefore may require management’s interpretation. Overpayments by Medicare and others occur in the normal course of business and reserves are recorded when, based upon our assessment of the facts and circumstance, we believe that the amounts due to Medicare and others are probable and estimable.

We are currently involved in litigation and could experience reduced net income if this litigation is not resolved in our favor

     PolyMedica and three former officers of PolyMedica are defendants in a lawsuit alleging violations of certain sections and rules of the Exchange Act, which was initiated in U.S. District Court for the District of Massachusetts in November 2000. PolyMedica believes it has meritorious defenses to the claims made against it in this action in which it is a defendant and intends to contest the claims vigorously. We cannot accurately predict the outcome of this proceeding at this time, and have therefore not recorded any charges relating to this proceeding. An unfavorable outcome could cause us to be liable for damages, which would reduce our net income in any such period. Our insurance may not provide adequate coverage for such damages. Please see Note 8 in Item 1 of Part I for a more complete description of this claim.

Failure to maintain effective internal control over financial reporting could result in a loss of investor confidence in our financial reports and have a material adverse effect on our stock price

     We must continue to document, test and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual reports by management regarding the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to management’s assessment and the effectiveness of the internal control. We have expended and expect that we will continue to expend significant time and resources documenting and testing our internal control over financial reporting. While management’s evaluation as of March 31, 2005 resulted in the conclusion that our internal control over financial reporting was effective as of that date, we cannot predict the outcome of testing in future

33

periods. If we conclude in future periods that our internal control over financial reporting is not effective, or if our independent registered public accounting firm is not able to render the required attestations, it could result in lost investor confidence in the accuracy, reliability and completeness of our financial reports. Any such events could have a material adverse effect on our stock price.

The market price of our common stock may experience substantial fluctuations for reasons over which we have little control.

     Our common stock is traded on the Nasdaq National Market System. The market price of our common stock could fluctuate substantially based on a variety of factors, including, among others:

— fluctuations in our quarterly results;

— announcements concerning us, our competitors, or manufacturers with whom we have relationships or the healthcare market;

— overall volatility of the stock market;

— changes in government regulations;

— changes in the financial estimates we provide to the market or estimates by analysts; and

— loss of key executives.

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

We plan to continue our expansion; if we do not manage our growth successfully, our growth and profitability may slow or stop

     The expansion of our operations has created significant demand on our administrative, operational and financial personnel and other resources. Additional expansion in existing or new markets could strain these resources and increase our need for capital. Our personnel, systems, procedures, controls and existing space may not be adequate to support further expansion.

Geopolitical events may reduce our ability to obtain favorable advertising rates for our direct-response advertising efforts, which may increase our expenses and/or lead to a reduction in revenues

     The effectiveness of our direct-response advertising is subject to the risks arising from geopolitical events. For example, around the clock news coverage on the war in Iraq and the war on terrorism affected our ability to obtain favorable rates for our product advertisements and thus affected our ability to obtain new patients since we reduced our advertising. Such geopolitical events may in the foreseeable future have a negative impact on our results of operations by increasing our expenses and/or leading to a reduction in our revenues.

The profitability of our Diabetes segment will decrease if we do not receive recurring orders from patients

     The profitability of our Diabetes segment depends in large part on recurring and sustained reorders. Reorder rates are inherently uncertain due to several factors, many of which are outside our control, including changing patient preferences, competitive price pressures, patient transition to extended care facilities, patient mortality and general economic conditions. We generally incur losses and negative cash flow with respect to the first order from a new patient, due primarily to the marketing and regulatory compliance costs associated with initial patient qualification.

34

We could experience significantly reduced profits from our Diabetes segment if new technologies that reduce or eliminate the need for consumable testing supplies are developed for glucose monitoring

     The majority of our Diabetes net revenues are from consumable testing supplies, used to draw and test small quantities of blood for the purpose of measuring and monitoring glucose levels. Numerous research efforts are underway to develop more convenient and less intrusive glucose measurement techniques. The commercialization and widespread acceptance of new technologies that eliminate or reduce the need for consumable testing supplies could negatively affect our Diabetes segment.

We could experience a charge to earnings as a result of an impairment of our goodwill or other intangible assets

     We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstance suggest that the carrying value of an asset may not be recoverable. The valuation of our goodwill and other intangible assets is based upon the results of these impairment tests. Changes in assumptions used and forecasted results of operations for the reporting unit carrying goodwill or other intangible assets, could affect the quantification of an impairment value, should one exist.

     Since our growth strategy may involve the acquisition of other companies, we may record additional goodwill in the future. The possible write-off of this goodwill could negatively impact our future earnings. We will also be required to allocate a portion of the purchase price of any acquisition to the value of non-competition agreements, patient base and contracts that are acquired. The amount allocated to these items could be amortized over a fairly short period. As a result, our earnings and the market price of our common stock could be negatively impacted.

We could be liable for harm caused by products that we sell and may incur significant expenses in connection with the defense of any product liability claims

     The sale of medical products entails the risk that users will make product liability claims. If any such product liability claim is successful, we could be liable for a significant amount of damages. Even if we are ultimately successful on the merits of any such claim, we could incur significant expenses in connection with the defense of any such claim. Our insurance may not provide adequate coverage for any such damages and/or expenses.

We could lose patients and revenues to new or existing competitors

     Competition from other sellers of products offered through our Diabetes and Pharmacy segments, manufacturers of healthcare products, pharmaceutical companies and other competitors is intense and expected to increase. Many of our competitors and potential competitors are large companies with well-known names and substantial resources. These companies may develop products and services that are more effective or less expensive than any that we are developing or selling. They may also promote and market these products more successfully than we promote and market our products.

Loss of use of data storage facilities could significantly reduce revenues and profits from our businesses

     We process and store most of our patient data in our facility in Port St. Lucie, Florida. If we cannot use any of these facilities as a result of the FDA, Occupational Safety and Health Administration or other regulatory action, fire, natural disaster or other event, our revenues and profits would decrease significantly. For example, as a result of the disruption caused by the two hurricanes sustained by our Port St. Lucie based facilities in 2004, excluding amounts that have been reimbursed to us under our property and casualty and business interruption insurance, we experienced reduced revenues of approximately $3.60 million and incurred losses in excess of $1.50 million.

If we or our suppliers do not comply with applicable government regulations, we may be prohibited from selling our products and/or may incur fines and other expenses

     The majority of the products that we sell are regulated by the FDA and other regulatory agencies. If any of these agencies mandate a suspension of production or sales of our products or mandate a recall, we may lose sales and incur fines and other expenses until we are in compliance with the regulations or change to another acceptable supplier.

35

We depend on key employees and the loss of a key employee could adversely affect our business.

     Our future performance will depend in part on the efforts and abilities of our key employees, and the loss of their services could have an adverse effect on our business. We have no key man life insurance policies on any of our employees.

Our quarterly revenues or operating results could vary, which may cause the market price of our securities to decline

     We have experienced fluctuations in our quarterly operating results and anticipate that such fluctuations could continue. Results may vary significantly depending on a number of factors, including:

— changes in reimbursement guidelines and amounts;

— changes in regulations affecting the healthcare industry;

— changes in suppliers;

— the timing of patient orders;

— the timing and cost of our advertising campaigns;

— the timing of the introduction or acceptance of new products offered by us or our competitors; and

— changes in the mix of our products; product costs are significantly influenced by the product brand chosen by the patients of our mail-order diabetes supply business. We provide a wide range of product brand choices to our patients, purchased at varying costs from suppliers. Our ability to sustain current gross margin levels is dependent both on our ability to continue securing favorable pricing from suppliers and on the brand choices of our patients.

A reduction in working capital or a change in our business could prevent us from paying dividends to shareholders

     A significant decline in our cash balances or a change in our business could cause us to reduce or eliminate the payment of dividends to shareholders.

We may make acquisitions that will strain our financial and operational resources

     We regularly review potential acquisitions of businesses’ products and assets. Acquisitions involve a number of risks that might adversely affect our financial and operational resources, including:

— diversion of the attention of senior management from important business matters;

— amortization of substantial intangible assets;

— difficulty in retaining key personnel of an acquired business;

— lack of adequate internal control over financial reporting;

— failure to assimilate operations of an acquired business;

— possible operating losses and expenses of an acquired business;

— exposure to legal claims for activities of an acquired business prior to acquisition; and

36

— incurrence of debt and related interest expense.

     We cannot guarantee that we would be able to obtain the intended benefits of any of these potential acquisitions. We could also require substantial capital resources to acquire complementary products or businesses. We cannot be certain that existing or additional financing would be available to us on acceptable terms, if at all.

We may issue preferred stock with rights senior to our common stock

     Our articles of organization authorize the issuance of up to 2,000,000 shares of preferred stock without shareholder approval. The shares may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our common stock. The rights and preferences of any such class or series of preferred stock would be established by our Board in its sole discretion.

37

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We own certain money market funds, commercial bonds and mutual funds that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is required to fund operations, investing or financing activities. None of the market-risk sensitive instruments held in our investment portfolio are held for trading purposes. We do, however, hold some market-risk sensitive instruments in our executive deferred compensation plans, for trading purposes. These investments are accounted for under SFAS No. 115, “Accounting for certain investments in Debt and Equity Securities.” The investments are recorded at fair value, and changes in fair value are recorded as compensation expense and investment income for the period. We do not own derivative financial instruments in our investment portfolio. We do not believe that the exposure to market risks in our investment portfolio is material.

38

Item 4. Controls and Procedures

(1) Disclosure controls and procedures

     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2005. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to PolyMedica, including its consolidated subsidiaries, is made known to PolyMedica’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by PolyMedica in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(2) Changes in internal controls

     No change in PolyMedica’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, PolyMedica’s internal control over financial reporting.

39

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

     Please refer to Item 3 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the SEC on June 13, 2005, for a complete description of our legal proceedings. There were no material developments regarding these legal proceedings during the six months ended September 30, 2005.

Item 2c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

	Total						Maximum Number of
	Number of		Average		Total Number of Shares		Shares that may yet
	Shares		Price Paid		Purchased as Part of Publicly		be Purchased under
	Purchased		per Share		Announced Plans or Programs		the Plans or Programs
(in thousands)
July		4,000,000	$	37.50		4,000,000		2,000,000
August		—		—		—		—
September		—		—		—		—
Total		4,000,000	$	37.50		4,000,000		2,000,000

40

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

          At our Annual Meeting of Stockholders held on September 23, 2005, the following proposals were submitted to a vote of our stockholders:

1. To elect the following three (3) nominee directors as Class II Directors of PolyMedica for the ensuing three years:

Nominees for Election as Directors:	FOR		WITHHELD
Thomas O. Pyle		21,467,631		1,204,439
Samuel L. Shanaman		21,804,716		867,354
Alan D. Solomont		22,199,257		472,813

2. To amend PolyMedica’s 2000 Stock Incentive Plan, increasing from 6,400,000 to 7,900,000 the number of shares available for issuance under the 2000 Stock Incentive Plan and limiting the aggregate number of shares of common stock that may be issued as restricted stock awards to 1,287,613:

FOR	AGAINST		ABSTAIN		BROKER NON-VOTES
11,226,549		6,239,452		431,213		4,774,856
3. To ratify the selection by the Board of PricewaterhouseCoopers LLP as PolyMedica’s public accountants for the fiscal year ending March 31, 2006:
FOR	AGAINST		ABSTAIN
22,099,915		534,706		37,449

41

Item 6. Exhibits

     See Exhibit Index immediately following this report, which is incorporated herein by reference.

42

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PolyMedica Corporation

(registrant)

/s/ Patrick T. Ryan

Patrick T. Ryan

President, Chief Executive Officer and Director

(Principal Executive Officer)

/s/ Keith W. Jones

Keith W. Jones

Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: November 4, 2005

43

Exhibit Index

Exhibit
Number		Description
10.53	–	Form of option agreement for issuances from the Company’s 2000 Stock Incentive Plan.
10.54	–	Form of restricted stock agreement for issuances from the Company’s 2000 Stock Incentive Plan.
10.55	–	Equity Purchase Agreement by and between the Registrant and National Diabetic Pharmacies, Inc., dated August 5, 2005.
31.1	–	Certification by Chief Executive Officer pursuant to Rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	–	Certification by Chief Financial Officer pursuant to Rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	–	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

44

EX-10.53

Exhibit 10.53

POLYMEDICA CORPORATION

Nonstatutory Stock Option Agreement
Granted Under The 2000 Stock Incentive Plan

     1. Grant of Option.

     This agreement evidences the grant by PolyMedica Corporation, a Massachusetts corporation (the “Company”), on                 (the “Grant Date”) to                , an employee of the Company (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2000 Stock Incentive Plan (the “Plan”), a total of                 shares (the “Shares”) of common stock, $0.01 par value per share, of the Company (“Common Stock”) at $                per Share. Unless earlier terminated, this option shall expire on the tenth anniversary of the Grant Date (the “Final Exercise Date”).

     It is intended that the option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

2. Vesting Schedule.

     [25% after one year and in equal installments quarterly thereafter]
This option is exercisable as to the number of Shares listed above at the times listed below:
on                 25% or ___ shares

on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares
on and after Date as to X additional shares

     The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan.

3. Exercise of Option.

     (a) Form of Exercise. Each election to exercise this option shall be in writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

     (b) Continuous Relationship with the Company Required. Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee, officer or director of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an “Eligible Participant”).

     (c) Termination of Relationship with the Company. If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate 90 days after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon such violation.

     (d) Exercise Period Upon Death or Disability. If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for “cause” as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant, provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date.

     (e) Discharge for Cause. If the Participant, prior to the Final Exercise Date, is discharged by the Company for “cause” (as defined below), the right to exercise this option shall terminate immediately upon the effective date of such discharge. “Cause” shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant shall be considered to have been discharged for “Cause” if the Company determines, within 30 days after the Participant’s resignation, that discharge for cause was warranted.

4. Withholding.

     No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

5. Nontransferability of Option.

     This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

6. Provisions of the Plan.

     This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

     IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

		POLYMEDICA CORPORATION
Dated:	By:
			Title:
			Address:	11 State Street Woburn, MA 01801

PARTICIPANT’S ACCEPTANCE

     The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 2000 Stock Incentive Plan.

PARTICIPANT:

EX-10.54

Exhibit 10.54

POLYMEDICA CORPORATION

Restricted Stock Agreement
Granted Under 2000 Stock Incentive Plan

     AGREEMENT made this ___ day of ___, between PolyMedica Corporation, a Massachusetts corporation (the “Company”), and ________ (the “Participant”).

     For valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows:

     1. Purchase of Shares.

     The Company shall issue and sell to the Participant, and the Participant shall purchase from the Company, subject to the terms and conditions set forth in this Agreement and in the Company’s 2000 Stock Incentive Plan (the “Plan”), ___ shares (the “Shares”) of common stock, $0.01 par value, of the Company (“Common Stock”), at a purchase price of $0.01 per share. The aggregate purchase price for the Shares shall be paid by the Participant by check payable to the order of the Company or such other method as may be acceptable to the Company. Upon receipt by the Company of payment for the Shares, the Company shall issue to the Participant one or more certificates in the name of the Participant for that number of Shares purchased by the Participant. The Participant agrees that certain of the Shares shall be subject to the purchase options set forth in Section 2 of this Agreement and the restrictions on transfer set forth in Section 4 of this Agreement.

     2. Purchase Option. Upon the termination of the employment agreement dated ________ by and between the Company and the Participant (the “Employment Agreement”), for any reason or no reason, with or without cause, prior to ________, the Company shall have the right and option (the “Purchase Option”) to purchase from the Participant, for a sum of $0.01 per share (the “Option Price”), some or all of the Unvested Shares (as defined below).

     “Unvested Shares” means the total number of Shares less the total number of Vested Shares (as defined herein) at the time the Purchase Option becomes exercisable by the Company. Of the Shares, ___ shall be “Vested Shares” on ________ and the remaining ___ Shares shall vest in equal installments at the end of each calendar quarter beginning ________ and ending on ________.

     3. Exercise of Purchase Option and Closing.

          (a) The Company may exercise the Purchase Option by delivering or mailing to the Participant (or his estate), within 60 days after the termination of the Employment Agreement, a written notice of exercise of the Purchase Option. Such notice shall specify the number of Shares to be purchased. If and to the extent the Purchase Option is not so exercised

by the giving of such a notice within such 60-day period, the Purchase Option shall automatically expire and terminate effective upon the expiration of such 60-day period.

          (b) Within 10 days after delivery to the Participant of the Company’s notice of the exercise of the Purchase Option pursuant to subsection (a) above, the Participant (or his estate) shall, pursuant to the provisions of the Joint Escrow Instructions referred to in Section 5 below, tender to the Company at its principal offices the certificate or certificates representing the Shares which the Company has elected to purchase in accordance with the terms of this Agreement, duly endorsed in blank or with duly endorsed stock powers attached thereto, all in form suitable for the transfer of such Shares to the Company. Promptly following its receipt of such certificate or certificates, the Company shall pay to the Participant the aggregate Option Price for such Shares (provided that any delay in making such payment shall not invalidate the Company’s exercise of the Purchase Option with respect to such Shares).

          (c) After the time at which any Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Shares.

          (d) The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company or in cash (by check) or both.

          (e) The Company shall not purchase any fraction of a Share upon exercise of the Purchase Option, and any fraction of a Share resulting from a computation made pursuant to Section 2 of this Agreement shall be rounded to the nearest whole Share (with any one-half Share being rounded upward).

          (f) The Company may assign its Purchase Option to one or more persons or entities.

     4. Restrictions on Transfer.

          (a) The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively “transfer”) any Shares, or any interest therein, that are subject to the Purchase Option, except that the Participant may transfer such Shares (i) to or for the benefit of any spouse, children, parents, uncles, aunts, siblings, grandchildren and any other relatives approved by the Board of Directors (collectively, “Approved Relatives”) or to a trust established solely for the benefit of the Participant and/or Approved Relatives, provided that such Shares shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in this Section 4 and the Purchase Option) and such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement or (ii) as part of the sale of all or substantially all of the shares of capital stock of the Company (including pursuant to a merger or consolidation), provided that, in

2

accordance with the Plan, the securities or other property received by the Participant in connection with such transaction shall remain subject to this Agreement.

          (b) The Participant shall have the right, at any time and from time to time, to pledge or hypothecate the Shares to a commercial bank or financial institution (the “Bank”) as security for a loan from such Bank. During the term of the pledge or hypothecation agreement, the Company may not exercise the Purchase Option with respect to the Shares that are subject to the pledge (the “Pledged Shares”), and if the Participant defaults on such loan, then the Bank may take possession of the Pledged Shares provided that such Pledged Shares shall remain subject to this Agreement, other than the Purchase Option which shall terminate with respect to the Pledged Shares and such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the other terms and conditions of this Agreement.

     5. Escrow.

     The Participant shall, upon the execution of this Agreement, execute Joint Escrow Instructions in the form attached to this Agreement as Exhibit A. The Joint Escrow Instructions shall be delivered to the Secretary of the Company, as escrow agent thereunder. The Participant shall deliver to such escrow agent a stock assignment duly endorsed in blank, in the form attached to this Agreement as Exhibit B, and hereby instructs the Company to deliver to such escrow agent, on behalf of the Participant, the certificate(s) evidencing the Shares issued hereunder. Such materials shall be held by such escrow agent pursuant to the terms of such Joint Escrow Instructions.

     6. Restrictive Legends.

     All certificates representing Shares shall have affixed thereto legends in substantially the following form, in addition to any other legends that may be required under federal or state securities laws:

“The shares of stock represented by this certificate are subject to restrictions on transfer and an option to purchase set forth in a certain Restricted Stock Agreement between the corporation and the registered owner of these shares (or his predecessor in interest), and such Agreement is available for inspection without charge at the office of the Secretary of the corporation.”

     7. Provisions of the Plan.

          (a) This Agreement is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this Agreement.

          (b) As provided in the Plan, upon the occurrence of an Acquisition Event (as defined in the Plan), the repurchase and other rights of the Company hereunder shall inure to the benefit of the Company’s successor and shall apply to the cash, securities or other property which the Shares were converted into or exchanged for pursuant to such Acquisition Event in the same manner and to the same extent as they applied to the Shares under this Agreement. If, in

3

connection with an Acquisition Event, a portion of the cash, securities and/or other property received upon the conversion or exchange of the Shares is to be placed into escrow to secure indemnification or similar obligations, the mix between the vested and unvested portion of such cash, securities and/or other property that is placed into escrow shall be the same as the mix between the vested and unvested portion of such cash, securities and/or other property that is not subject to escrow.

     8. Withholding Taxes; Section 83(b) Election.

          (a) The Participant acknowledges and agrees that the Company has the right to deduct from payments of any kind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to the purchase of the Shares by the Participant or the lapse of the Purchase Option.

          (b) The Participant has reviewed with the Participant’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Participant understands that the Participant (and not the Company) shall be responsible for the Participant’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Participant understands that it may be beneficial in many circumstances to elect to be taxed at the time the Shares are purchased rather than when and as the Company’s Purchase Option expires by filing an election under Section 83(b) of the Code with the I.R.S. within 30 days from the date of purchase.

          THE PARTICIPANT ACKNOWLEDGES THAT IT IS THE PARTICIPANT’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PARTICIPANT’S BEHALF.

     9. Miscellaneous.

          (a) No Rights to Employment. The Participant acknowledges and agrees that the vesting of the Shares pursuant to Section 2 hereof is earned only by continuing service pursuant to the Employment Agreement (not through the act of being hired or purchasing shares hereunder). The Participant further acknowledges and agrees that the transactions contemplated hereunder and the vesting schedule set forth herein do not constitute an express or implied promise of continued engagement as an employee or consultant for the vesting period, for any period, or at all.

          (b) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.

4

          (c) Waiver. Any provision for the benefit of the Company contained in this Agreement may be waived, either generally or in any particular instance, by the Board of Directors of the Company.

          (d) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and the Participant and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in Section 4 of this Agreement.

          (e) Notice. All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery or five days after deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party hereto at the address shown beneath his or its respective signature to this Agreement, or at such other address or addresses as either party shall designate to the other in accordance with this Section 9(e).

          (f) Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.

          (g) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties, and supersede all prior agreements and understandings, relating to the subject matter of this Agreement.

          (h) Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Participant.

          (i) Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the Commonwealth of Massachusetts without regard to any applicable conflicts of laws.

          (j) Participant’s Acknowledgments. The Participant acknowledges that he or she: (i) has read this Agreement; (ii) has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of the Participant’s own choice or has voluntarily declined to seek such counsel; (iii) understands the terms and consequences of this Agreement; (iv) is fully aware of the legal and binding effect of this Agreement; and (v) understands that the law firm of ________, is acting as counsel to the Company in connection with the transactions contemplated by the Agreement, and is not acting as counsel for the Participant.

5

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

POLYMEDICA CORPORATION
By:
Title:
Address: 11 State Street
	Woburn, MA 01801
PARTICIPANT
Address:

6

EX-10.55

Exhibit 10.55

EQUITY PURCHASE AGREEMENT

     This Equity Purchase Agreement (“Agreement”) is dated August 5, 2005, by and among PolyMedica Corporation, a Massachusetts corporation (“Buyer”), National Pharmacies Group, Inc., a Delaware corporation (“Seller”), and National Diabetic Pharmacies, Inc., a Virginia corporation (together with any successor in interest, collectively, the “Company”).

RECITALS

     WHEREAS, the Company is a nationwide specialized pharmaceutical distribution company focusing on diabetes management products, including diabetes testing supplies, insulin pumps, respiratory medications, wound care supplies and prescriptions (the “Business”);

     WHEREAS, Seller owns all of the issued and outstanding shares (the “Shares”) of capital stock of the Company;

     WHEREAS, Seller intends to cause the Company to be converted into a single member limited liability company in Virginia prior to the Closing Date (as defined herein);

     WHEREAS, as of the Conversion (as defined herein), Seller shall own all of the issued and outstanding membership interests (the “Interests”) of the Company; and

     WHEREAS, Seller desires to sell, and Buyer desires to purchase, all of the Interests for the consideration and on the terms set forth in this Agreement.

AGREEMENT

     The parties, intending to be legally bound, agree as follows:

1. Sale and Transfer of Interests; Closing

     1.1 Interests. Upon the terms and subject to the conditions set forth herein, at the Closing, but effective as of the Effective Time, Seller will sell, convey, assign, transfer and deliver to Buyer, and Buyer will purchase and acquire from Seller, free and clear of any Encumbrances, the Interests.

     1.2 Purchase Price. The purchase price for the Interests will be $55,000,000.00 plus the Adjustment Amount (such sum, as so adjusted is herein referred to as the “Purchase Price”). On the Closing Date, Buyer shall make payment on account of the Purchase Price as follows: $55,000,000.00 plus the Estimated Closing Working Capital Excess or minus the Estimated Closing Working Capital Shortfall by wire transfer to an account designated by Seller as set forth on Schedule 1.2(a).

     1.3 Closing. The purchase and sale of the Interests provided for in this Agreement (the “Closing”) will take place at the offices of Buyer’s counsel at Weil, Gotshal & Manges LLP, 100 Federal Street, 34th Floor, Boston, Massachusetts 02110, commencing at 10:00 a.m. (local time) on the later of (a) August 22, 2005, or (b) the date that is five (5) Business Days following the termination of the applicable waiting period under the HSR Act, unless Buyer and Seller

otherwise agree. Subject to the provisions of Section 8, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 1.3 will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement. In such a situation, the Closing will occur as soon as practicable, subject to Section 8. The Closing shall be deemed effective as of 12:01 a.m. local time, on the Closing Date (the “Effective Time”).

     1.4 Closing Obligations. In addition to any other documents to be delivered pursuant to other provisions of this Agreement, at the Closing:

          (a) Seller and the Company will deliver to Buyer:

               (i) the Interests Certificate duly endorsed (or accompanied by a duly executed power) for transfer to Buyer;

               (ii) a release in the form of Exhibit A duly executed by Seller (the “Seller’s Release”);

               (iii) [Intentionally Omitted]

               (iv) a noncompetition agreement in the form of Exhibit C duly executed by Robert Haft (the “Noncompetition Agreement”);

               (v) the Seller’s Secretary Certificate;

               (vi) the Consents listed on Schedule 1.4(a)(vi).

               (vii) the Seller’s Officer Certificate;

               (viii) certificates of the Secretaries of State of the State of Delaware and the Commonwealth of Virginia certifying the good standing of Seller and the Company, respectively, dated as of a recent date prior to the Closing Date; and

               (ix) resignations of each of the Company’s officers and directors from such positions effective as of the Effective Time.

          (b) Buyer will deliver to Seller:

               (i) the Purchase Price to be paid to Seller on the Closing Date in accordance with Section 1.2;

               (ii) the Buyer’s Secretary Certificate; and

               (iii) the Buyer’s Officer Certificate.

Each of the deliveries pursuant to this Section 1.4 will be deemed to occur simultaneously and no delivery shall be made unless all other deliveries have been made.

-2-

          1.5 Adjustment Amount. (a) Pre-Closing Date Purchase Price Adjustment Estimate.

               (i) Not later than three (3) Business Days prior to the Closing Date, the Seller shall provide Buyer with a statement (the “Estimated Closing Statement”) setting forth in reasonable detail a calculation of its good faith estimation of the Closing Working Capital (“Estimated Closing Working Capital”). The Estimated Closing Statement and Estimated Closing Working Capital shall be prepared by the Company in good faith in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation and accrual methodologies that were used in the preparation of the Company’s audited Financial Statements for the most recent fiscal year end as if such Estimated Closing Statement and Estimated Closing Working Capital were being prepared and audited as of a fiscal year end. Notwithstanding the foregoing or any other provision of this Agreement, the Estimated Closing Statement, the Estimated Working Capital and the Closing Working Capital Statement shall reflect the reserves set forth on Schedule 1.5 attached hereto (collectively, the “Supplemental Reserves”). The Supplemental Reserves shall be disregarded for the purposes of calculating any adjustment required to be made under this Section 1.5.

               (ii) If Estimated Closing Working Capital is less than Target Working Capital, then the Purchase Price payable at Closing will be decreased by the positive difference between Estimated Closing Working Capital and Target Working Capital (the “Estimated Closing Working Capital Shortfall”). If Estimated Closing Working Capital is greater than Target Working Capital, then the Purchase Price payable at Closing will be increased by the positive difference between Estimated Closing Working Capital and Target Working Capital (the “Estimated Closing Working Capital Excess”).

          (b) Post-Closing Date Purchase Price Adjustment.

               (i) Following the Closing, the Purchase Price shall be adjusted as provided herein to reflect the difference between Closing Working Capital and Target Working Capital (the “Adjustment Amount”).

               (ii) Within sixty (60) days following the Closing Date, Buyer shall deliver to Seller a statement of Closing Working Capital (the “Closing Working Capital Statement”) setting forth in reasonable detail Buyer’s calculations of Closing Working Capital. The Closing Working Capital Statement shall be prepared in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Company’s audited Financial Statements for the most recent fiscal year end as if such Closing Working Capital Statement was as of a fiscal year end. In order for the Seller and its Representatives to review such Closing Working Capital Statement, Buyer will promptly furnish to Seller and its Representatives such work papers, supporting schedules, analyses and other documents and information as Seller and its Representatives may reasonably request. Buyer shall reasonably cooperate with Seller to assist Seller’s and its Representatives’ review of any such Closing Working Capital Statement and if requested, Buyer’s accounting

-3-

personnel will meet in person with Seller and its Representatives to discuss the Closing Working Capital Statement.

               (iii) If, within forty-five (45) days following delivery of the Closing Working Capital Statement, Seller has not given Buyer written notice of its objection as to the Adjustment Amount (which notice shall state in reasonable detail the basis of Seller’s objection or identify additional information reasonably required by Seller and its Representatives to evaluate the determination made by Buyer), then the Adjustment Amount calculated by Buyer shall be binding and conclusive on the parties.

               (iv) If Seller gives Buyer such written notice of objection, and if Seller and Buyer fail to resolve the issues outstanding with respect to the Closing Working Capital Statement and the calculation of the Adjustment Amount within thirty (30) days of Buyer’s receipt of Seller’s objection notice, Seller and Buyer shall submit the issues remaining in dispute as identified in Seller’s notice of objection to Deloitte & Touche LLP or such other independent public accounting firm mutually selected by Buyer and Seller (the “Independent Accountants”) for resolution applying the principles, policies and practices referred to in Section 1.5(b)(ii). If issues are submitted to the Independent Accountants for resolution, (i) Seller and Buyer shall furnish or cause to be furnished to the Independent Accountants such work papers, supporting schedules, analyses and other documents and information relating to the disputed issues as the Independent Accountants may request and are available to that party or its agents and shall be afforded the opportunity to present to the Independent Accountants any material relating to the disputed issues and to discuss the issues with the Independent Accountants; and (ii) the determination by the Independent Accountants, as set forth in a notice to be delivered to both Seller and Buyer within sixty (60) days of the submission to the Independent Accountants of the issues remaining in dispute, shall be final, binding and conclusive on the parties and shall be used in the calculation of the Adjustment Amount. Copies of all materials submitted or furnished by a Party to the Independent Accountants shall also be provided to the other Party and its Representatives and all meetings and communications with the Independent Accountants shall be held so that all Parties are given a reasonable opportunity to participate. The costs and expenses of the Independent Accountants in a dispute regarding the Adjustment Amount shall be paid by Seller if (A) the positive difference between (i) the Adjustment Amount resulting from determination of the Independent Accountants, and (ii) the Adjustment Amount set forth in Seller’s notice of objection, is greater than (B) the positive difference between (i) the Adjustment Amount resulting from determination of the Independent Accountants, and (ii) Buyer’s calculation of the Adjustment Amount as delivered to Seller; otherwise, such costs and expenses of the Independent Accounts will be paid by Buyer. The Independent Accounts will be entitled to the privileges and immunities of arbitrators.

               (v) If Closing Working Capital is greater than the Estimated Closing Working Capital, the difference shall be paid by Buyer to Seller within five (5) days of either the delivery of the Closing Working Capital Statement or, if Seller gives notice pursuant to Section 1.5(b)(iii) herein, the determination of the Independent Accountants. If Closing Working Capital is less than Estimated Closing Working Capital, the difference shall be paid by Seller to Buyer within five (5) days of either the delivery of the Closing Working Capital

-4-

Statement or, if Seller gives notice pursuant to Section 1.5(b)(iii) herein, the determination of the Independent Accountants.

               (vi) The Independent Accountants shall have not been engaged by any Party or any Related Person of such Party within the prior five (5) year period ending on the date of this Agreement.

2. Representations and Warranties of Seller and the Company

     In order to induce Buyer to enter into this Agreement, except as set forth in the Seller Disclosure Schedule to the specific reference to the section as to which the disclosure applies or to the extent reasonably apparent in any section of such Seller Disclosure Schedule (the “Seller Disclosure Schedule”), Seller and the Company, jointly and severally, subject to the limitations set forth in Section 10, represent and warrant to Buyer as follows:

     2.1 Organization, Good Standing and Capitalization.

          (a) Each of Seller and the Company is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under the Applicable Contracts. The Company is duly qualified and licensed to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which either the property owned, leased or operated by it or the nature of the Business as currently conducted makes such qualification or license necessary, except where the failure to be so qualified or licensed and in good standing would not have, individually or in the aggregate, a Material Adverse Effect.

          (b) Seller has delivered or made available to Buyer copies of all Governing Documents of Seller and the Company as currently in effect.

          (c) Prior to the Conversion, the authorized equity securities of the Company consist of 5,000 shares of voting common stock and 5,000 shares of non-voting common stock, without par value, all of which are issued and outstanding and constitute the Shares. Following the Conversion, the authorized equity securities of the Company will consist of one hundred units of limited liability company interests, all of which will be issued and outstanding and constitute the Interests. Seller is the record and beneficial owner and holder of the Shares, free and clear of all Encumbrances and will be on the Closing Date the record and beneficial owner and holder of the Interests, free and clear of all Encumbrances other than Permitted Encumbrances. The Shares have been duly authorized and validly issued and are fully paid and nonassessable, and following the Conversion, the Interests will be duly authorized and validly issued and fully paid and nonassessable. There are no Contracts relating to the issuance, sale or transfer of any equity securities or other securities of the Company. None of the Shares were issued in violation of the Securities Act or any other Legal Requirement, and following the Conversion, none of the Interests will have been issued in violation of the Securities Act or any other Legal Requirement.

-5-

          (d) Except for the Interests, neither the Company nor the Seller owns, or has any Contract to acquire, any equity securities or other securities of any Person or other direct or indirect equity or other ownership interest in any other business.

     2.2 Enforceability; Authority; No Conflict.

          (a) This Agreement constitutes the legal, valid and binding obligation of Seller and the Company, enforceable against each of them in accordance with its terms. Upon the execution and delivery by Seller or the Company of each other agreement to be executed or delivered by Seller or the Company at the Closing (collectively, the “Seller’s Closing Documents”), each of the Seller’s Closing Documents will constitute the legal, valid and binding obligation of Seller and/or the Company, enforceable against it/them in accordance with its terms. Seller and the Company have the absolute and unrestricted right, power and authority to execute and deliver this Agreement and the Seller’s Closing Documents and to perform their obligations under this Agreement and Seller’s Closing Documents, and such action has been duly authorized by all necessary action by Seller’s and the Company’s shareholders and boards of directors.

          (b) Except as set forth on Schedule 2.2(b), neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time): (i) Breach (A) any provision of any of the Governing Documents of Seller or the Company or (B) any resolution adopted by the board of directors or the shareholders of Seller or the Company; (ii) Breach or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under any Legal Requirement or any Order to which Seller or the Company may be subject; (iii) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by Seller or the Company that otherwise relates to the Business; (iv) cause Buyer or the Company to become subject to, or to become liable for the payment of, any Tax; (v) Breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any Contract identified or required to be identified on Schedule 2.20(a); or; (vi) result in the imposition or creation of any Encumbrance upon or with respect to any asset owned or used by the Company.

          (c) Except as set forth on Schedule 2.2(c), neither Seller nor the Company is or will be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions; provided that, in the case of Contracts, this representation applies only to Contracts identified or required to be identified on Schedule 2.20(a).

     2.3 Financial Statements. Seller has delivered to Buyer: (a) an audited consolidated balance sheet of the Company and Seller as at December 31, in each of the years 2002 through 2004, and the related audited consolidated statements of income, changes in shareholders’ equity and cash flows for each fiscal year then ended, including the notes thereto (the “Annual Financial

-6-

Statements”); and (b) an interim unaudited consolidated balance sheet of the Company and Seller as at June 30, 2005 (the “Balance Sheet Date”), including the notes thereto (the “Balance Sheet”) and the related statements of income, changes in shareholders’ equity, and cash flows for the period then ended (together with the Balance Sheet, the “Most Recent Financial Statements” and together with the Annual Financial Statements, the “Financial Statements”). The Financial Statements fairly present, in all material respects, the consolidated financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Company and Seller as at the respective dates of and for the periods referred to therein, all in accordance with GAAP, applied on a consistent basis throughout the periods covered thereby, subject in the case of the Most Recent Financial Statements to footnotes and normal year end adjustments. The Financial Statements have been prepared from and are in accordance with the accounting records of the Company and Seller.

     2.4 Books and Records. The books of account, minute books, stock record books, and other records of the Company and Seller, all of which have been made available to Buyer, are complete and correct in all material respects and have been maintained in accordance with sound business practices.

     2.5 Title to Properties; Encumbrances.

     (a) Schedule 2.5(a) contains a list of all real property leased (“Leased Real Property”) by the Company. The Company does not own any real property. Except as set forth in Schedule 2.5(a), the Company has valid and subsisting leasehold estate in, and enjoys peaceful and undisturbed possession of, all Leased Real Property, subject only to (i) any Permitted Encumbrances and (ii) Encumbrances constituting a lease, sublease or occupancy agreement that gives any third party any right to occupy any portion of the Leased Real Property (which have been disclosed in Schedule 2.5(a)).

     (b) Except as set forth in Schedule 2.5(b), the Company owns and has good title to or a valid leasehold in all material buildings, machinery, equipment and other tangible assets (i) shown on the Most Recent Financial Statements and (ii) necessary for the conduct of the Business as currently conducted, in each case free and clear or all Encumbrances other than Permitted Encumbrances, except for properties and assets disposed of in the Ordinary Course of Business since the Balance Sheet Date.

     2.6 Condition and Sufficiency of Assets. The buildings, plants, structures, and equipment of the Company are in good operating condition and repair, and are adequate for the uses to which they are currently being used, except as would not reasonably be expected to have a Material Adverse Effect. None of such buildings, plants, structures or equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. The assets of the Company used in the Business are, taken as a whole, sufficient for the continued conduct of the Business after the Closing in substantially the same manner as conducted prior to the Closing.

     2.7 Accounts Receivable. All Accounts Receivable of the Company that are reflected on the Balance Sheet or the accounting records of the Company as of the Closing Date represent

-7-

or will represent valid obligations arising from sales actually made or services actually performed by the Company in the Ordinary Course of Business.

     2.8 Inventories. The Inventories, taken as a whole, consist of a quality and quantity usable and, with respect to finished goods, saleable, in the Ordinary Course of Business, except for obsolete items and items of below-standard quality arising in the Ordinary Course of Business. The Company is not in possession of any Inventories not owned by it, including goods already sold. All Inventories not written off have been valued using the weighted average cost method, which approximates the first-in, first-out (FIFO) method.

     2.9 No Undisclosed Liabilities. Except as set forth on Schedule 2.9, the Company has no Liability that would be required to be reflected on a balance sheet of the Company prepared as of the date hereof in accordance with GAAP (excluding footnotes and normal year end adjustments), except for Liabilities reflected, accrued for or reserved against in the Most Recent Financial Statements and liabilities incurred in the Ordinary Course of Business since the Balance Sheet Date.

     2.10 Taxes. Except as set forth on Schedule 2.10:

          (a) The Company has filed or caused to be filed on a timely basis all Tax Returns that are or were required to be filed by or with respect to it, either separately or as a member of a group of Persons, pursuant to applicable Legal Requirements. Seller has delivered or made available to Buyer copies of all such Tax Returns filed by Seller or the Company with respect to the tax periods ending on December 31, 2001, December 31, 2002, December 31, 2003 and December 31, 2004 and Schedule 2.10(a) lists all federal and state income Tax Returns filed by Seller or the Company with respect to tax periods ending on December 31, 2001, December 31, 2002, December 31, 2003 and December 31, 2004. All Tax Returns and reports filed by Seller and/or the Company are true, correct and complete in all material respects. The Company has timely paid all of its Taxes that have or may have become due for all periods covered by the Tax Returns, or pursuant to any assessment received by Seller or the Company, except such Taxes, if any, as are listed on Schedule 2.10(a) and are being contested in good faith and as to which either adequate reserves (as required and as determined in accordance with GAAP) have been provided in the Balance Sheet (subject to any footnote and normal year-end adjustment) or which will be taken into account in the calculation of Closing Working Capital. Except as provided on Schedule 2.10(a), neither Seller nor the Company currently is the beneficiary of any extension of time within which to file any Tax Return. No written claim has been made within the past five years by any Governmental Body in a jurisdiction where Seller or the Company do not file Tax Returns that either of them is or may be subject to taxation by that jurisdiction. There are no Encumbrances on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Tax.

          (b) Schedule 2.10(b) contains a list of all Tax Returns of Seller and the Company that have been audited within the past three years or are currently under audit and accurately describes any deficiencies or other amounts that were paid or are currently being contested with respect to such audits. All deficiencies proposed in writing as a result of such audits have been paid, settled or are being contested in good faith by appropriate proceedings as

-8-

described on Schedule 2.10(b). Seller has delivered, or made available to Buyer, copies of any examination reports, statements or deficiencies or similar items with respect to such audits. There is no outstanding dispute or claim concerning any Taxes of the Company claimed or raised by any Governmental Body in writing. Except as described in Schedule 2.10(b), neither Seller nor the Company has given or been requested to give waivers or extensions that are still in effect (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of Seller or the Company or for the Company may be liable after the Closing Date.

          (c) Except as set forth on Schedule 2.10(c), as of the date of the Balance Sheet, the charges, accruals and reserves with respect to Taxes on the Balance Sheet of the Company are adequate (as required and as determined in accordance with GAAP) and are at least equal to the Company’s liability for Taxes as of the date of the Balance Sheet as determined and as required by GAAP, subject to any footnotes and normal year end adjustments. No consent to the application of former Section 341(f)(2) of the Code has been filed with respect to any property or assets of the Company. All Taxes that the Company is or was required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person.

          (d) There is no tax sharing agreement or tax allocation agreement with respect to the Company’s Taxes that will require any payment by the Company after the Closing Date. The Company is not a party to any advance pricing agreement or any closing agreement that would require any payment by the Company after the Closing Date. The Company (A) has not been a member of an affiliated group within the meaning of Code Section 1504(a) (or any similar group defined under a similar provision of state, local or foreign law) and (B) has no liability for Taxes of any other Person under Treas. Reg. sect. 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor by contract or otherwise.

          (e) For federal income tax purposes Seller is an S corporation as defined in Code Section 1361. Prior to the Conversion, for federal income tax purposes the Company was a Qualified Subchapter S Subsidiary as defined under Section 1361 of the Code. Following the Conversion, Seller shall not take or cause to be taken any action that would prevent the Company from being disregarded as an entity separate from its owners under Treas. Reg. § 301.7701-3 for federal income tax purposes, and to the extent permitted, for all other income tax purposes.

2.11 Employees.

          (a) Schedule 2.11 contains a list of the following information, as of July 25, 2005, for each employee or director of the Company, including each employee on leave of absence or layoff status: employer; name; job title; current base compensation and target bonus, status as exempt or non-exempt and any material change in compensation since January 1, 2005; date of hire; and, to the extent different from date of hire, service credited for purposes of vesting and eligibility to participate under the Company’s pension, retirement, profit-sharing, thrift-savings, deferred compensation, stock bonus, stock option, cash bonus, employee stock ownership (including investment credit or payroll stock ownership), severance pay, insurance, medical, welfare, vacation plan or any other Employee Plan.

-9-

          (b) To the Knowledge of the Seller and the Company, no employee or director of the Company is a party to, or is otherwise bound by, any agreement or arrangement, including any confidentiality, noncompetition, or proprietary rights agreement, between such employee or director and any other Person (“Proprietary Rights Agreement”) that in any way materially adversely affects or will affect (i) the performance of his duties as an employee or director of the Company, or (ii) the ability of the Company to conduct its business, including any Proprietary Rights Agreement with Seller or the Company by any such employee or director. To the Knowledge of Seller and the Company, no director, officer, or other key employee of the Company intends to terminate his employment with the Company within 30 days after Closing.

          (c) Schedule 2.11 also contains a list of the following information for each retired employee or director of the Company, or their dependents, receiving retiree benefits from the Company or scheduled to receive retiree benefits in the future from the Company: name, retiree medical insurance coverage, retiree life insurance coverage, and other retiree benefits.

     2.12 Labor Disputes; Compliance. Since January 1, 2003, the Company has not been or is not a party to any collective bargaining or other labor Contract. Since January 1, 2003, there has not been and, there is not presently pending, existing or to the Knowledge of Seller and the Company, Threatened (a) any material strike, slowdown, picketing, organizing campaign, work stoppage, or employee grievance process, (b) any material Proceeding against or affecting the Company relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters, including any material charge or complaint filed by an employee or union with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any comparable Governmental Body, organizational activity, or other material labor or employment dispute against or affecting the Company or its premises, or (c) any application for certification of a collective bargaining agent. There is no lockout of the employees by the Company, and no such action is contemplated by the Company. Except as set forth on Schedule 2.12, the Company has complied in all material respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and plant closing. The Company is not liable for the payment of any material compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements.

     2.13 WARN Act. Since January 1, 2003, neither Seller nor the Company has effectuated (a) a “plant closing” (as defined in the Worker Adjustment and Retraining Notification Act (the “WARN Act”), 29 U.S.C. §§ 2101 et seq.,) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business, or (b) a “mass layoff” (as defined in the WARN Act) affecting any site of employment or facility of the Business where liabilities under the WARN Act remain, nor has Seller or the Company been affected by any transaction or engaged in layoffs or employment terminations relating to the Business sufficient in number to trigger application of any similar state or local law where liabilities under such law remain.

2.14 Employee Benefits.

-10-

          (a) Set forth on Schedule 2.14(a) is a list of all “employee benefit plans” as defined by Section 3(3) of ERISA, all specified fringe benefit plans as defined in Section 6039D of the Code, and all other bonus, incentive-compensation, deferred-compensation, profit-sharing, stock-option, stock-appreciation-right, stock-bonus, stock-purchase, employee-stock-ownership, savings, severance, change-in-control, supplemental-unemployment, layoff, salary-continuation, retirement, pension, health, life-insurance, disability, accident, group-insurance, vacation, holiday, sick-leave, fringe-benefit or welfare plan, and any other benefit plan, agreement, policy, practice, commitment, contract or understanding (whether qualified or nonqualified, currently effective or terminated, written or unwritten) and any trust, escrow or other agreement related thereto that (i) is maintained or contributed to by the Company or any other Person controlled by, controlling or under common control with the Company (within the meaning of Section 414 of the Code or Section 4001(a)(14) or 4001(b) of ERISA) (“ERISA Affiliate”) or has been maintained or contributed to in the last six years by the Company or any ERISA Affiliate, and with respect to which the Company has or may have any liability, and (ii) provides benefits, or describes policies or procedures applicable to any current or former director, officer, employee or service provider of the Company or any ERISA Affiliate, or the dependents of any thereof, regardless of how (or whether) liabilities for the provision of benefits are accrued or assets are acquired or dedicated with respect to the funding thereof (collectively the “Employee Plans”). No Employee Plan is (x) a “Defined Benefit Plan” (as defined in Section 414(l) of the Code); (y) a “Multiemployer Plan” (as defined in Section 3(37) of ERISA); or (z) a plan subject to Title IV of ERISA, other than a Multiemployer Plan.

          (b) Seller has delivered to Buyer copies of (i) the material documents comprising each Employee Plan (or, with respect to any Employee Plan which is unwritten, a detailed written description of eligibility, participation, benefits, funding arrangements, assets and any other material documents which relate to the obligations of Seller, the Company or any ERISA Affiliate); (ii) all trust agreements, insurance contracts or any other funding instruments related to the Employee Plans; (iii) the most recent rulings, determination letters, no-action letters or advisory opinions from the IRS, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation (“PBGC”) or any other Governmental Body that pertain to any Employee Plan and any open requests therefor; (iv) the most recent actuarial and financial reports (audited and/or unaudited) and the annual reports filed with any Government Body with respect to the Employee Plans during the current year and each of the three preceding years; (v) all collective bargaining agreements pursuant to which contributions to any Employee Plan(s) have been made or obligations incurred (including both pension and welfare benefits) by the Company or any ERISA Affiliate, and all collective bargaining agreements pursuant to which contributions are being made or obligations are owed by such entities; (vi) all contracts with third-party administrators, actuaries, investment managers, consultants and other independent contractors that relate to any Employee Plan; and (vii) all summary plan descriptions, employee handbooks and other material written communications regarding the Employee Plans.

          (c) Except as set forth on Schedule 2.14(c), full payment has been made for all amounts that are required under the terms of each Employee Plan to be paid as contributions with respect to all periods prior to and including the last day of the most recent fiscal year of such Employee Plan ended on or before the date of this Agreement and all periods thereafter

-11-

prior to the Closing Date, and no accumulated funding deficiency or liquidity shortfall (as those terms are defined in Section 302 of ERISA and Section 412 of the Code) has been incurred with respect to any such Employee Plan, whether or not waived. The Company is not required to provide security to an Employee Plan under Section 401(a)(29) of the Code.

          (d) The Company has, at all times, complied, and currently complies, in all material respects with the applicable continuation requirements for its welfare benefit plans, including (1) Section 4980B of the Code (as well as its predecessor provision, Section 162(k) of the Code) and Sections 601 through 608, inclusive, of ERISA, which provisions are hereinafter referred to collectively as “COBRA” and (2) any applicable state statutes mandating health insurance continuation coverage for employees.

          (e) Except as set forth on Schedule 2.14(e), the form of all Employee Plans is in compliance in all material respects with the applicable terms of ERISA, the Code, and any other applicable laws, including the Americans with Disabilities Act of 1990, the Family Medical Leave Act of 1993 and the Health Insurance Portability and Accountability Act of 1996, and such plans have been operated in material compliance with such laws and the written Employee Plan documents. Neither Seller nor the Company has violated the requirements of Section 404 of ERISA.

          (f) Each Employee Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS, and neither Seller nor the Company has Knowledge of any circumstances that will result in revocation of any such favorable determination letter. Each trust created under any Employee Plan has been determined to be exempt from taxation under Section 501(a) of the Code, and neither Seller nor the Company has Knowledge of any circumstance that will result in a revocation of such exemption. No Employee Plan utilizes a funding vehicle described in Section 501(c)(9) of the Code or is subject to the provisions of Section 505 of the Code. With respect to each Employee Plan, no event has occurred or condition exists that will or could reasonably be expected to give rise to a loss of any intended tax consequence or to any Tax under Section 511 of the Code.

          (g) There is no material pending or to the Knowledge of the Seller and the Company threatened Proceeding relating to any Employee Plan, nor to the Knowledge of the Seller and the Company, is there any basis for any such Proceeding. Neither Seller, the Company nor any fiduciary of an Employee Plan has engaged in a transaction with respect to any Employee Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject Seller, the Company or Buyer to a material Tax or penalty imposed by either Section 4975 of the Code or Section 502(l) of ERISA or a violation of Section 406 of ERISA. The Contemplated Transactions will not result in the potential assessment of a Tax or penalty under Section 4975 of the Code or Section 502(l) of ERISA nor result in a violation of Section 406 of ERISA.

          (h) Seller and the Company have maintained workers’ compensation coverage as required by applicable state law through purchase of insurance and not by self-insurance or otherwise.

-12-

          (i) Except as required by Legal Requirements or as set forth on Schedule 2.14(i), the consummation of the Contemplated Transactions will not accelerate the time of vesting or the time of payment, or increase the amount, of compensation due to any director, employee, officer, former employee or former officer of Seller or the Company. Except as disclosed on Schedule 2.14(i), there are no contracts or arrangements providing for payments by Seller or the Company, in their current form, that could subject any Person to Liability for tax under Section 4999 of the Code.

          (j) Except for the continuation coverage requirements of COBRA or similar statute, the Company has no potential Liability for benefits to employees, former employees or their respective dependents with respect to claims incurred following termination of employment or retirement under any of the Employee Plans that are Employee Welfare Benefit Plans.

          (k) Except as set forth on Schedule 2.14(k), no Contemplated Transaction will result in an amendment, modification or termination of any of the Employee Plans. No written or oral representations have been made to any employee or former employee of Seller or the Company promising or guaranteeing any employer payment or funding for the continuation of medical, dental, life or disability coverage for any period of time beyond the end of the current plan year (except to the extent of coverage required under COBRA or similar statute). Except as set forth in Section 6.1 hereof, no written or oral representations have been made by Seller or the Company to any employee or former employee of Seller or the Company concerning the employee benefits of Buyer.

     2.15 Compliance With Legal Requirements; Governmental Authorizations.

          (a) Except as set forth on Schedule 2.15(a): (i) the Company is, and at all times since January 1, 2001 has been, in material compliance with each Legal Requirement that is or was applicable to it or to the conduct or operation of the Business, including its reimbursement, marketing, billing and collection practices; (ii) notwithstanding any qualifications as to time and materiality set forth in subsection (a)(i) above, no event has occurred or circumstance exists that (with or without notice or lapse of time) may give rise to any obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any repayment of overpayments made to the Company by Medicare, Medicaid or any other governmentally funded health care reimbursement program or payment of penalties or other amounts in connection therewith; (iii) no event has occurred or circumstance exists that (with or without notice or lapse of time) may give rise to any obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any Remedial Action of any material nature; and (iv) the Company has not received, at any time since January 1, 2001, any notice or other communication (whether oral or written) from any Governmental Body regarding (A) any actual or alleged material violation of, or material failure to comply with, any Legal Requirement, (B) any actual or alleged obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any Remedial Action of any material nature, or (C) any obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any repayment of overpayments made to the Company by Medicare, Medicaid or any other governmentally funded health care reimbursement program or payment of penalties or other

-13-

amounts in connection therewith. Neither Seller nor the Company has received notice of any material change and does not have Knowledge of any potential material change in its status as a Medicare or Medicaid participating supplier with Medicare or Medicaid. Neither the Seller nor the Company, nor, to the Knowledge of Company, any officer, director, employee, contractor or vendor of any of them, is now or has ever been suspended or excluded from participation in Medicare, Medicaid or any other governmentally funded health care reimbursement program.

          (b) The Company holds all Governmental Authorizations that are material to operation of the Business, including those necessary to be a Medicare or Medicaid participating supplier. Each Governmental Authorization material to operation of the Business is valid and in full force and effect. Except as set forth on Schedule 2.15(b): (i) the Company is, and at all times since January 1, 2001, has been, in material compliance with the terms and requirements of each Governmental Authorization material to operation of the Business; (ii) no event has occurred or circumstance exists that may (with or without notice or lapse of time) (A) constitute or result directly or indirectly in a material violation of or a failure to comply with any material term or requirement of any Governmental Authorization material to operation of the Business or (B) result directly or indirectly in the revocation, withdrawal, suspension, cancellation or termination of, or any modification to, any Governmental Authorization material to operation of the Business; (iii) the Company has not received, at any time since January 1, 2001, any notice or other communication (whether oral or written) from any Governmental Body regarding (A) any actual or alleged violation of or failure to comply with any term or requirement of any Governmental Authorization or (B) any actual or proposed revocation, withdrawal, suspension, cancellation, termination of or modification or restriction to any Governmental Authorization; and (iv) all applications required to have been filed for the renewal of the Governmental Authorizations material to operation of the Business have been duly filed on a timely basis with the appropriate Governmental Bodies, and all other filings required to have been made with respect to such Governmental Authorizations have been duly made on a timely basis with the appropriate Governmental Bodies.

          (c) Notwithstanding any disclosure made elsewhere herein, since January 1, 2001, neither Seller nor the Company has engaged in any activities, nor, to the Knowledge of Company, has any event occurred or circumstance existed, which would constitute or give rise to a material violation of, or subject Seller or the Company to mandatory or permissive exclusion under, 31 U.S.C. §3729, or 42 U.S.C. §§1320a-7, 1320a-7a or §1320a-7b or any regulation promulgated thereunder, or any comparable state or local statutes or regulations, or which are prohibited by rules of professional conduct including, but not limited to, the following: (i) making or causing to be made a materially false statement or representation of a material fact in any application for any benefit or payment; (ii) making or causing to be made any materially false statement or representation of a material fact for use in determining rights to any benefit or payment; (iii) any failure by a claimant to disclose knowledge of the occurrence of any material event affecting the initial or continued right to any benefit or payment on its own behalf or on behalf of another, with the intent to fraudulently secure such benefit or payment; and (iv) offering or paying, or soliciting or receiving, any remuneration (including and kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind, or offering to pay or receive such remuneration (I) in return for referring an individual to a Person for the furnishing or

-14-

arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare, Medicaid or any other federal or state health care program, as defined in such statutes and regulations, or (II) in return for or to induce purchasing, leasing or ordering or arranging for, or recommending, purchasing, leasing or ordering any good, facility, service or item for which payment may be made in whole or in part by Medicare, Medicaid or any other federal or state health care program, as defined in such statutes and regulations.

          (d) This Section 2.15 does not pertain to matters concerning any Environmental Law or Environmental, Health and Safety Liabilities, which, for purposes of this Agreement, are exclusively addressed in Section 2.22 hereof.

     2.16 Legal Proceedings; Orders.

          (a) Except as set forth on Schedule 2.16(a), there is no pending Proceeding (provided that with respect to any Proceeding involving an audit or investigation, so long as no written notice of such audit or investigation has been received by the Company, to the Knowledge of the Seller and the Company, there is no such audit or investigation): (i) by or against the Company or that otherwise relates to or may materially affect the Business; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Contemplated Transactions. To the Knowledge of Seller and the Company, (1) no such Proceeding has been Threatened, and (2) no event has occurred or circumstance exists that is likely to give rise to or serve as a basis for the commencement of any such Proceeding. Seller has delivered or made available to Buyer copies of all pleadings, correspondence and other documents relating to each Proceeding listed on Schedule 2.16(a). The Proceedings listed or required to be listed on Schedule 2.16(a) will not have a Material Adverse Effect.

          (b) Except as set forth on Schedule 2.16(b): (i) there is no Order to which the Company or the Business is subject requiring payment in excess of $100,000; and (ii) neither Seller or the Company, nor any officer or director of Seller or the Company is subject to any Order that prohibits Seller, the Company or any such officer or director of Seller or the Company from conducting the Business.

          (c) Except as set forth on Schedule 2.16(c): (i) the Company is, and, at all times since January 1, 2000, has been in compliance in all material respects with all of the terms and requirements of each Order to which it or any of the assets owned or used by it, is or has been subject; (ii) no event has occurred or circumstance exists that may constitute or result in (with or without notice or lapse of time) a material violation of or failure to comply in any material respects with any term or requirement of any Order to which the Company, or any of the assets owned or used by the Company, is subject; and (iii) neither Seller nor the Company has received, at any time since January 1, 2000, any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding any actual, alleged, possible or potential material violation of, or failure to comply with, any term or requirement of any Order to which the Company, or any of the assets owned or used by the Company, is or has been subject.

-15-

          (d) This Section 2.16 does not pertain to matters concerning any Environmental, Health and Safety Liabilities or to any Proceeding or Order relating to any Environmental Law, which, for purposes of this Agreement, are exclusively addressed in Section 2.22 hereof.

     2.17 No Material Adverse Change. Except as set forth on Schedule 2.17, to the Knowledge of Seller and the Company, since the Balance Sheet Date, there has not been any Material Adverse Change.

     2.18 Absence of Certain Changes and Events. Except as set forth on Schedule 2.18, since the Balance Sheet Date, the Company has operated the Business only in the Ordinary Course of Business and, to the Knowledge of Seller and the Company, there has not been any event, change, occurrence or circumstance that has had or would reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, since the date of the Balance Sheet there has not been any:

          (a) change in the Company’s authorized or issued capital stock; grant of any stock option or right to purchase shares of capital stock of the Company; issuance of any security convertible into such capital stock; grant of any registration rights; purchase, redemption, retirement, or other acquisition by the Company of any shares of any such capital stock; or declaration or payment of any dividend or other distribution or payment in respect of shares of capital stock;

          (b) amendment to the Governing Documents of the Company;

          (c) except in the Ordinary Course of Business, payment or increase by the Company of any bonuses, salaries, or other compensation to any shareholder, director, officer, or employee or entry into any severance or similar Contract with any director, officer, or employee;

          (d) except in the Ordinary Course of Business, adoption of, or material increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company;

          (e) except in the Ordinary Course of Business, damage to or destruction or loss of any asset or property of the Company, whether or not covered by insurance, materially and adversely affecting the properties, assets, business, financial condition, or prospects of the Company;

          (f) except in the Ordinary Course of Business, entry into, termination of, or receipt of notice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit, or similar agreement, or (ii) any Contract or transaction involving a total remaining commitment by or to the Company of at least $100,000;

          (g) sale (other than sales of inventory in the Ordinary Course of Business), lease, or other disposition of any asset or property of the Company or Encumbrance on any

-16-

material asset or property of the Company, including the sale, lease, or other disposition of any of the Intellectual Property Assets;

          (h) except in the Ordinary Course of Business, cancellation or waiver of any claims or rights with a value to the Company in excess of $100,000;

          (i) material change in the accounting methods used by the Company;

          (j) except for the Conversion, any election or rescinding of any election relating to Taxes of the Company or settlement or compromise of any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes of the Company, or except as may be required by applicable law, any changes to any of the Company’s methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of its or Sellers most recently filed federal tax returns if any of the foregoing actions would have an adverse effect on Buyer or the Company following the Closing Date; or

          (k) agreement, whether oral or written, by the Company to do any of the foregoing.

     2.19 Third Party Payors and Suppliers.

          (a) Set forth on Schedule 2.19(a) is a list of the eight (8) most significant third party payors (the “Major Customers”) in terms of revenue to the Company during the twelve-month periods ended December 31, 2002, 2003 and 2004 and the six month period ended June 30, 2005, showing the approximate total revenue of the Company from each such payor during the periods then ended. Except to the extent set forth on Schedule 2.19(a), since December 31, 2004, neither Seller nor the Company has received notice that any Major Customer has ceased, or intends to cease, to do business with the Seller, the Company or Buyer, or has reduced, or will reduce, its business in a manner that has a Material Adverse Effect. All of the Company’s claims billed to third party payors have been for items and services actually provided, and such claims, items and services have been billed and provided in accordance with all applicable requirements of such third party payors.

          (b) Set forth on Schedule 2.19(b) is a list of the ten most significant suppliers (the “Major Suppliers”) of services (including, without limitation, subcontractors), supplies, merchandise or other goods for the Company in terms of purchases by the Company for the twelve-month periods ended December 31, 2002, 2003 and 2004 and the six month period ended June 30, 2005, showing the amount paid to each such Major Supplier during such period. Except as disclosed on Schedule 2.19(b), since December 31, 2004, neither Seller nor the Company has received any notice that any such Major Supplier will not sell supplies, merchandise or other goods to Buyer and the Company on substantially the same terms and conditions as those used in its current sales to Seller and the Company, subject only to general and customary price increases or other customary changes in terms, or changes in general business conditions or the like.

     2.20 Contracts; No Defaults.

-17-

          (a) Schedule 2.20(a) contains a list, and Seller has delivered to Buyer copies, of: (i) each Applicable Contract that involves performance of services or delivery of goods or materials by the Company to the Major Customers; (ii) each Applicable Contract that involves performance of services or delivery of goods or materials to the Company by the Major Suppliers; (iii) each Applicable Contract that was not entered into in the Ordinary Course of Business and that involves expenditures or receipts of the Company in excess of $25,000; (iv) each lease, rental or occupancy agreement, license, installment and conditional sale agreement, and other Applicable Contract affecting the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $25,000 and with terms of less than one year); (v) each licensing agreement or other Applicable Contract with respect to patents, trademarks, copyrights, or other intellectual property (other than licenses to use “shrink-wrap” or “off-the-shelf” software or any other software which is generally commercially available), including agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property Assets; (vi) each collective bargaining agreement and other Applicable Contract to or with any labor union or other employee representative of a group of employees of the Company; (vii) each joint venture, partnership, and other Applicable Contract (however named) involving a sharing of profits, losses, costs, or liabilities by the Company with any other Person; (viii) each Applicable Contract containing covenants that in any way purport to restrict the business activity of the Company or any Related Person of the Company or limit the freedom of the Company or any Related Person of the Company to engage in any line of business or to compete with any Person; (ix) each Applicable Contract providing for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods; (x) each power of attorney that is currently effective and outstanding; (xi) each Applicable Contract entered into other than in the Ordinary Course of Business that contains or provides for an express undertaking by the Company to be responsible for consequential damages; (xii) each Applicable Contract for capital expenditures in excess of $25,000; (xiii) each written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by the Company other than in the Ordinary Course of Business; and (xiv) each amendment, supplement, and modification (whether oral or written) in respect of any of the foregoing.

          (b) Except as set forth on Schedule 2.20(b), to Seller’s and the Company’s Knowledge, no officer, director, agent, employee, consultant, or contractor of the Company is bound by any Contract that purports to limit the ability of such officer, director, agent, employee, consultant, or contractor to (A) engage in or continue any conduct, activity, or practice relating to the Business, or (B) assign to the Company any rights to any invention, improvement, or discovery.

          (c) Except as set forth on Schedule 2.20(c), each Contract identified or required to be identified on Schedule 2.20(a) is in full force and effect and is valid and enforceable in accordance with its terms (except as such enforceability may be limited by (i) bankruptcy, insolvency, moratorium, reorganization and other similar Legal Requirements affecting creditors’ rights generally and (ii) the general principles of equity, regardless of whether asserted in a Proceeding in equity or at law).

-18-

          (d) Except as set forth on Schedule 2.20(d): (i) the Company is, and at all times since January 1, 2003 has been, in compliance in all material respects with all applicable terms and requirements of each Contract identified or required to be identified on Schedule 2.20(a); (ii) to the Knowledge of Seller and the Company, each other Person that has or had any Liability under each Contract identified or required to be identified on Schedule 2.20(a) is, and at all times since January 1, 2003 has been, in compliance in all material respects with all applicable terms and requirements of such Contract; (iii) no event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a violation or breach of, or give the Company or, to the Knowledge of Seller and the Company, any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Contract identified or required to be identified on Schedule 2.20(a); and (iv) the Company has not given to or received from any other Person, at any time since January 1, 2003, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Contract identified or required to be identified on Schedule 2.20(a), except where any such failure would not have a Material Adverse Effect.

     2.21 Insurance.

          (a) Seller has delivered to Buyer: (i) copies of all policies of insurance to which the Company is a party or under which the Company, or any director of the Company, is or has been covered at any time within the three years preceding the date of this Agreement; (ii) copies of all pending applications for policies of insurance; copies of all applications filed in connection with current policies and (iii) any statement by the auditor of the Company’s financial statements with regard to the adequacy of such entity’s coverage or of the reserves for claims. Set forth on Schedule 2.21(a) is a list of all policies of insurance to which the Company is a party, including the policy number of each such policy.

          (b) Schedule 2.21(b) describes: (i) any self-insurance arrangement by or affecting the Company, including any reserves established thereunder and any partial self-insurance such as through deductibles of more than $25,000 each occurrence, at any time during the two years preceding the date of this Agreement, (ii) any current or previous contract or arrangement, other than a policy of insurance, for the transfer or sharing of any material risk by the Company, including any captive insurance company participation; and (iii) all obligations of the Company to the Major Customers with respect to insurance and identifies the policy under which such coverage is provided.

          (c) Schedule 2.21(c) sets forth, by year, for the current policy year and each of the two preceding policy years: (i) a summary (whether internally prepared or insurance company issued) of the loss experience under each policy; (ii) a statement describing each open claim and all closed claims for an amount in excess of $25,000 under an insurance policy, which sets forth: (A) the name of the claimant; (B) a description of the policy by insurer, type of insurance, and period of coverage; and (C) the amount and a brief description of the claim; and (iii) a statement describing the loss experience for all claims that were self-insured, including the number and aggregate cost of such claims.

-19-

          (d) Except as set forth on Schedule 2.21(d): (i) All policies to which the Company is a party or that provide coverage to Seller, the Company, or any director or officer of the Company: (A) are valid, outstanding, and enforceable; (B) are issued by an insurer that is to the Knowledge of Seller and the Company financially sound and reputable; (C) are sufficient for compliance with all Legal Requirements and Contracts to which the Company is a party or by which it is bound; (D) will continue in full force and effect following the consummation of the Contemplated Transactions, except with respect to Seller; and (E) do not provide for any retrospective premium adjustment or other experienced-based liability on the part of the Company. (ii) Neither Seller nor the Company has received (A) any refusal of coverage or any notice that a defense will be afforded with reservation of rights, or (B) any notice of cancellation or any other indication that any insurance policy is no longer in full force or effect or will not be renewed or that the issuer of any policy is not willing or able to perform its obligations thereunder. (iii) The Company has paid all premiums due, and has otherwise performed all of its obligations, under each policy to which the Company is a party or that provides coverage to the Company or any director thereof. (iv) The Company has given notice to the insurer of all material claims that may be insured thereby.

     2.22 Environmental Matters. Except as set forth on Schedule 2.22, and except as would not reasonably be expected to have a Material Adverse Effect:

          (a) The Company is in compliance with, and has not been and is not in violation of or subject to material liability under, any Environmental Law. Neither Seller nor the Company has any basis to expect, nor has any of them received, any actual or Threatened order, notice, or other communication from any Governmental Body or other person alleging any actual or potential violation or failure to comply with any Environmental Law, or of any actual or Threatened obligation to undertake or bear the cost of any Environmental, Health, and Safety Liabilities with respect to any of the Facilities in which Seller or the Company has had an interest, or with respect to any property or Facility at or to which Hazardous Materials were generated, manufactured, refined, transferred, imported, used, or processed by Seller or the Company.

          (b) Seller has delivered to Buyer copies of any Phase 1 or Phase 2 reports, and similar environmental self-assessment documentation pertaining to the Facilities, or concerning compliance by the Company with Environmental Laws.

          2.23 Intellectual Property Assets.

          (a) Set forth on Schedule 2.23(a) is a list and description of all material patents, patent rights, trademarks, service marks, trade names, brands and copyrights (whether or not registered and, if applicable, including pending applications for registration) owned, used, licensed or held by the Company as of the date hereof. Except as set forth on Schedule 2.23(a), (vii) (A) to the Seller’s and the Company’s Knowledge, the Company is the owner of all right, title and interest in and to all of the material Intellectual Property Assets owned by the Company, free and clear of any Encumbrances other than Permitted Encumbrances, and (B) the Company has the right to use and license the same in the conduct of the Business as currently conducted; (viii) there have been no claims made against Seller or the Company asserting the invalidity,

-20-

abuse, misuse, or unenforceability of any of the Intellectual Property Assets; (ix) neither Seller nor the Company has made any claim of any material violation or infringement by others of any of its Intellectual Property Assets or interests therein and, to the Knowledge of Seller and the Company, no grounds for any such claims exist; (x) neither Seller nor the Company has received any notice that it is in conflict with or infringing upon the asserted intellectual property rights of others in connection with the Intellectual Property Assets and, to the Knowledge of Seller and the Company, neither the use of the Intellectual Property Assets nor the operation of the Business is infringing or has infringed upon any intellectual property rights of others; (xi) the Intellectual Property Assets are, in the aggregate, sufficient and include all intellectual property rights necessary for the Company to lawfully operate the Business as presently being operated; and (xii) to the Knowledge of Seller and the Company, no interest in any of Seller’s or the Company’s Intellectual Property Assets has been assigned, transferred, licensed or sublicensed by Seller or the Company to any Person other than Buyer pursuant to this Agreement.

          (b) Schedule 2.23(b) contains a list and of all internet web sites and internet domain names presently used by the Company comprising part of the Intellectual Property Assets of the Company (collectively “Net Names”). All Net Names have been registered in the name of the Company. No Net Name has been or is now involved in any dispute, opposition, invalidation or cancellation Proceeding and, to the Knowledge of Seller and the Company, no such action is Threatened with respect to any Net Name. To the Knowledge of Seller and the Company, there is no domain name application pending of any other Person which would or would potentially interfere with or infringe any Net Name. No Net Name is infringed or, to the Knowledge of Seller and the Company, has been challenged, interfered with or threatened in any way. To the Knowledge of Seller and the Company, no Net Name infringes, interferes with or is alleged to interfere with or infringe the trademark, copyright or domain name of any other Person.

     2.24 Certain Payments. Since January 1, 2003, neither the Company or any of its directors or officers, nor any employee authorized by any such director or officer, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of the Company or any Related Person of the Company, or (iv) in violation of any Legal Requirement, (b) established or maintained any fund or asset belonging to the Company that has not been recorded in the books and records of the Company.

     2.25 Relationships With Related Persons. Neither Seller nor any Related Person of Seller or of the Company has, or since January 1, 2003 has had, any interest in any property (whether real, personal, or mixed and whether tangible or intangible), used in or pertaining to the Business of the Company . Neither Seller nor any Related Person of Seller or of the Company is, or since January 1, 2003 has owned (of record or as a beneficial owner) an equity interest or any other financial or profit interest in, a Person that has (i) had business dealings or a material financial interest in any transaction with the Company, or (ii) engaged in direct competition with the Company with respect to any of the line of the products or services of the Company set forth

-21-

in Schedule 2.25 (a “Competing Business”) in any market presently served by the Company, except for less than five percent (5%) of the outstanding capital stock of any Competing Business that is publicly traded on any recognized exchange or in the over-the-counter market.

     2.26 Brokers or Finders. Seller and its Representatives have incurred no Liability for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with this Agreement.

     2.27 Disclosure.

          (a) No representation or warranty of Seller or the Company in this Agreement omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

          (b) No notice given pursuant to Section 4.5 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading.

3. Representations and Warranties of Buyer

     In order to induce Seller and the Company to enter into this Agreement, Buyer represents and warrants to Seller and the Company as follows:

     3.1 Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, with full corporate power and authority to conduct its business as it is now conducted.

     3.2 Authority; No Conflict.

          (a) This Agreement constitutes the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. Upon the execution and delivery by Buyer of each agreement to be executed or delivered by Buyer at Closing (collectively, the “Buyer’s Closing Documents”), each Buyer’s Closing Document will constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its respective terms. Buyer has the absolute and unrestricted right, power and authority to execute and deliver this Agreement and the Buyer’s Closing Documents and to perform its obligations under this Agreement and the Buyer’s Closing Documents, and such action has been duly authorized by all necessary corporate action.

          (b) Neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Contemplated Transactions by Buyer will give any Person the right to prevent, delay or otherwise interfere with any of the Contemplated Transactions pursuant to: (i) any provision of Buyer’s Governing Documents; (ii) any resolution adopted by the board of directors or the shareholders of Buyer; (iii) any Legal Requirement or Order to which Buyer may be subject; or (iv) any Contract to which Buyer is a party or by which Buyer may be bound.

-22-

     Except as set forth on Schedule 3.2, Buyer is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions.

     3.3 Investment Intent. Buyer is acquiring the Interests for its own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act.

     3.4 Certain Proceedings. There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Contemplated Transactions. To Buyer’s Knowledge, no such Proceeding has been Threatened.

     3.5 Brokers or Finders. Buyer and its Representatives have incurred no Liability for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with this Agreement.

     3.6 No Outside Reliance. Buyer acknowledges that it has conducted to its satisfaction an independent investigation of the financial condition, results of operations, assets, liabilities, properties and projected operations of the business of the Company and the Seller and, in making the determination to proceed with the Contemplated Transactions, has relied solely on the results of its own independent investigation and the representations and warranties set forth in Section 2 hereof, provided, however, that no such investigation shall in any way preclude or limit Buyer’s ability to recover for breaches of such representations and warranties under Section 10 herein. Such representations and warranties constitute the sole and exclusive representations and warranties of the Company and the Seller, respectively, to Buyer in connection with the Contemplated Transactions, and Buyer acknowledges and agrees that neither the Company nor Seller is making any representation or warranty whatsoever, express or implied, beyond those expressly given in this Agreement, including any implied warranty as to the condition, merchantability or suitability as to any of the assets or properties of the Company. Buyer further acknowledges and agrees that any estimates, projections, forecasts or other predictions that may have been provided to Buyer or any of its employees, agents or Representatives are not representations or warranties of the Company or Seller, or any of their respective Related Persons, and were not relied upon by the Buyer in entering into this Agreement or consummating the Contemplated Transactions.

     3.7 Disclosure.

          (a) No representation or warranty of Buyer in this Agreement omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

          (b) No notice given pursuant to Section 5.3 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading.

4. Seller’s Preclosing Covenants

-23-

     4.1 Access and Investigation. Between the date of this Agreement and the Closing Date, Seller and the Company will and will cause their Representatives to, (a) afford Buyer and its Representatives (collectively, “Buyer’s Advisors”) reasonable access to the Company’s personnel, properties (including subsurface testing), Contracts, books and records, and other documents and data during the Company’s normal business hours, (b) furnish Buyer and Buyer’s Advisors with copies of all such Contracts, books and records, and other existing documents and data as Buyer may reasonably request, and (c) furnish Buyer and Buyer’s Advisors with such additional financial, operating, and other data and information as Buyer may reasonably request. Notwithstanding the foregoing, Buyer shall not, without Seller’s prior written consent, which may be withheld at Seller’s sole and absolute discretion, contact or otherwise communicate with any of Seller’s or the Company’s employees, customers, lenders, prospects, vendors or suppliers or any other third parties with whom Seller or the Company has a contractual relationship concerning this Agreement, provided, however, that Buyer (through individuals approved by Seller) shall be permitted to meet in person, together with a Representative of the Company, with the Company’s contacts at its top four (4) commercial payors (United Healthcare, Sentara Health, Anthem Blue Cross Blue Shield of Virginia, and Catalyst RX) at such time and place each as shall be mutually agreed upon by Buyer, Seller and the Company. Buyer, Seller and the Company agree that the purpose of these meetings is to introduce Buyer to the representatives of such payors and to assure such payors that the Company’s business will be conducted in accordance with historic practices.

     4.2 Operation of the Business. Between the date of this Agreement and the Closing Date, Seller and the Company will:

          (a) conduct the Business only in the Ordinary Course of Business; and

          (b) use their Best Efforts to preserve intact the current business organization of the Company, keep available the services of the current officers, employees, and agents of the Company, and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, agents, and others having business relationships with the Company.

     4.3 Negative Covenant. Except as set forth on Schedule 4.3 or as otherwise expressly permitted by this Agreement, between the date of this Agreement and the Closing Date, Seller and the Company will not, without the prior consent of Buyer, take any of the following actions:

          (a) change the Company’s authorized or issued capital stock; grant any stock option or right to purchase shares of capital stock of the Company; issue any security convertible into such capital stock; grant any registration rights; purchase, redemption, retirement, or other acquisition by the Company of any shares of any such capital stock; or declare or pay any dividend or otherwise distribute or pay in respect of shares of capital stock;

          (b) amend the Governing Documents of the Company, except as required by any Legal Requirement and except in connection with the Conversion;

          (c) enter into any employment or similar Contract with any director, officer, or employee or, except in the Ordinary Course of Business consistent with past practice, pay or

-24-

increase any severance payment, bonuses, salaries, or other compensation to any shareholder, director, officer, or employee;

          (d) adopt any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement or other employee benefit plan or, except in the Ordinary Course consistent with past practice of Business, increase the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company;

          (e) materially change the accounting methods used by the Company; or

          (f) agree, whether oral or written, to do any of the foregoing.

     4.4 Required Approvals. As promptly as practicable after the date of this Agreement, Seller and the Company will make all filings required by Legal Requirements to be made by them in order to consummate the Contemplated Transactions (including all filings under the HSR Act, which shall be made no later than three (3) Business Days after the date hereof) and use their best efforts to furnish or cause to be furnished as promptly as practicable all information and documents requested with respect to such Legal Requirements (including specifically under the HSR Act) and shall otherwise cooperate with the applicable Governmental Body in order to obtain any Legal Requirements and Consents in connection therewith as expeditiously as possible. Between the date of this Agreement and the Closing Date, Seller and the Company will (a) reasonably cooperate with Buyer (at no out-of-pocket expense to Seller and the Company) with respect to all filings that Buyer elects to make or is required by Legal Requirements to make in connection with the Contemplated Transactions, and (b) reasonably cooperate with Buyer in obtaining all consents identified on Schedule 3.2; provided that this Agreement will not require Seller to dispose of or make any change in any portion of its business or to incur any other burden to obtain a Governmental Authorization. Seller and the Company shall use their best efforts to resolve such objections, if any, as any Governmental Body may assert with respect to this Agreement and the Contemplated Transactions in connection with the Legal Requirements. In the event that a suit is instituted by a Person or Governmental Body challenging this Agreement and the Contemplated Transactions as a violation of applicable antitrust or competition laws, Seller and the Company shall use their best efforts to resist or resolve such suit. Seller and the Company each shall, upon request by the other, furnish Buyer with all information concerning itself, its Subsidiaries, directors, officers and stockholders and such other matters as may reasonably be necessary or advisable in connection with any statement, filing, ruling request, notice or application made by or on behalf of Seller, the Company, Buyer or any of their respective Subsidiaries to any third party and/or any Governmental Body in connection with this Agreement and the Contemplated Transactions.

     4.5 Notification.

          (a) Between the date of this Agreement and the Closing Date, Seller will promptly notify Buyer in writing if Seller or the Company becomes aware of any fact or condition that causes or constitutes a Breach of any of Seller’s and the Company’s representations and warranties as of the date of this Agreement or becomes aware of the

-25-

occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of any such representation or warranty had such representation or warranty been made as of the Closing Date. The Seller and the Company shall promptly supplement or amend the Disclosure Schedule to reflect any fact necessary to make the representations true and correct. Any such supplement or amendment shall be deemed to qualify the Seller’s and the Company’s representations and warranties contained herein in determining Buyer’s rights under Sections 7 and 10 unless such supplement or amendment arose out of a fact which, as of the date of execution of the Agreement, constituted a breach of a representation or warranty contained herein.

     4.6 Payment of or Cancellation of Indebtedness. Except as expressly provided in this Agreement or on Schedule 4.6, Seller will, prior to Closing, (i) cause all indebtedness owed to the Company by Seller or any Related Person of Seller to be paid in full prior to Closing, (ii) cancel all indebtedness of the Company to Seller or any Related Person of Seller, (iii) pay off any indebtedness owed or guaranteed by the Company to any bank or other financial institution, and (iv) use its Best Efforts to pay off in full all amounts owed under the Master Lease Agreement between CitiCapital Technology Finance Inc. and the Company, dated February 22, 2005.

     4.7 No Negotiation. After the date of this Agreement and until such time, if any, as this Agreement is terminated pursuant to Section 9, Seller and the Company will not, and will cause each of their Representatives not to, directly or indirectly solicit, initiate, or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any Person (other than Buyer) relating to any transaction involving the sale of the Business, or any of the capital stock of the Company, or any merger, consolidation, business combination, or similar transaction involving the Company. If Seller, the Company, or any of their officers, directors, officers, agents, employees or affiliates receives any such inquiry or proposal, Seller shall provide written notice to Buyer as soon as practicable of any such inquiry or proposal by any such Person.

     4.8 Best Efforts. Between the date of this Agreement and the Closing Date, Seller and the Company will use their Best Efforts to cause (i) the conditions in Sections 7 and 8 to be satisfied and (ii) the Master Lease Agreement between CitiCapital Technology Finance Inc. and the Company, dated February 22, 2005, to be terminated and of no further force and effect as of the Effective Time.

     4.9 Change of Name. On or before the Closing Date, Seller shall (a) amend its Governing Documents and take all other actions necessary to change its name to one sufficiently dissimilar to Seller’s present name, in Buyer’s reasonable judgment, to avoid confusion and (b) take all actions requested by Buyer to enable Buyer and the Company to utilize Seller’s present name following Closing.

     4.10 Interim Financial Statements. Until the Closing Date, Seller shall deliver to Buyer within twenty (20) Business Days after the end of each month, copies of consolidated balance sheets, statements of income and shareholders equity and statements of cash flows for the Company and Seller for such month prepared in accordance with GAAP (without footnotes

-26-

and normal year end adjustments) and certified by Seller’s chief financial officer as to compliance with Section 2.3.

     4.11 Conversion of Company. No later than three (3) Business Days prior to the Closing Date, Seller shall cause the Company to convert into a single member limited liability company in Virginia (the “Conversion”). Following the Conversion, Seller shall not take or cause to be taken any action that would prevent the Company from being disregarded as an entity separate from its owners under Treas. Reg. § 301.7701-3 for federal income tax purposes, and to the extent permitted, for all other income tax purposes.

5. Buyer’s Preclosing Covenants

     5.1 Required Approvals. Buyer acknowledges that the Parties proceeding to Closing as expeditiously as possible is an important element of the Contemplated Transactions for Seller and, as promptly as practicable after the date of this Agreement, Buyer will make all filings required by Legal Requirements to be made by it in order to consummate the Contemplated Transactions (including all filings under the HSR Act, which shall be made no later than three (3) Business Days after the date hereof) and use its best efforts to furnish or cause to be furnished as promptly as practicable all information and documents requested with respect to such Legal Requirements (including specifically under the HSR Act) and shall otherwise cooperate with the applicable Governmental Body in order to obtain any Legal Requirements and Consents in connection therewith as expeditiously as possible. Between the date of this Agreement and the Closing Date, Buyer will (a) reasonably cooperate with Seller and the Company (at no out-of-pocket expense to Buyer) with respect to all filings that Seller and the Company elect to make or are required by Legal Requirements to make in connection with the Contemplated Transactions, and (b) diligently pursue obtaining all consents identified on Schedule 3.2; provided that this Agreement will not require Buyer to dispose of or make any change in any portion of its business or to incur any other burden to obtain a Governmental Authorization. Buyer shall use its best efforts to resolve such objections, if any, as any Governmental Body may assert with respect to this Agreement and the Contemplated Transactions in connection with the Legal Requirements. In the event that a suit is instituted by a Person or Governmental Body challenging this Agreement and the Contemplated Transactions as a violation of applicable antitrust or competition laws, Buyer shall use its best efforts to resist or resolve such suit. Buyer shall, upon request by Seller and the Company, furnish the other with all information concerning itself, its Related Persons, directors, officers and stockholders and such other matters as may reasonably be necessary or advisable in connection with any statement, filing, ruling request, notice or application made by or on behalf of the Seller, the Company, Buyer or any of their respective Subsidiaries to any third party and/or any Governmental Body in connection with this Agreement and the Contemplated Transactions.

     5.2 Best Efforts. Except as set forth in the proviso to Section 5.1, between the date of this Agreement and the Closing Date, Buyer will use its Best Efforts to cause the conditions in Sections 7 and 8 to be satisfied.

     5.3 Notification. Between the date of this Agreement and the Closing Date, Buyer will promptly notify Seller in writing if Buyer becomes aware of any fact or condition that

-27-

causes or constitutes a Breach of any of Buyer’s representations and warranties as of the date of this Agreement that would reasonably be expected to result in a failure to satisfy the condition in Section 8.1, or if Buyer becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of any such representation or warranty had such representation or warranty been made as of the Closing Date that would reasonably be expected to result in a failure to satisfy the condition in Section 8.1.

6. Additional Covenants

     6.1 Employee Matters.

          (a) Employees. For a period of one year following the Closing Date (or such longer period as provided in any written employment agreement), Buyer covenants and agrees that the employees of the Company who remain employed with the Company (it being understood that Buyer shall in its sole discretion determine who shall continue to be so employed) shall maintain at least the same salary or hourly wage rate in effect immediately prior to the Closing. Such individuals who continue their employment with Company following the Closing Date are hereinafter referred to as the “Continuing Employees”.

          (b) Benefits.

               (i) For a period of no more than one year following the Closing Date, or such longer period of time required by applicable Law or in any applicable employment agreement, Buyer shall cause to be maintained the Employee Plans, programs arrangements and policies of the Company, for each of the Continuing Employees or shall otherwise provide such transferred employees with compensation (including salary, wages and opportunities for commissions, bonuses, incentive pay, overtime and premium pay), employee benefits, location of employment and a position of employment that are, in each case, at least substantially equivalent (in the aggregate) to those provided to such Continuing Employee immediately prior to the Closing.

               (ii) For purposes of eligibility and vesting (but not benefit accrual) under the employee benefit plans of Buyer providing benefits to Continuing Employees, but expressly excluding the Buyer’s employee stock purchase plan, (the “Buyer Plans”), Buyer shall credit each Continuing Employee with his or her years of service with the Company, its Related Persons and any of their predecessor entities, to the same extent as such Continuing Employee was entitled immediately prior to the Closing to credit for such service under any similar Employee Plan. The Buyer Plans shall not deny Continuing Employee coverage on the basis of pre-existing conditions and shall credit such Continuing Employee for any deductibles and out-of-pocket expenses paid in the year of initial participation in the Buyer Plans.

               (iii) Buyer shall be liable for any and all obligations and Liabilities in respect of employees of the Company (to the extent arising on or after the Closing Date), in each case arising under WARN or any similar state Legal Requirement, including any Liabilities imposed or incurred as a result of the failure of any Party to this Agreement to give any requisite

-28-

notice under the WARN or any similar state Legal Requirement (including in connection with the transactions contemplated herein).

               (iv) For the eighteen (18) month period following Closing, Buyer shall offer to provide to Robert Haft and his wife and children health continuation medical care coverage under COBRA, at his sole expense.

7. Conditions Precedent To Buyer’s Obligation To Close

     Buyer’s obligation to purchase the Interests and to take the other actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):

     7.1 Accuracy of Representations. The representations and warranties contained in Section 2 of this Agreement (i) that are qualified by materiality or Material Adverse Effect shall be true and correct as if made on the Closing Date and (ii) that are not qualified by materiality or Material Adverse Effect shall be true and correct in all material respects as if made on the Closing Date, except, in each case, for inaccuracies or omissions that would not reasonably be expected to have a Material Adverse Effect, and except for the representations and warranties in Sections 2.1 and 2.2, which shall be true in all respects.

     7.2 Seller’s and the Company’s Performance.

          (a) All of the covenants and obligations that Seller and the Company are required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), must have been duly performed and complied with in all material respects.

          (b) Each document required to be delivered pursuant to Section 1.4 must have been delivered, and each of the other covenants and obligations in Section 4 must have been performed and complied with in all material respects.

     7.3 Consents. Each Consent identified on Schedule 1.4(a)(vi), must have been obtained and must be in full force and effect.

     7.4 No Proceedings. No temporary restraining order, preliminary or permanent injunction or other order issues by a court or other Governmental Authority of competent jurisdiction shall be in effect and have the effect of making the Contemplated Transactions illegal or otherwise prohibiting consummation of the Contemplated Transactions; provided, however, that the provisions of this Section 7.4 shall not be available to Buyer if its failure to fulfill its obligations shall have been the cause of, or shall have resulted in, such order or injunction.

     7.5 No Claim Regarding Stock Ownership or Sale Proceeds. There must not have been made or Threatened by any Person any claim asserting that such Person (a) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock

-29-

of, or any other voting, equity, or ownership interest in, the Company, or (b) is entitled to all or any portion of the Purchase Price payable for the Interests.

     7.6 Termination of Certain Agreements. Seller and the Company shall have caused to be terminated prior to the Effective Time the loan agreement between the Company and Wachovia, N.A. and the Guaranty of the Seller’s obligations to Wachovia N.A., and shall have provided lien release waivers from Wachovia, N.A. with respect thereto.

     7.7 UnitedHealth. UnitedHealth shall not have notified Seller or the Company prior to Closing that it will cease or materially reduce its business with the Company before Closing or within thirty (30) days thereafter.

8. Conditions Precedent To Seller’s Obligation To Close

     Seller’s obligation to sell the Interests and to take the other actions required to be taken by Seller at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Seller, in whole or in part):

     8.1 Accuracy of Representations. The representations and warranties contained in Section 3 of this Agreement (i) that are qualified by materiality or Material Adverse Effect shall be true and correct as if made on the Closing Date and (ii) that are not qualified by materiality or Material Adverse Effect shall be true and correct in all material respects as if made on the Closing Date, except, in each case, for inaccuracies or omissions that would not reasonably be expected to have a Material Adverse Effect, and except for the representations and warranties in Sections 3.1 and 3.2, which shall be true in all respects.

     8.2 Buyer’s Performance.

          (a) All of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), must have been performed and complied with in all material respects.

          (b) Buyer must have delivered each of the documents required to be delivered by Buyer pursuant to Section 1.4 and must have made the cash payments required to be made by Buyer pursuant to Section 1.4(b)(i).

     8.3 No Injunction. There must not be in effect any Legal Requirement or any injunction or other Order that (a) prohibits the sale of the Interests by Seller to Buyer, and (b) has been adopted or issued, or has otherwise become effective, since the date of this Agreement.

     8.4 Consents. Each Consent identified on Schedule 3.2, must have been obtained and must be in full force and effect.

9. Termination

-30-

     9.1 Termination Events. This Agreement may, by notice given prior to or at the Closing, be terminated:

          (a) by either (i) Buyer or (ii) Seller and the Company, if a material Breach of any provision of this Agreement has been committed by the other party or parties and such Breach has not been waived and has continued without cure for a period of five (5) days following notice thereof by the terminating Party;

          (b) (i) by Buyer if any condition in Section 7 has not been satisfied as of October 1, 2005 or if satisfaction of such a condition is or becomes impossible (other than through the failure of Buyer to comply with its obligations under this Agreement) and Buyer has not waived such condition on or before the Closing Date; or (ii) by Seller and the Company, if any condition in Section 8 has not been satisfied as of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of Seller or the Company to comply with their obligations under this Agreement) and neither Seller nor the Company has waived such condition on or before the Closing Date;

          (c) by mutual consent of Buyer, Seller and the Company; or

          (d) by either (i) Buyer or (ii) Seller and the Company if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply with its obligations under this Agreement) on or before September 15, 2005, or such later date as the parties may agree upon.

     9.2 Effect of Termination. Each party’s right of termination under Section 9.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 9.1, all further obligations of the parties under this Agreement will terminate, except that the obligations in Sections 11.1 and 11.3 will survive; provided, however, that if this Agreement is terminated by a party because of a willful or intentional Breach of the Agreement by the other party or parties or because one or more of the conditions to the terminating party’s obligations under this Agreement is not satisfied as a result of the other party’s or parties’ failure to comply with its or their obligations under this Agreement in all material respects, the terminating party’s right to pursue all legal remedies will survive such termination unimpaired.

10. Indemnification; Remedies

     10.1 Survival and Right to Indemnification. All representations, warranties, covenants, and obligations in this Agreement, the supplements to Seller’s and the Company’s schedules, the certificates delivered pursuant to Section 1.4, and any other certificate or document delivered pursuant to this Agreement will survive the Closing; provided, however that all of the Company’s Liability with respect to its representations, warranties, covenants and obligations pursuant hereto (whether or not made jointly with Seller) shall terminate at Closing and each such representation, warranty, covenant and obligation shall be deemed to be solely the representation, warranty, covenant or obligation of Seller as if the Company was not a party to this Agreement. The right to indemnification, payment of Damages or other remedy based on

-31-

such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Damages, or other remedy based on such representations, warranties, covenants, and obligations.

     10.2 Indemnification and Payment of Damages by Seller and the Company. Prior to Closing, Seller and the Company will jointly and severally and following the Closing Seller solely will indemnify and hold harmless Buyer, the Company, and their respective Representatives, shareholders, controlling persons, and affiliates (collectively, the “Buyer Indemnified Persons”) for, and will pay to the Indemnified Persons the amount of, any Damages, arising, directly or indirectly, from or in connection with:

          (a) any Breach of any representation or warranty made by Seller or the Company in this Agreement (without giving effect to any supplement to Seller’s and the Company’s schedules) or any other certificate or document delivered by Seller pursuant to this Agreement;

          (b) any Breach by Seller or the Company of any covenant or obligation of Seller or the Company in this Agreement; or

          (c) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Seller or the Company (or any Person acting on its behalf) in connection with any of the Contemplated Transactions.

     Notwithstanding the foregoing, neither the Seller nor the Company shall be obligated to provide indemnification for any Breach of a representation or warranty contained herein to the extent that the amount of Damages arising from such Breach is provided for in the Supplemental Reserves.

     10.3 Indemnification and Payment of Damages by Buyer. Buyer will indemnify and hold harmless Seller and its Representatives, shareholders, controlling persons and affiliates (collectively, “Seller Indemnified Persons”), and will pay to the Seller Indemnified Persons the amount of any Damages arising, directly or indirectly, from or in connection with (a) any Breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement, (b) any Breach by Buyer of any covenant or obligation of Buyer in this Agreement, or (c) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with any of the Contemplated Transactions.

-32-

     10.4 Time Limitations. If the Closing occurs, Seller will have liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied with prior to the Closing Date, for a period of eighteen (18) months after the Closing Date; provided, however, that the representations and warranties set forth in Sections 2.1, 2.2, 2.10, 2.14, 2.22, and 2.26 and the indemnification obligation set forth in Section 10.7 shall survive the Closing for a period of three (3) years, and provided further that the representations and warranties set forth in Section 2.15 shall survive the Closing for a period of four (4) years. If the Closing occurs, Buyer will have liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied with prior to the Closing Date, for a period of eighteen (18) months after the Closing Date; provided, however, that the representations and warranties set forth in Section 3.5 or a claim for indemnification or reimbursement based upon Section 10.6(e) shall survive the Closing for a period of four (4) years.

     10.5 Monetary Limitations.

          (a) If the Closing occurs, Seller will have no liability (for indemnification or otherwise) with respect to the matters described in this Section 10.5(a), or, to the extent relating to any failure to perform or comply prior to the Closing Date, clause (b) of Section 10.2, or, subject to the last sentence of this Section 10.5(a), indemnification claims made under Section 10.7 unless the total of all Damages with respect to such matters is at least $750,000, at which time the Seller shall be liable for all Damages in excess of $250,000 (the “Basket”). The maximum aggregate liability of the Seller as a result of all Damages described in Section 10.2 and in Section 10.7 shall not exceed $11,400,000.00 (the “Cap Amount”). The Basket will not apply to any Breach of any of Seller’s representations and warranties set forth in Section 2.15 or to any Damages arising out of the failure of the Company to pay Income Taxes for taxable periods (or portions thereof) ending on or before the Closing Date and neither the Basket nor the Cap Amount will apply to any Breach of any of Seller’s representations and warranties set forth in Sections 2.1, 2.2, or 2.26 such that Buyer shall be entitled to recover the full amount of such Damages, which shall not exceed the aggregate consideration that the Seller received hereunder.

          (b) If the Closing occurs, Seller’s liability for any Damages with respect to any Breach of Seller’s representations and warranties set forth in Section 2.15 shall be as follows, with the remaining liability to be assumed and paid by Buyer: (i) with respect to the first $1,000,000.00 of Damages, liability for fifty percent (50%) of such Damages; (ii) with respect to up to the next $4,000,000.00 of Damages, liability for eighty percent (80%) of such Damages; and (iii) with respect to up to the next $6,400,000.00 of Damages, liability for one hundred percent (100%) of such Damages. For the avoidance of doubt, liability for all such damages shall be cumulative and subject, together with any other claims under Section 10.2, to the Cap Amount.

          (c) [Intentionally omitted.]

          (d) If the Closing occurs, in no event shall the total Liability of Seller or Buyer with respect to claims under this Section 10 exceed the Purchase Price.

-33-

          (e) The amount of any Damages shall be reduced or reimbursed, as the case may be, by any amount received by the Indemnified Person with respect thereto under any insurance coverage or from any other party. An Indemnified Person shall use reasonable efforts to collect any amounts available under such insurance coverage or from such other party. If an Indemnified Person receives an amount under insurance coverage or from a third party with respect to Damages at any time subsequent to any indemnification provided by an Indemnifying Party, then such Indemnified Person shall promptly reimburse the Indemnifying Party for any payment made or expense incurred by such party in connection with providing such indemnification up to such amount received by the Indemnified Person.

          (f) Any indemnification payments required to be made hereunder with respect to any matter shall be reduced by the amount of any economic benefits (including, income tax benefits) that are readily quantifiable and have been received by the Indemnified Person as a result of the same matter.

          (g) To the extent Seller discharges any claim for indemnification hereunder, it shall be subrogated to all related rights of the Buyer Indemnified Parties against third parties.

          (h) The Buyer Indemnified Parties shall not be entitled to indemnification with respect to any matters or amounts which are the subject of a Closing Working Capital adjustment pursuant to Section 1.5.

          (i) The Basket shall be increased dollar for dollar by any refund or recovery actually received (net of Tax costs associated with such refund or recovery) by the Company after Closing in connection with (1) the matter described on Schedule 10.5(i) with respect to the DMERC Audit and (2) the Company’s amended Sales and Use Tax Returns for the State of California, which is described on Schedule 2.10(b).

          (j) From and after the Closing, the indemnification provided in this Section 10 shall be the sole and exclusive remedy of any Party hereto with respect to this Agreement and the Contemplated Transactions, except with respect to the Noncompetition Agreement. Notwithstanding any provision of this Agreement to the contrary, nothing contained in this Agreement shall in any way limit, impair, modify or otherwise affect the rights of Buyer to bring any claim, demand, suit or cause of action otherwise available to Buyer based upon, or to seek or recover any Damages arising from or related to, an allegation or allegations that an indemnifying party had an intent to defraud (as such term applies under common law and securities law principles) or made a willful, intentional or reckless misrepresentation or omission of a material fact in connection with this Agreement or any of the agreements contemplated hereby.

     (k) To the extent that a Breach of a representation or warranty contained in Section 2 arises out of a review being conducted by the State of Virginia first described in Item 2 to Schedule 2.9, then any Damages arising from such Breach shall first be applied toward the Basket and then any excess Damages arising from such Breach shall be funded eighty percent (80%) by Seller and twenty percent (20%) by Buyer; provided, that Seller’s total liability for Damages under this Section 10.5(k) shall be cumulative and subject to the Cap Amount along with other Damages subject to the Cap Amount.

-34-

     10.6 Procedure For Indemnification — Third Party Claims.

          (a) Promptly after receipt by an indemnified party under Sections 10.2 or 10.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party’s failure to give such notice.

          (b) If any Proceeding referred to in Section 10.6(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel reasonably satisfactory to the indemnified party (Latham & Watkins, LLP being acceptable to Buyer for these purposes) and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Section 10 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation conducted at the request of the indemnifying party. If the indemnifying party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification; (ii) no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party’s consent (not to be unreasonably withheld, conditioned or delayed) unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent (not to be unreasonably withheld, conditioned or delayed). If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within thirty (30) days after the indemnified party’s notice is given, give notice to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the indemnified party.

          (c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying

-35-

party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld).

          (d) Seller hereby consents to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Indemnified Person for purposes of any claim that an Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and agrees that process may be served on Seller with respect to such a claim anywhere in the world.

          (e) The Parties covenant and agree that the protocol set forth on Schedule 10.6(e) shall be followed without exception in connection with any matters involving Medicare or Medicaid, including indemnification claims arising under Section 2.15.

          (f) The Indemnified Party shall cooperate with the Indemnifying Party and its counsel in such defense and make available to the Indemnifying Party all witnesses, records, materials, and information in the Indemnified Party’s possession or under the Indemnified Party’s control relating thereto as may be reasonably requested by the Indemnifying Party, and in contesting any claim, demand or Proceeding which the Indemnifying Party defends, or if appropriate and related to the claim, demand or Proceeding in question, in making any counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person. In the event the Indemnifying Party fails to assume the defense of such Third Party Claim within thirty (30) days after receipt of notice thereof in accordance with the terms hereof, (A) the Indemnified Party against which such Third Party Claim has been asserted shall have the right to undertake the defense, and (B) the Indemnifying Party agrees to cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, all witnesses, records, materials and information in the Indemnifying Party’s possession or under the Indemnifying Party’s control relating thereto as may be reasonably requested by the Indemnified Party.

     10.7 Tax Indemnification.

     In addition to Section 10.2, without duplication, Seller agrees to indemnify and hold harmless the Indemnified Persons from any Damages for (i) any Taxes imposed on the Company with respect to Tax periods ending on or prior to the Closing Date (a “Pre-Closing Tax Period”) and (ii) any Taxes imposed on the Company with respect to Tax periods beginning before and ending after the Closing Date, but only with respect to the portion of such period up to and including the Closing Date (such portion, a “Pre-Closing Partial Period”), to the extent such Taxes are allocable pursuant to Section 11.4(b) to the Pre-Closing Partial Period, including, without limitation, any Taxes (other than Transfer Taxes which are governed under Section 12.2) arising as a result of the transactions contemplated in this Agreement to be undertaken by Seller or the Company (including, without limitation, the Conversion described in Sections 4.11) on or prior to the Closing Date. Notwithstanding the foregoing, Seller shall not be liable to the Indemnified Parties for Taxes to the extent of the amount of Taxes that are taken into account in determining Closing Working Capital or any Taxes imposed on the Company that are payable as

-36-

a result of any events occurring on the Closing Date after the Closing that are outside of the ordinary course of business. Seller’s indemnification obligation under this Section 10.7 shall survive the Closing for a period of three (3) years and as provided in Section 10.5, Seller’s indemnification obligations with respect to Taxes (other than Income Taxes) shall be subject to the Basket.

     10.8 Procedure For Indemnification — Other Claims. A claim for indemnification for any matter not involving a Third-Party Claim may be asserted by notice to the party from whom indemnification is sought.

     10.9 Payment of Indemnification Obligations. All indemnification amounts payable to any party hereto in connection with a claim for indemnification pursuant to this Section 10 shall be effected immediately upon final determination of the amount of the indemnification liability by payment of cash or delivery of a cashier’s check in the amount of the indemnification liability.

     10.10 Retention of Holdback Amount by the Seller.

          (a) At the Closing, the Seller shall retain $11,400,000.00 from the proceeds of the Purchase Price (the “Holdback Amount”) to satisfy payment of any future indemnification obligations of the Seller or the Company pursuant to the terms of this Section 10. The Seller shall invest at least $5,700,000.00 of the Holdback Amount in Required Investments. The term “Required Investments” means (A) the following investments so long as they have maturities of six (6) months or less: (a) obligations issued or guaranteed by the United States or by any person controlled or supervised by or acting as an instrumentality of the United States pursuant to authority granted by Congress; (b) obligations issued or guaranteed by any state or political subdivision thereof rated either AA or higher, or MIG 1 or higher, by Moody’s Investors Service, Inc. or AA or higher, or an equivalent, by Standard & Poor’s Corporation, both of New York, New York, or their successors; (c) commercial or finance paper which is rated either Prime-1 or higher or an equivalent by Moody’s Investors Service, Inc. or A-1 or higher or an equivalent by Standard & Poor’s Corporation, both of New York, New York, or their successors; (d) certificates of deposit or time deposits of banks or trust companies, organized under the laws of the United States, having a minimum equity of $500,000,000 or (e) money market funds and (B) equity securities freely tradeable without regard to volume limitations and traded on either Nasdaq or The New York Stock Exchange, Inc. The Seller shall be entitled to invest the remainder of the Holdback Amount as it determines.

          (b) The Seller shall not pay dividends or make liquidating distributions involving all or a portion of the Holdback Amount until the date that is four (4) years following the Closing; provided, however, that if on the date that is four (4) years following the Closing there is a pending claim or controversy governed by the terms of this Section 10, the Seller shall be obligated to maintain that amount of the Holdback Amount, necessary to satisfy such pending claim or controversy. In such event, the first Five Million Seven Hundred Thousand ($5,700,000) Dollars of such Holdback Amount shall be in the form of Required Investments.

-37-

     10.11 Access to Company Employees. Buyer shall make available to Seller from time to time, at no charge, members of the Company’s management as well as other Company personnel as may be reasonably requested by Seller to assist Seller after Closing in connection with the process described in Section 1.5 hereof or with any claim for indemnification under this Section 10.

     10.12 Tax Treatment of Indemnity Payments. Seller and Buyer agree to treat any indemnity payment made pursuant to this Section 10 as an adjustment to the Purchase Price for federal, state, local and foreign income tax purposes unless a contrary treatment is required under applicable law.

11. Additional Covenants

11.1 Noncompetition, Nonsolicitation and Nondisparagement.

          (a) Noncompetition. For a period of three (3) years after the Closing Date, Seller shall not, directly or indirectly, invest in, own, manage, operate, finance, control, advise, render services to or guarantee the obligations of any company identified on Schedule 11.1(a) (each, a “Competing Company” and, together, the “Competing Companies”), provided, however, that Seller may purchase or otherwise acquire up to (but not more than) five percent (5%) of any class of the securities of any such Competing Company (but may not otherwise participate in the activities of such Person) if such securities are listed on any national securities exchange.

          (b) Nonsolicitation. For a period of three (3) years after the Closing Date, Seller shall not, directly or indirectly: (i) cause, induce or attempt to cause or induce any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation of the Company as of the date of this Agreement to cease doing business with the Company or to deal with any Competing Company; (ii) cause, induce or attempt to cause or induce any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation of Seller or the Company on the Closing Date or within the year preceding the Closing Date to cease doing business with the Company or, to deal with any Competing Company; or (iii) hire, retain or attempt to hire or retain any Continuing Employee (other than by general solicitations of employment) or in any way interfere with the relationship between the Company and any of its Continuing Employees.

          (c) Modification of Covenant. If a final judgment of a court or tribunal of competent jurisdiction determines that any term or provision contained in Sections 11.1(a) and (b) is invalid or unenforceable, then the parties agree that the court or tribunal will have the power to reduce the scope, duration or geographic area of the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. This Section 11.1 will be enforceable as so modified after the expiration of the time within which the judgment may be appealed. This Section 11.1 is reasonable and necessary to protect and preserve Buyer’s legitimate business interests and the value of the Company and the Business and to prevent any unfair advantage conferred on Seller.

-38-

11.2 Intentionally Omitted.

     11.3 Confidentiality.

          (a) Seller and Buyer have entered into a letter agreement dated August 26, 2004 (the “NDA Agreement”) and the terms of the NDA Agreement are hereby incorporated herein by reference as if set forth in full in this Section 11.3.

          (b) Following the Closing, Seller shall and shall cause its Related Persons to, hold in strict confidence all, and not divulge or disclose any Confidential Information, except to the extent required in connection with any Legal Requirement (including preparation and filing of tax returns for pre-closing periods) or as required or requested by any Governmental Body.

     11.4 Tax Matters.

          (a) Seller shall be responsible for preparing and filing all Income Tax Returns with respect to Taxes relating to the Company for taxable periods (or portions thereof) ending on or prior to the Closing Date, including any form 1120S’s to be filed by Seller after the Closing Date, and all other Tax Returns of the Company (including all sales and use Tax Returns) that are filed on or before the Closing Date). Buyer shall prepare or cause to be prepared all Tax Returns of the Company, other than those described in the preceding sentence, that are due to be filed after the Closing Date and those Tax Returns of the Company which are filed after the Closing Date, including all sales and use and property Tax Returns. Buyer shall furnish copies of all such Tax Returns for periods that end on before the Closing Date and for Straddle Periods (as defined below in Section 11.4(b)) with respect to Taxes relating to the Company, to Seller for its review at least ten (10) days prior to the due date for filing such Tax Returns and shall make any revisions to such Tax Returns as are not unreasonably requested by Seller to the extent such revisions relate to Taxes of the Company for a period that ends on or prior to the Closing Date or for a Pre-Closing Partial Period. Such Tax Returns shall be prepared on a basis consistent with those prepared for prior taxable periods, unless a different treatment of any item is required by applicable law or such different treatment does not result in increased Tax Liability to the Seller or an increased Tax Liability to the Company with respect to a Pre-Closing Tax Period or a Pre-Closing Partial Period. Not later than five (5) Business Days prior to the due date for the payment of any Tax on any such Tax Return, Seller shall pay to Buyer or the Company the amount of Taxes owed by Seller pursuant to Section 10.7. Buyer and Seller shall provide such assistance (including the provision of information and any required consents, powers of attorney, authorizations or signatures) necessary or desirable to allow the applicable party to file any Tax Returns described in this section.

     (b) In order to apportion appropriately any Taxes relating to a taxable period that includes (but does not end on) the Closing Date (a “Straddle Period”), the parties hereto will, to the extent permitted by applicable law, elect with the relevant taxing authority to treat for all purposes the Closing Date as the last day of a taxable period of the Company (a “Short Period”). In any case where applicable law does not permit Seller to elect the Closing Date as the last day of a Short Period, then, for purposes of this Agreement, the portion of each Tax relating to the Company for the Pre-Closing Partial Period shall be (i) in the case of ad valorem or property

-39-

Taxes, be deemed to be the amount of such Taxes for the entire Straddle Period multiplied by a fraction, the numerator of which is the number of calendar days during the Pre-Closing Partial Period and the denominator of which is the total number of calendar days in the Straddle Period, and (ii) in the case of all other Taxes be determined based on an interim closing of the books as of the close of business on the Closing Date.

     (c) For federal income tax purposes, and to the extent permitted, for all other income tax purposes, the parties acknowledge and agree that Buyer shall be treated as acquiring the assets held by the Company in exchange for the Purchase Price. Buyer and Seller shall report the transaction hereunder in a manner consistent with such treatment. Buyer and Seller agree to negotiate in good faith to determine the amount of the Purchase Price to be allocated to the non-competition agreement that Seller is entering into pursuant to Section 11.1(a) of this Agreement (the “Seller Non-Compete”) and that $0 of the Purchase Price shall be allocated to all other non-competition agreements entered into in connection with this Agreement and the remainder of the Purchase Price plus any liabilities of the Company that are treated as being assumed by the Buyer for federal income tax purposes shall be allocated among the Company’s assets in accordance with Section 1060 of the Code as provided in this Section 11.4(c), provided that in no event will the amount allocated to the Seller Non-Compete exceed $100,000 (the “Asset Allocation”). Consistent with the foregoing sentence, Buyer and Seller shall use good faith efforts to agree upon, prior to Closing the Asset Allocation and if agreed upon prior to Closing will incorporate the Asset Allocation on a schedule to be attached hereto prior to or at Closing. If Buyer and Seller are unable to agree upon the Asset Allocation by the Closing Date, they shall determine the Asset Allocation within sixty (60) days of the Closing Date. If Seller and Buyer are unable to reach a resolution within such sixty (60) day period, then all remaining disputed issues shall be submitted for resolution by an independent accounting firm mutually acceptable to Seller and Buyer which shall make a final determination as to the disputed items within thirty (30) days after such submission, and such determination shall be final, binding and conclusive on the Seller and Buyer. Each of the parties hereto agree that (i) none of the parties shall take a position on any Tax Return (including IRS Form 8594), that is in any way inconsistent with such Asset Allocation without the written consent of the other party or unless specifically required by an applicable governmental authority, and (ii) they shall promptly advise each other regarding the existence of any tax audit, controversy or litigation related to such Asset Allocation. Notwithstanding the foregoing, nothing contained herein shall prevent Buyer or Seller from settling any proposed deficiency or adjustment by any governmental authority based upon or arising out of the Asset Allocation, and neither Buyer nor Seller shall be required to litigate before any court any proposed deficiency or adjustment by any governmental authority challenging such Asset Allocation.

     (d) If after the Closing Date either party hereto receives any notice, letter, correspondence, claim or decree relating to Taxes of the Company from any taxing authority (a “Tax Notice”) for periods or portions of period that end or prior to the Closing Date or for which an indemnification claim may be made hereunder, the party receiving such Tax Notice shall deliver such Tax Notice to the other party hereto. Seller shall have the right to handle, defend, conduct and control any Tax audit or other proceeding that relates to Taxes for which Seller may have liability provided that Seller shall not compromise or settle any such Tax audit or

-40-

proceeding without obtaining Buyer’s consent, which consent shall not be unreasonably withheld, conditioned or delayed. In the event that Seller fails to provide Buyer with a written notice that it elects to defend a Tax audit or proceeding described in this Section 11.4(d) within thirty (30) days of receiving a Tax Notice, Buyer shall have the right to handle, defend, conduct and control such Tax audit or proceeding and Seller shall have the right to participate in such Tax audit or proceeding at its own expense. Buyer shall also have the right to compromise or settle any such Tax audit or proceeding that it controls pursuant to the preceding sentence, subject to Seller’s consent, which consent shall not be unreasonably withheld, conditioned or delayed. To the extent of any conflict between the provision set forth in this Section 11.4(d) and the provision set forth in Section 10.6 of this Agreement, the provisions set forth in this Section shall control.

     (e) Without the Seller’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, the Buyer shall not and it shall not permit or cause the Company or any of its Affiliates to make or change any Tax election, amend any Tax Return of the Company for a period that ends on prior to the Closing or for a Straddle Period, take any action or enter into any transaction that results in any increased Tax liability of the Seller or the owners of the Seller or that would increase the indemnification obligation of the Seller under this Agreement unless such election, amendment, action or transaction is required by applicable law.

     (f) Buyer agrees to assume the preparation and filing of all income tax withholding and employment tax forms (including Forms W-2) for all Company employees for the full 2005 calendar year in accordance with the alternate procedure set forth in Rev. Proc. 2004-53, 2004-34 I.R.B. 320.

     (g) Buyer and Seller shall furnish or cause to be furnished to each other, as promptly as practicable, such information and assistance relating to the Company as is reasonably necessary for the preparation and filing of any Tax Return, claim for refund or other filings relating to Tax matters, for the preparation for any Tax audit, for the preparation for any Tax protest, for the prosecution or defense of any suit or other proceeding relating to Tax matters.

12. General Provisions

     12.1 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants in connection with this Agreement and the Contemplated Transactions; provided that the fees and expenses of Seller’s and the Company’s attorneys, finders and brokers will be borne by Seller. Buyer will pay one-half and Seller will pay one-half of the HSR Act filing fee. In the event of termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a Breach of this Agreement by another party.

     12.2 Transfer Taxes. All Transfer Taxes applicable to, or resulting from, the purchase of the Interests contemplated under this Agreement shall be borne equally by Seller and Buyer.

-41-

     12.3 Public Announcements. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, at such time and in such manner as agreed by each of the parties hereto, except as required by Legal Requirements. Unless consented to in writing by each party hereto in advance or required by Legal Requirements, prior to the Closing, each party to this Agreement shall, and shall cause the Company to, keep this Agreement strictly confidential and may not make any disclosure of this Agreement to any Person. Seller and Buyer will consult with each other concerning the means by which the Company’s employees, customers, and suppliers and others having dealings with the Company will be informed of the Contemplated Transactions, and Buyer will have the right to be present for any such communication. The foregoing will in no way preclude communications or disclosures by the parties necessary to comply with any applicable accounting, stock exchange or federal securities disclosure obligations.

     12.4 Notices. All notices, notifications, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

Seller:	National Pharmacies Group, Inc.
	2157 Apperson Drive
	Salem, Virginia 24153
	Attention: David Dixon and J. O’Neil Leftwich
	Facsimile No.: (540) 777-0015 (Dixon)
	Facsimile No.: (888) 797-4643 (Leftwich)
with copies to	Latham & Watkins, LLP
	555 Eleventh Street, NW
	Washington, DC 20004
	Attention: Michael Schlesinger, Esq.
	Facsimile No.: (202) 637-2201
	Robert Haft
	2346 Massachusetts Avenue NW
	Washington, DC 20008
Buyer:	PolyMedica Corporation
	11 State Street
	Woburn, Massachusetts 01801
	Attention: Chief Executive Officer
	Facsimile No.: (781) 938-6950

-42-

with copies to	PolyMedica Corporation
	11 State Street
	Woburn, Massachusetts 01801
	Attention: Devin Anderson, Esq.
	Facsimile No.: (781) 935-0695
	Weil, Gotshal & Manges LLP
	100 Federal Street, 34th Floor
	Boston, Massachusetts 02110
	Attention: James Westra, Esq.
	Facsimile No.: (617) 772-8333

     12.5 Jurisdiction; Service Of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the State of Delaware, or, if it has or can acquire jurisdiction, in any United States District Court sitting in Delaware, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world. Each party waives personal service of any and all process upon it, and irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to such party at the address set forth above, such service to become effective five business days after mailing.

     12.6 Waiver of Jury Trial. THE PARTIES HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE PARTIES AGREE THAT ANY OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE TRIAL BY JURY AND THAT ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.

     12.7 Enforcement of Agreement. The parties acknowledge and agree that in the event of a Breach of this Agreement, the non-breaching party would be irreparably damaged and could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which the non-breaching party may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent Breaches or threatened Breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.

-43-

     12.8 Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

     12.9 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

     12.10 Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.

     12.11 Disclosure Schedules.

          (a) The schedules to this Agreement, and any supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate or to which any disclosure therein is readily apparent.

          (b) In the event of any inconsistency between the statements in the body of this Agreement and those in the schedules, the statements in the body of this Agreement will control.

     12.12 Assignments, Successors, and No Third-Party Rights. No party may assign any of its rights under this Agreement without the prior consent of the other parties, except that Buyer may assign any of its rights under this Agreement to any Related Person of the Buyer; provided that no such assignment shall release Buyer from its liabilities hereunder. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are

-44-

for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns.

     12.13 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

     12.14 Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Section” or “Sections” refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.

     12.15 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

     12.16 Governing Law. This Agreement will be governed by the laws of the State of Delaware without regard to conflicts of laws principles.

     12.17 Legal Fees. Each party shall pay its own attorneys’ fees and other costs and expenses incurred as a result of any legal proceeding commenced in connection with this Agreement.

     12.18 Execution of Agreement. This Agreement may be executed in counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Agreement and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.

13. Definitions And Usage

     13.1 Definitions. In addition to the terms defined elsewhere in this Agreement, for purposes of this Agreement, the following terms and variations thereof have the meanings specified or referred to in this Section 13.1:

     “Accounts Receivable”—all accounts receivable and other rights to payment from customers of the Company for products sold or services rendered thereto, whether or not generated in the Ordinary Course of Business, including the full benefit of all security for such accounts or rights to payment and any claim, remedy or other related right.

     “Adjustment Amount”—as defined in Section 1.5(b)(i).

-45-

     “Agreement”—as defined in the preamble.

     “Annual Financial Statements”—as defined in Section 2.3.

     “Applicable Contract”—any Contract (a) under which the Company has or may acquire any rights, (b) under which the Company has or may become subject to any obligation or liability, or (c) by which the Company or any of the assets owned or used by it is or may become bound.

     “Asset Allocation”—as defined in Section 11.4(c).

     “Balance Sheet”—as defined in Section 2.3.

     “Balance Sheet Date”—as defined in Section 2.3.

     “Basket” —as defined in Section 10.5(a).

     “Best Efforts”—the efforts that a prudent business Person desirous of achieving a result would use in similar circumstances to achieve that result as expeditiously as possible.

     “Breach”—(a) any breach of, or any inaccuracy in, any representation or warranty, (b) any claim (by any Person) or other occurrence or circumstance that is or was inconsistent with any representation or warranty or (c) any breach of, or failure to perform or comply with, any covenant or obligation.

     “Business”—as defined in the recitals of this Agreement.

     “Business Day”—any day other than (a) Saturday or Sunday or (b) any other day on which banks in Woburn, Massachusetts are permitted or required to be closed.

     “Buyer”—as defined in the preamble.

     “Buyer Plans”—as defined in Section 6.1(b)(ii).

     “Buyer Indemnified Persons”—as defined in Section 10.2.

     “Buyer’s Advisors”—as defined in Section 4.1.

     “Buyer’s Closing Documents”—as defined in Section 3.2(a).

     “Buyer’s Officer Certificate” – a certificate of an officer of Buyer in the form of Exhibit G.

     “Buyer’s Secretary Certificate” – a certificate of the Secretary of Buyer in the form of Exhibit H.

     “Cap Amount” – as defined in Section 10.5(a).

-46-

     “Closing”—as defined in Section 1.3.

     “Closing Working Capital” – as of Closing, the excess of (x) the sum of the Company’s cash, cash equivalents, accounts receivables, inventory, prepaid assets and other assets that may be properly classified as current assets in conformity with GAAP, over (y) the Company’s liabilities that may be properly classified as current liabilities in conformity with GAAP. Closing Working Capital shall be calculated after giving effect to payment in full of that certain Master Lease Agreement between CitiCapital Technology Finance Inc. and the Company, dated February 22, 2005, whether or not paid off by the Effective Time. In addition, Closing Working Capital shall be prepared in good faith in accordance with GAAP applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation and accrual methodologies that were used in the preparation of the Company’s audited Financial Statements for the most recent fiscal year end Closing Working Capital was being prepared and audited as of a fiscal year end.

     “Closing Working Capital Statement” – as defined in Section 1.5(b)(ii).

     “Closing Date”—the date and time as of which the Closing actually takes place.

     “COBRA”— the Consolidated Omnibus Reconciliation Act of 1985, as amended, and the rules and regulations promulgated thereunder.

     “Code”—the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

     “Company”—as defined in the preamble.

     “Competing Business”—as defined in Section 2.25.

     “Competing Company”—as defined in Section 11.1(a).

     “Confidential Information”—all knowledge, documents, materials and information, not generally known to the public, regarding matters relating to the Company and/or the Company’s Business, including its finances, financial condition, owners, technology, products, services, research and development, marketing, operations or plans, technical data, trade secrets or know-how, equipment procurement plans or designs, ideas, inventions, specifications, techniques, discoveries, models, software, including source code and object code, systems, technology research and development partners and/or materials vendors, customer lists and customers and employees (including names, contacts and other information relating to existing or potential key employees of the Company).

     “Consent”—any approval, consent, ratification, waiver or other authorization of any Person.

     “Contemplated Transactions”— (a) the sale of the Interests by Seller to Buyer; (b) the execution, delivery and performance of the Noncompetition Agreement and the Seller’s Release;

-47-

(c) the performance by Buyer, Seller and the Company of their respective covenants and obligations under this Agreement; and (d) Buyer’s acquisition of the Interests.

     “Continuing Employees”—as defined in Section 6.1(a).

     “Contract”—any agreement, contract, Lease, consensual obligation, promise or undertaking (whether written or oral and whether express or implied), which is, or intended to be, legally binding.

     “Conversion” —as defined in Section 4.11.

     “Damages” – means any and all costs, Taxes, liabilities, obligations, damages, expenses, and reasonable attorneys’ fees. Notwithstanding anything to the contrary in his Agreement, “Damages” shall expressly exclude lost profits, consequential damages, special damages, punitive damages, exemplary damages, multiple damages and other penalty damages, except and solely to the extent such types of Damages are actually paid in respect of a Third Party Claim.

     “Effective Time”—as defined in Section 1.3.

     “Employee Plans”—as defined in Section 2.14(a).

     “Encumbrance”—any charge, claim, community or other marital property interest, condition, equitable interest, lien, option, pledge, security interest, mortgage, right of way, easement, encroachment, building or use restriction, servitude, conditional sales agreement, right of first option, right of first refusal or similar restriction, encumbrance or right of third parties, whether voluntarily or by operation of law, and includes any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof.

     “Environment”—soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins and wetlands), groundwaters, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life and any other environmental medium or natural resource.

     “Environmental, Health and Safety Liabilities”—any cost, damage, expense, liability, obligation or other responsibility arising from or under any Environmental Law or Occupational Safety and Health Law.

     “Environmental Law”—any Legal Requirement that requires or relates to (a) advising appropriate authorities, employees or the public of intended or actual Releases of pollutants or hazardous substances or materials, violations of discharge limits or other prohibitions that could have significant impact on the Environment; (b) preventing or reducing to acceptable levels the Release of pollutants or hazardous substances or materials into the Environment; (c) reducing the quantities, preventing the Release or minimizing the hazardous characteristics of wastes that are generated; (d) assuring that products are designed, formulated, packaged and used so that they do not present unreasonable risks to human health or the Environment when used or disposed of; (e)

-48-

protecting resources, species or ecological amenities; (f) reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil or other potentially harmful substances; or (g) cleaning up pollutants that have been Released, preventing the Threat of Release or paying the costs of such clean up or prevention.

     “ERISA”—the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

     “ERISA Affiliate”—as defined in Section 2.14(a).

     “Estimated Closing Statement” – as defined in Section 1.5(a)(i).

     “Estimated Closing Working Capital” – as defined in Section 1.5(a)(i).

     “Estimated Closing Working Capital Excess” – as defined in Section 1.5(a)(ii).

     “Estimated Closing Working Capital Shortfall” – as defined in Section 1.5(a)(ii).

     “Exchange Act”—the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

     “Facilities”—any real property, leaseholds, or other interests currently owned or operated by the Company and any buildings, plants, structures, or equipment (including motor vehicles, tank cars, and rolling stock) currently or formerly owned or operated by the Company.

     “Financial Statements”—as defined in Section 2.3.

     “GAAP”—generally accepted accounting principles for financial reporting in the United States, in effect from time to time applied consistently with the Balance Sheet and the other Financial Statements.

     “Governing Documents”—with respect to any corporation, the corporate charter and the bylaws; as amended or supplemented from time to time, all equityholders’ agreements, voting agreements, voting trust agreements, joint venture agreements, registration rights agreements or other agreements or documents, as amended or supplemented from time to time, relating to the organization, management or operation thereof or relating to the rights, duties and obligations of the equityholders thereof.

     “Governmental Authorization”—any Consent, license, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

     “Governmental Body”—any: (a) nation, state, county, city, town, borough, village, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any agency, branch, department, board, commission, court, tribunal or other entity exercising governmental or quasi-governmental powers); (d) multinational organization or body; (e) body

-49-

exercising, or entitled or purporting to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power; or (f) official of any of the foregoing.

     “Hazardous Material”—any substance, material or waste which is regulated by any Governmental Body, including any material, substance or waste which is defined as a “hazardous waste,” “hazardous material,” “hazardous substance,” “extremely hazardous waste,” “restricted hazardous waste,” “contaminant,” “toxic waste” or “toxic substance” under any provision of Environmental Law, and including petroleum, petroleum products, asbestos, presumed asbestos-containing material or asbestos-containing material, urea formaldehyde and polychlorinated biphenyls.

     “Holdback Amount”—as defined in Section 10.10(a).

     “HSR Act”—the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or any successor law, and regulations and rules issued pursuant to that act or any successor law.

     “Income Taxes” means all federal, state, local and foreign income taxes imposed on or measured by net income (including gains and capital gains) of the relevant entity, together with any interest and any penalty, addition to tax or additional amount imposed with respect thereto.

     “Independent Accountants”—as defined in Section 1.5(b)(iv).

     “Intellectual Property Assets”—collectively, all worldwide intellectual property and associated rights, including patents, patent applications, rights to file for patent applications (including but not limited to continuations, continuations-in-part, divisionals and reissues), trademarks, logos, confidential documentation, service marks, trade names and service names (in each case whether or not registered) and applications for and the right to file applications for registration thereof, Internet domain name or application for an Internet domain name, Internet and World Wide Web URLs or addresses, copyrights (whether or not registered) and applications for and the right to file applications for registration thereof, moral rights, mask work rights, mask work registrations and applications therefor, franchises, licenses, license or lease rights with respect to software or hardware, inventions, trade secrets, trade dress, know-how, customer lists, supplier lists, proprietary processes and formulae, software source code and object code, algorithms, net lists, architectures, structures, screen displays, layouts, inventions, development tools, designs, blueprints, specifications, technical drawings (or similar information in electronic or digital format), publicity and privacy rights and any other intellectual property rights arising under the laws of the United States of America, any state thereof, or any other country or province thereof, and all documentation and media (in whatever form) constituting, describing or relating to the foregoing, including, without limitation, manuals, programmers’ notes, memoranda and records.

     “Interests”—as defined in the recitals to this Agreement.

     “Interests Certificate” – a certificate representing the Interests in the form of Exhibit D.

-50-

     “Inventories”—all inventories of the Company attributable to the Business, held for resale, wherever located, and all of the Company’s raw materials, work in process, finished products, supplies and packing items and similar items with respect to the Business, in each case wherever located.

     “IRS”—the United States Internal Revenue Service and, to the extent relevant, the United States Department of the Treasury.

     “Knowledge”— an individual will be deemed to have Knowledge of a particular fact or other matter if that individual is actually aware of that fact or matter. The Company and Seller will each be deemed to have Knowledge of a particular fact or other matter if any of Robert Haft, David Dixon, Scott Snead, Samuel Silek or J. O’Neil Leftwich has, or at any time had, Knowledge of that fact or other matter. The Buyer will be deemed to have Knowledge of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer or manager of that Person (or in any similar capacity) has, or at any time had, Knowledge of that fact or other matter.

     “Lease”—any lease or rental agreement, license, right to use or installment and conditional sale agreement to which the Company is a party and any other Contract pertaining to the leasing or use of any Tangible Personal Property.

     “Leased Real Property”—as defined in Section 2.5(a).

     “Legal Requirement”— any (i) federal, state, local, municipal, foreign, international or multinational law (statutory, judicial or otherwise), ordinance, rule, regulation, judgment, order, injunction, writ, decree or award of any Governmental Body, including without limitation laws, regulations, manual instructions, and Centers for Medicare and Medicaid Services (“CMS”) program memoranda relating to participation as a provider or supplier in the Medicare and Medicaid programs or other governmentally funded health care reimbursement programs and to the provision of, and billing and collection for, items and services provided to beneficiaries of such programs; and (ii) standards of organizations offering accreditation or certification programs in which the Company participates or must participate.

     “Liability”—with respect to any Person, any liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise, and whether or not the same is required to be accrued on the financial statements of such Person.

     “Major Customers”—as defined in Section 2.19(a).

     “Major Suppliers”—as defined in Section 2.19(b).

     “Material Adverse Effect” or “Material Adverse Change”— with respect to the Business, any material adverse effect or material adverse change in the condition (financial or other),

-51-

business, results of operations or operations of the Business or on the ability of Seller to consummate the Contemplated Transactions, provided that none of the following events set forth in clauses (a) through (h) below shall be deemed to constitute a Material Adverse Effect or Material Adverse Change for one or more of the following occurrences: (a) changes in general business or economic conditions, including such conditions related to the Business, (b) changes in national or international political or social conditions, (c) changes in financial, banking, or securities markets, (d) changes in the United States generally accepted accounting principles, (e) changes in law, rules, regulations, orders, or other binding directives issued by any governmental entity, (f) any change, circumstance, event or effect that relates to or results from the announcement of the execution of this Agreement or the pendency of the consummation of the Contemplated Transactions, (g) the taking of any action contemplated by this Agreement and the other agreements contemplated hereby or (h) the termination or reduction or Threatened termination or reduction of business with the Company by any of the Company’s Major Customers or Major Suppliers, with the exception of UnitedHealth.

     “Most Recent Financial Statements”—as defined in Section 2.3.

     “Multiemployer Plan”—as defined in Section 2.14(a).

     “NDA Agreement”—as defined in Section 11.3(a).

     “Net Names”—as defined in Section 2.23(b).

     “Noncompetition Agreement”—as defined in Section 1.4(a)(iv.

     “Occupational Safety and Health Law”—any Legal Requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards, including the Occupational Safety and Health Act.

     “Order”—any award, decision, injunction, judgment, order, decree, ruling, assessment (including without limitation overpayment notice or demand), subpoena, or verdict entered, issued, made or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator.

     “Ordinary Course of Business”—an action taken by a Person will be deemed to have been taken in the Ordinary Course of Business only if that action: (i) is consistent in nature, scope and magnitude with the past practices of such Person and is taken in the ordinary course of the normal, day-to-day operations of such Person; and (ii) does not require authorization by the board of directors of such Person (or by any Person or group of Persons exercising similar authority) and does not require any other separate or special authorization of any nature.

     “Party” or “Parties” – one or more of Seller, Buyer and the Company.

     “PBGC”—as defined in Section 2.14(b).

-52-

     “Permitted Encumbrances”—means (i) all defects, exceptions, restrictions, easements, rights of way and Encumbrances disclosed in policies of title insurance which have been made available to Buyer; (ii) statutory liens for current Taxes, assessments or other governmental charges not yet delinquent or the amount or validity of which is being contested in good faith by appropriate proceedings, provided an appropriate reserve is established therefor; (iii) mechanics’, carriers’, workers’, repairers’ and similar liens arising or incurred in the Ordinary Course of Business that are not material to the business, operations and financial condition of the property so encumbered or the Company; (iv) zoning, entitlement and other land use and environmental regulations by any Governmental Body, provided that such regulations have not been violated; and (v) such other imperfections in title, charges, easements, restrictions and encumbrances which do not materially detract from the value of or materially interfere with the present use of any Leased Real Property subject thereto or affected thereby.

     “Person”—any individual, partnership, corporation, business trust, limited liability company, general, limited or limited liability partnership, joint stock company, trust, unincorporated association, joint venture or other entity or a Governmental Body.

     “Pre-Closing Partial Period” as defined in Section 10.7.

     “Pre-Closing Tax Period” as defined in Section 10.7.

     “Proceeding”—any action, arbitration, audit, governmental health care program integrity review, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, whether public or private) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Body or other Person.

     “Proprietary Rights Agreement”—as defined in Section 2.11(b).

     “Purchase Price”—as defined in Section 1.2.

     “Related Person”—With respect to a particular individual (a) each other member of such individual’s Family; (b) any Person that is directly or indirectly controlled by any one or more members of such individual’s Family; (c) any Person in which members of such individual’s Family hold (individually or in the aggregate) a Material Interest; and (d) any Person with respect to which one or more members of such individual’s Family serves as a director, officer, partner, executor or trustee (or in a similar capacity).

     With respect to a specified Person other than an individual (a) any Person that directly or indirectly controls, is directly or indirectly controlled by or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, executor or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; and (e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity).

-53-

     For purposes of this definition, (a) “control” (including “controlling,” “controlled by,” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and shall be construed as such term is used in the rules promulgated under the Exchange Act; (b) the “Family” of an individual includes (i) the individual, (ii) the individual’s spouse, (iii) any other natural person who is related to the individual or the individual’s spouse within the second degree and (iv) any other natural person who resides with such individual; and (c) “Material Interest” means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of voting securities or other voting interests representing at least twenty-five percent (25%) of the outstanding voting power of a Person or equity securities or other equity interests representing at least twenty-five percent (25%) of the outstanding equity securities or equity interests in a Person.

     “Release”—any release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the Environment or into or out of any property.

     “Remedial Action”—all actions, including any capital expenditures, required or voluntarily undertaken (a) to clean up, remove, treat or in any other way address any Hazardous Material or other substance; (b) to prevent the Release or Threat of Release or to minimize the further Release of any Hazardous Material or other substance so it does not migrate or endanger or threaten to endanger public health or welfare or the Environment; (c) to perform pre-remedial studies and investigations or post-remedial monitoring and care; or (d) to bring the Premises and the operations conducted thereon into compliance with Environmental Laws and environmental Governmental Authorizations.

     “Representative”—with respect to a particular Person, any director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other representative of that Person.

     “Securities Act”—the Securities Act of 1933, as amended, or any successor law, and regulations and rules issued pursuant to that act or any successor law.

     “Seller”—as defined in the preamble.

     “Seller Disclosure Schedule”—as defined in Section 2.

     “Seller Indemnified Persons”—as defined in Section 10.3.

     “Seller Non-Compete”—as defined in Section 11.4(c).

     “Seller’s Closing Documents”—as defined in Section 2.2(a).

     “Seller’s Officer Certificate” – a certificate of an officer of the Seller in the form of Exhibit E.

-54-

     “Seller’s Release”—as defined in Section 1.4(a)(ii).

     “Seller’s Secretary Certificate” – a certificate of the Secretary of Seller in the form of Exhibit F.

     “Shares”—as defined in the recitals to this Agreement.

     “Straddle Period” shall have the meaning as set forth in Section 11.4(b).

     “Short Period” shall have the meaning set forth in Section 11.4(b).

     “Subsidiary”—with respect to any Person (the “Owner”), (a) any other Person of which securities or other interests having the power to elect a majority of that Person’s board of directors or similar governing body, or otherwise having the power to direct the business and policies of that other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred), are held by the Owner or one or more of its Subsidiaries; or (b) any Person that is directly or indirectly controlled by the Owner.

     “Supplemental Reserves”—as defined in Section 1.5(a)(i).

     “Tangible Personal Property”—all machinery, equipment, tools, furniture, office equipment, fixtures, leasehold improvements, computer hardware, supplies, materials, vehicles and other items of tangible personal property (other than Inventories) of every kind owned or leased by the Company (wherever located and whether or not carried on the Company’s books), together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof and all maintenance records and other documents relating thereto.

     “Target Working Capital” shall be $3,075,000.00.

     “Tax”—any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Body.

     “Tax Notice”—as defined in Section 11.4(d).

     “Tax Return”—any return (including any information return), report, statement, schedule, notice, form, declaration, claim for refund or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the

-55-

administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.

     “Third Party”—a Person that is not a party to this Agreement.

     “Third-Party Claim”—any claim against any Indemnified Person by a Third Party, whether or not involving a Proceeding.

     “Threat of Release”—a reasonable likelihood of a Release that may require action in order to prevent or mitigate damage to the Environment that may result from such Release.

     “Threatened”—a claim, Proceeding, dispute, action, or other matter will be deemed to have been “Threatened” if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing), or if any other event has occurred or any other circumstances exist, that would lead a prudent Person to conclude that such a claim, Proceeding, dispute, action or other matter is likely to be asserted, commenced, taken or otherwise pursued in the future.

     “Transfer Tax” means all sales, use, transfer, intangible, recordation, documentary, stamp or similar taxes or charges of any nature whatsoever.

     “WARN Act” —as defined in Section 2.13.

     13.2 Usage.

          (a) Interpretation. In this Agreement, unless a clear contrary intention appears: (i) the singular number or term includes the plural number or term and vice versa; (ii) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are not prohibited by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (v) reference to any Legal Requirement means such Legal Requirement as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Legal Requirement means that provision of such Legal Requirement from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision; (vi) “hereunder,” “hereof,” “hereto,” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof; (vii) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding such term; (viii) “or” is used in the inclusive sense of “and/or”; (ix) with respect to the determination of any period of time, “from” means “from and including” and “to” means “to but excluding”; and (x) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments thereto.

-56-

          (b) Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP.

          (c) Legal Representation of the Parties. This Agreement was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof.

[Signature Page Follows.]

-57-

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

Buyer:		Seller:
PolyMedica Corporation		National Pharmacies Group, Inc.
By:		By:
	Name:		Name:
	Title:		Title:
		The Company:
		National Diabetic Pharmacies, Inc.
		By:
			Name:
			Title:

-58-

TABLE OF CONTENTS

				Page
1.	SALE AND TRANSFER OF INTERESTS; CLOSING				1
		1.1	Interests		1
		1.2	Purchase Price		1
		1.3	Closing		1
		1.4	Closing Obligations		2
		1.5	Adjustment Amount		3
2.	REPRESENTATIONS AND WARRANTIES OF SELLER AND THE COMPANY				5
		2.1	Organization, Good Standing and Capitalization		5
		2.2	Enforceability; Authority; No Conflict		6
		2.3	Financial Statements		6
		2.4	Books and Records		7
		2.5	Title to Properties; Encumbrances		7
		2.6	Condition and Sufficiency of Assets		7
		2.7	Accounts Receivable		7
		2.8	Inventories		8
		2.9	No Undisclosed Liabilities		8
		2.10	Taxes		8
		2.11	Employees		9
		2.12	Labor Disputes; Compliance		10
		2.13	WARN Act		10
		2.14	Employee Benefits		10
		2.15	Compliance With Legal Requirements; Governmental Authorizations		13
		2.16	Legal Proceedings; Orders		15
		2.17	No Material Adverse Change		16
		2.18	Absence of Certain Changes and Events		16

i

TABLE OF CONTENTS

(continued)

				Page
		2.19	Third Party Payors and Suppliers		17
		2.20	Contracts; No Defaults		17
		2.21	Insurance		19
		2.22	Environmental Matters		20
		2.23	Intellectual Property Assets		20
		2.24	Certain Payments		21
		2.25	Relationships With Related Persons		21
		2.26	Brokers or Finders		22
		2.27	Disclosure		22
3.	REPRESENTATIONS AND WARRANTIES OF BUYER				22
		3.1	Organization and Good Standing		22
		3.2	Authority; No Conflict		22
		3.3	Investment Intent		23
		3.4	Certain Proceedings		23
		3.5	Brokers or Finders		23
		3.6	No Outside Reliance		23
		3.7	Disclosure		23
4.	SELLER’S PRECLOSING COVENANTS				23
		4.1	Access and Investigation		24
		4.2	Operation of the Business		24
		4.3	Negative Covenant		24
		4.4	Required Approvals		25
		4.5	Notification		25
		4.6	Payment of or Cancellation of Indebtedness		26
		4.7	No Negotiation		26
		4.8	Best Efforts		26
		4.9	Change of Name		26

ii-

TABLE OF CONTENTS

(continued)

				Page
		4.10	Interim Financial Statements		26
		4.11	Conversion of Company		27
5.	BUYER’S PRECLOSING COVENANTS				27
		5.1	Required Approvals		27
		5.2	Best Efforts		27
		5.3	Notification		27
6.	ADDITIONAL COVENANTS				28
		6.1	Employee Matters		28
7.	CONDITIONS PRECEDENT TO BUYER’S OBLIGATION TO CLOSE				29
		7.1	Accuracy of Representations		29
		7.2	Seller’s and the Company’s Performance		29
		7.3	Consents		29
		7.4	No Proceedings		29
		7.5	No Claim Regarding Stock Ownership or Sale Proceeds		29
		7.6	Termination of Certain Agreements		30
		7.7	UnitedHealth		30
8.	CONDITIONS PRECEDENT TO SELLER’S OBLIGATION TO CLOSE				30
		8.1	Accuracy of Representations		30
		8.2	Buyer’s Performance		30
		8.3	No Injunction		30
		8.4	Consents		30
9.	TERMINATION				30
		9.1	Termination Events		31
		9.2	Effect of Termination		31
10.	INDEMNIFICATION; REMEDIES				31
		10.1	Survival and Right to Indemnification		31
		10.2	Indemnification and Payment of Damages by Seller and the Company		32

iii

TABLE OF CONTENTS

(continued)

				Page
		10.3	Indemnification and Payment of Damages by Buyer		32
		10.4	Time Limitations		33
		10.5	Monetary Limitations		33
		10.6	Procedure For Indemnification — Third Party Claims		34
		10.7	Tax Indemnification		36
		10.8	Procedure For Indemnification — Other Claims		37
		10.9	Payment of Indemnification Obligations		37
		10.10	Retention of Holdback Amount by the Seller		37
		10.11	Access to Company Employees		37
		10.12	Tax Treatment of Indemnity Payments		38
11.	ADDITIONAL COVENANTS				38
		11.1	Noncompetition, Nonsolicitation and Nondisparagement		38
		11.2	Intentionally Omitted		38
		11.3	Confidentiality		38
		11.4	Tax Matters		39
12.	GENERAL PROVISIONS				41
		12.1	Expenses		41
		12.2	Transfer Taxes		41
		12.3	Public Announcements		41
		12.4	Notices		42
		12.5	Jurisdiction; Service Of Process		43
		12.6	Waiver of Jury Trial		43
		12.7	Enforcement of Agreement		43
		12.8	Further Assurances		44
		12.9	Waiver		44
		12.10	Entire Agreement and Modification		44
		12.11	Disclosure Schedules		44

iv

TABLE OF CONTENTS

(continued)

				Page
		12.12	Assignments, Successors, and No Third-Party Rights		44
		12.13	Severability		45
		12.14	Section Headings, Construction		45
		12.15	Time of Essence		45
		12.16	Governing Law		45
		12.17	Legal Fees		45
		12.18	Execution of Agreement		45
13.	DEFINITIONS AND USAGE				45
		13.1	Definitions		45
		13.2	Usage		56

v

EXHIBITS

A	Form of Seller’s Release
B	[Reserved]
C	Noncompetition Agreement of Robert Haft
D	Form of Interests Certificate
E	Form of Seller’s Officer’s Certificate
F	Form of Seller’s Secretary’s Certificate
G	Form of Buyer’s Officer’s Certificate
H	Form of Buyer’s Secretary’s Certificate

i

SCHEDULES

1.2(a)	Designated Seller’s Account
1.4(a)(vi)	Consents Deliveries
1.5	Supplemental Reserves
2.2(b)	Enforceability; Authority; No Conflict
2.2(c)	Notice/Consents
2.5(a)	Leased Real Property
2.5(b)	Title to Properties; Encumbrances
2.9	Undisclosed Liabilities
2.10(a)	Tax Returns
2.10(b)	Audited Tax Returns
2.10(c)	Tax Assessments and Deficiencies
2.11	Employees
2.12	Labor Disputes; Compliance
2.14(a)	Employee Benefits
2.14(c)	Contributions to Employee Plans
2.14(e)	Employee Plan Compliance
2.14(i)	Accelerated Payments
2.14(k)	Promised Benefits
2.15(a)	Compliance with Legal Requirements
2.15(b)	Governmental Authorization
2.16(a)	Legal Proceedings
2.16(b)	Orders
2.16(c)	Compliance
2.17	Material Adverse Changes
2.18	Absence of Certain Changes and Events
2.19(a)	Major Customers
2.19(b)	Major Suppliers
2.20(a)	Material Contracts
2.20(b)	Seller’s Rights and Liabilities
2.20(c)	Contract Validity
2.20(d)	Contract Compliance
2.21(a)	Insurance Policies
2.21(b)	Third Party Insurance
2.21(c)	Insurance Claims
2.21(d)	Policy Validity
2.22	Environmental Matters
2.23(a)	Intellectual Property Assets
2.23(b)	Net Names
2.25	Relationships with Related Persons
3.2	Consents
4.3	Negative Covenant
4.6	Payment or Cancellation of Indebtedness by or to Related Persons
10.5(i)	DMERC Audit
10.5(b)(i)	California Sales and Use Tax Returns
10.6(e)	Medicare Protocol

ii

11.1(a) Competing Companies

iii

EX-31.1

EXHIBIT 31.1

PRINCIPAL EXECUTIVE OFFICER CERTIFICATION

I, Patrick T. Ryan, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of PolyMedica Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 4, 2005

/s/ Patrick T. Ryan

Patrick T. Ryan

President, Chief Executive Officer and Director

EX-31.2

EXHIBIT 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION

I, Keith W. Jones, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of PolyMedica Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 4, 2005

/s/ Keith W. Jones  

Keith W. Jones 

Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report on Form 10-Q of PolyMedica Corporation (“PolyMedica”) for the three and six months ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Patrick T. Ryan, President and Chief Executive Officer, and Keith W. Jones, Chief Financial Officer of PolyMedica, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PolyMedica.

Dated: November 4, 2005	/s/ Patrick T. Ryan Patrick T. Ryan
	President, Chief Executive Officer and Director
Dated: November 4, 2005	/s/ Keith W. Jones Keith W. Jones
	Chief Financial Officer