================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             -----------------------

                                    FORM 10-Q

                             -----------------------

(Mark One)

|X|   Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

For the quarterly period ended June 30, 2005

                                       OR

|_|   Transition report pursuant to Section 13 or 15 (d) of the Securities
      Exchange Act of 1934

Commission File Number:  000-50371

                         Curative Health Services, Inc.
             (Exact name of registrant as specified in its charter)

           MINNESOTA                                           51-0467366
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                          Identification Number)

                               61 Spit Brook Road
                           Nashua, New Hampshire 03060
                    (Address of principal executive offices)

                                 (603) 888-1500
              (Registrant's telephone number, including area code)

                      -------------------------------------

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

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes |X| No |_|

      As of August 1, 2005, there were 13,019,800 shares of the Registrant's
Common Stock, $.01 par value, outstanding.

================================================================================
<PAGE>

                                      INDEX

Part I    Financial Information                                            Page
--------------------------------------------------------------------------------

Item 1    Financial Statements:

          Condensed Consolidated Statements of Operations
              Three and Six months ended June 30, 2005 and 2004              3

          Condensed Consolidated Balance Sheets
              June 30, 2005 and December 31, 2004                            4

          Condensed Consolidated Statements of Cash Flows
              Six months ended June 30, 2005 and 2004                        5

          Notes to Condensed Consolidated Financial Statements               6

Item 2    Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                     16

          Cautionary Statement and Risk Factors                             25

Item 3    Quantitative and Qualitative Disclosures About Market Risk        43

Item 4    Controls and Procedures                                           44



Part II   Other Information                                                Page
--------------------------------------------------------------------------------

Item 1    Legal Proceedings                                                 45

Item 4    Submission of Matters to a Vote of Security Holders               45

Item 5    Other Information                                                 46

Item 6    Exhibits                                                          46

          Signatures                                                        48


                                       2
<PAGE>

Part I     Financial Information

Item 1.    Financial Statements

                 Curative Health Services, Inc. and Subsidiaries
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                   Three Months Ended        Six Months Ended
                                                         June 30                  June 30
                                                    2005         2004         2005         2004
                                                 ----------------------    ----------------------
<S>                                              <C>          <C>          <C>          <C>
Revenues:
   Products                                      $  64,539    $  57,698    $ 144,514    $ 116,784
   Services                                          7,070        6,742       13,838       13,214
                                                 ---------    ---------    ---------    ---------
     Total revenues                                 71,609       64,440      158,352      129,998

Costs and operating expenses:
   Cost of product sales                            55,367       46,586      124,835       93,411
   Cost of services                                  3,283        2,972        6,331        5,899
   Selling, general and administrative              13,668       16,176       25,119       26,193
                                                 ---------    ---------    ---------    ---------
     Total costs and operating expenses             72,318       65,734      156,285      125,503
                                                 ---------    ---------    ---------    ---------

(Loss) income from operations                         (709)      (1,294)       2,067        4,495

Interest expense                                    (6,172)      (3,993)     (11,998)      (4,609)
Other income                                         2,582          101          608          108
                                                 ---------    ---------    ---------    ---------

Loss before income taxes                            (4,299)      (5,186)      (9,323)          (6)

Income tax provision (benefit)                         475       (2,054)      (1,185)          (8)
                                                 ---------    ---------    ---------    ---------

Net (loss) income                                $  (4,774)   $  (3,132)   $  (8,138)   $       2
                                                 =========    =========    =========    =========

Net (loss) income per common share, basic        $   (0.37)   $   (0.24)   $   (0.63)   $    0.00
                                                 =========    =========    =========    =========

Net (loss) income per common share, diluted(1)   $   (0.37)   $   (0.24)   $   (0.63)   $    0.00
                                                 =========    =========    =========    =========

Weighted average common shares, basic               13,011       13,092       13,011       13,087
                                                 =========    =========    =========    =========

Weighted average common shares, diluted             13,011       13,092       13,011       13,827
                                                 =========    =========    =========    =========
</TABLE>

---------------------

(1)   See Note 2 for net (loss) income per share calculation.

                             See accompanying notes


                                       3
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            June 30,    December 31,
                                                              2005          2004
                                                           ---------    ------------
<S>                                                        <C>          <C>
ASSETS
Current assets:
Cash and cash equivalents                                  $   1,002    $      1,176
Accounts receivable, net                                      76,639          81,766
Inventories                                                   11,435          18,398
Prepaids and other current assets                              8,003           5,660
Federal income tax refund receivable                           3,431           3,431
Deferred income tax assets                                     3,966           3,977
                                                           ---------    ------------
    Total current assets                                     104,476         114,408

Property and equipment, net                                   11,558          11,104
Intangibles subject to amortization, net                      19,628          20,540
Intangibles not subject to amortization (trade names)          1,615           1,615
Goodwill                                                     114,509         123,138
Other assets                                                  13,289          12,979
                                                           ---------    ------------
    Total assets                                           $ 265,075    $    283,784
                                                           =========    ============

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable                                           $  18,709    $     35,740
Accrued expenses and other current liabilities                20,632          21,384
Current portion of long-term liabilities                       4,996           6,496
                                                           ---------    ------------
    Total current liabilities                                 44,337          63,620

Long-term liabilities                                        217,776         210,991
Deferred income taxes                                          4,348           3,511
Other long-term liabilities                                       83           1,209
                                                           ---------    ------------
    Total long-term liabilities                              222,207         215,711

Stockholders' (deficit) equity:
Common stock                                                     129             128
Additional paid in capital                                   120,224         119,449
Accumulated deficit                                         (119,425)       (111,287)
Deferred compensation                                         (2,397)         (2,364)
Notes receivable - stockholders                                   --          (1,473)
                                                           ---------    ------------
    Total stockholders' (deficit) equity                      (1,469)          4,453
                                                           ---------    ------------

    Total liabilities and stockholders' (deficit) equity   $ 265,075    $    283,784
                                                           =========    ============
</TABLE>

                             See accompanying notes


                                       4
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                   Six Months Ended
                                                                                        June 30
                                                                                    2005         2004
                                                                                 ---------    ---------
<S>                                                                              <C>          <C>
OPERATING ACTIVITIES:
Net (loss) income                                                                $  (8,138)   $       2
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
   Depreciation and amortization                                                     3,124        2,334
   Provision for doubtful accounts                                                   1,684          476
   Amortization of deferred financing fees                                             984          438
   Stock based compensation                                                            742           --
   Change in fair value of interest rate swap                                       (1,082)          --
   Deferred income taxes                                                              (248)          --
Changes in operating assets and liabilities, net of effects from
Specialty Infusion acquisitions:
   Accounts receivable                                                               3,444        7,258
   Inventories                                                                       6,963        3,913
   Prepaids and other                                                                1,567          174
   Accounts payable and accrued expenses                                           (15,228)     (13,463)
                                                                                 ---------    ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                 (6,188)       1,132

INVESTING ACTIVITIES:
Specialty Infusion acquisitions, net of cash acquired                                 (100)    (152,765)
Sale of Accordant Health Services, Inc.                                                 --        2,327
Purchases of property and equipment, net of disposals                               (2,244)      (1,161)
                                                                                 ---------    ---------
NET CASH USED IN INVESTING ACTIVITIES                                               (2,344)    (151,599)

FINANCING ACTIVITIES:
Net proceeds from long-term borrowings                                                  --      173,685
Proceeds from exercise of stock options                                                 --          162
Proceeds from repayment of notes receivable - stockholders                           1,473           --
Borrowing on (repayments of) credit facilities and long-term liabilities, net,
   and payment of deferred financing costs                                           6,885      (23,271)
                                                                                 ---------    ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                            8,358      150,576
                                                                                 ---------    ---------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                  (174)         109
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     1,176        1,072
                                                                                 ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $   1,002    $   1,181
                                                                                 =========    =========
</TABLE>

                             See accompanying notes


                                       5
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

      The condensed consolidated financial statements are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2004 and notes
thereto contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Certain prior year amounts have been
reclassified to conform to the current year classifications. The results of
operations for the three and six months ended June 30, 2005 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2005.

Stock Based Compensation Plans

      The Company grants options for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants under the intrinsic
value method of Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations because the Company
believes the alternate fair value accounting provided for under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recorded.

      The following table illustrates the effect on net (loss) income and net
(loss) income per share for the three and six months ended June 30 as if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               Three Months Ended         Six Months Ended
                                                                     June 30                   June 30
                                                                2005          2004         2005         2004
                                                              ----------------------    ----------------------
<S>                                                           <C>          <C>          <C>          <C>
Net (loss) income, as reported                                $  (4,774)   $  (3,132)   $  (8,138)   $       2
Add:  Stock based employee compensation expense included in
 reported net (loss) income, net of related tax effects             416           --          704           --
Deduct:  Total stock-based employee compensation expense
 determined under fair value based method for all awards,
 net of related tax effects                                      (1,240)      (1,274)      (2,426)      (2,449)
                                                              ---------    ---------    ---------    ---------
Pro forma net loss                                            $  (5,598)   $  (4,406)   $  (9,860)   $  (2,447)
                                                              =========    =========    =========    =========

(Loss) income per share:
Basic - as reported                                           $   (0.37)   $   (0.24)   $   (0.63)   $    0.00
Basic - pro forma                                                 (0.43)       (0.34)       (0.76)       (0.19)

Diluted - as reported(1)                                      $   (0.37)   $   (0.24)   $   (0.63)   $    0.00
Diluted - pro forma                                               (0.43)       (0.34)       (0.76)       (0.19)
</TABLE>

-----------
(1)   See Note 2 for net (loss) income per share calculation.


                                       6
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation (continued)

      In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123(R)") which eliminated the alternative of
accounting for share-based compensation transactions under the intrinsic value
method of APB No. 25, "Accounting for Stock Issued to Employees." Instead, SFAS
No. 123(R) requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. The grant date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments. SFAS No. 123(R) will be adopted
by the Company beginning January 1, 2006.

Note 2. Net (Loss) Income per Common Share

      Net (loss) income per common share, basic, is computed by dividing the net
(loss) income by the weighted average number of common shares outstanding. Net
(loss) income per common share, diluted, is computed by dividing adjusted net
(loss) income (see below) by the weighted average number of shares outstanding
plus dilutive common share equivalents. The following table sets forth the
computation of weighted average shares, basic and diluted, used in determining
basic and diluted (loss) income per share for the three and six months ended
June 30 (in thousands):

<TABLE>
<CAPTION>
                                                         Three Months Ended     Six Months Ended
                                                               June 30               June 30
                                                           2005       2004       2005       2004
                                                         --------   --------   --------   --------
<S>                                                        <C>        <C>        <C>        <C>
Weighted average shares, basic                             13,011     13,092     13,011     13,087
Effect of dilutive stock options and convertible notes         --         --         --        740
                                                         --------   --------   --------   --------
Weighted average shares, diluted                           13,011     13,092     13,011     13,827
                                                         ========   ========   ========   ========
</TABLE>

      Adjusted net (loss) income and net (loss) income per common share,
diluted, for the three and six months ended June 30 were computed as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                  Three Months Ended                Six Months Ended
                                                                         June 30                        June 30
                                                                   2005            2004            2005            2004
                                                                --------------------------      --------------------------
<S>                                                             <C>             <C>             <C>             <C>
Net (loss) income, as reported                                  $   (4,774)     $   (3,132)     $   (8,138)     $        2
Add back interest related to convertible notes, net of tax              --              31              --              63
                                                                ----------      ----------      ----------      ----------
Adjusted net (loss) income                                      $   (4,774)     $   (3,101)     $   (8,138)     $       65
                                                                ==========      ==========      ==========      ==========

Net (loss) income per common share, diluted                     $    (0.37)(1)  $    (0.24)(2)  $    (0.63)(1)  $     0.00(2)
                                                                ==========      ==========      ==========      ==========

Weighted average shares, diluted                                    13,011          13,092          13,011          13,827
                                                                ==========      ==========      ==========      ==========
</TABLE>

------------
(1)   Basic shares were used to calculate net loss per common share, diluted,
      for the three and six months ended June 30, 2005 as using the effects of
      stock options and convertible notes would have an anti-dilutive effect on
      net loss per share. If not anti-dilutive, weighted average shares,
      diluted, would have been 13,287 and 13,325 for the three and six months
      ended June 30, 2005, respectively.


                                       7
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Net (Loss) Income per Common Share (continued)

(2)   In accordance with SFAS No. 128, "Earnings Per Share," net income per
      common share, diluted, for the three and six months ended June 30, 2004
      was calculated under the "as if converted" method, which requires adding
      shares related to convertible notes that have no contingencies to the
      denominator for diluted net income per share and adding to net income, the
      numerator, tax effected interest expense relating to those convertible
      notes.

Note 3. Specialty Infusion Acquisition

      On April 23, 2004, the Company acquired Critical Care Systems, Inc.
("CCS"), a leading national provider of specialty infusion pharmaceuticals and
related comprehensive clinical services. Total cash consideration was
approximately $154.2 million, including working capital adjustments of
approximately $4.1 million. The Company financed the acquisition of CCS with a
portion of its $185.0 million aggregate principal amount of 10.75% senior notes
due 2011 (the "Notes") and additional borrowings under the Company's refinanced
credit facility with General Electric Capital Corporation ("GE Capital"), as
agent and lender. Fair market valuations have not yet been finalized and, as
such, the allocation of the purchase price is preliminary, pending completion of
a final valuation and the resolution of certain pre-acquisition account balance
contingencies.

      The CCS acquisition was consummated for purposes of expanding the
Company's Specialty Infusion business and was accounted for using the purchase
method of accounting. The accounts of CCS and related goodwill and intangibles
are included in the accompanying condensed consolidated balance sheets. The
operating results of CCS are included in the accompanying condensed consolidated
statements of operations from the date of acquisition.

      Unaudited pro forma amounts for the three and six months ended June 30,
2004 assuming the CCS acquisition had occurred on January 1, 2004, were as
follows (in thousands, except per share data):

                                             Three Months        Six Months
                                                 Ended             ended
                                             June 30, 2004     June 30, 2004
                                            ---------------   ---------------
   Revenue                                    $    71,830       $   163,548
   Net loss                                        (5,161)           (3,949)
                                              -----------       -----------
   Net loss per common share, diluted(1)      $     (0.39)      $     (0.29)
                                              ===========       ===========

----------
(1)   Calculated under the "as if converted" method. See Note 2.

      The pro forma amounts shown above for the three and six months ended June
30, 2004 give effect to: (i) the Company's issuance of the Notes; (ii) the
refinancing of the Company's revolving credit facility and (iii) adjustments
related to the CCS acquisition, including, but not limited to, the amortization
of identifiable intangibles related to a preliminary purchase price allocation,
additional compensation expense and retention incentives, and pro forma tax
adjustments as if the acquisition and related transactions occurred on January
1, 2004.

      The pro forma operating results shown above are not necessarily indicative
of operations in the periods following the CCS acquisition.


                                       8
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Segment Information

      The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company has two
reportable segments: Specialty Infusion and Wound Care Management. In its
Specialty Infusion business unit, the Company purchases biopharmaceutical
products (including Synagis(R) for the prevention of respiratory syncytial
virus) and other pharmaceutical products from suppliers and contracts with
insurance companies and other payors to provide its services, which include
coordination of patient care, 24-hour nursing and pharmacy availability, patient
education and reimbursement billing and collection services. Revenues from
Synagis(R) sales for the three and six months ended June 30, 2005 were
approximately $2.6 million and $27.2 million, respectively. As respiratory
syncytial virus ("RSV") occurs primarily during the winter months, the major
portion of the Company's Synagis(R) sales may be higher during the first and
fourth quarters of the calendar year which may result in significant
fluctuations in the Company's quarterly operating results.

      In its Wound Care Management business unit, the Company contracts with
hospitals to manage outpatient Wound Care Center(R) programs.

      The Company evaluates segment performance based on (loss) income from
operations. For the three and six months ended June 30, 2005, management
estimated that corporate general and administrative expenses allocated to the
reportable segments were 61% and 39% for Specialty Infusion and Wound Care
Management, respectively. For the three and six months ended June 30, 2004,
management estimated that corporate general and administrative expenses
allocated to the reportable segments were 63% and 61%, respectively, for
Specialty Infusion and 37% and 39%, respectively, for Wound Care Management.
Intercompany transactions were eliminated to arrive at consolidated totals.

      The following tables present the results of operations and total assets of
the reportable segments of the Company at and for the three and six months ended
June 30 (in thousands):

                                At and for the Three Months Ended June 30, 2005
                                -----------------------------------------------
                                    Specialty       Wound Care
                                     Infusion       Management      Totals
                                    ---------       ---------      ---------
 Revenues                           $  64,539       $   7,070      $  71,609
 (Loss) income from operations      $  (1,834)      $   1,125      $    (709)
 Total assets                       $ 245,300       $  19,775      $ 265,075

                                At and for the Three Months Ended June 30, 2004
                                -----------------------------------------------
                                    Specialty       Wound Care
                                     Infusion       Management      Totals
                                    ---------       ---------      ---------
 Revenues                           $  57,698       $   6,742      $  64,440
 (Loss) income from operations      $  (2,289)      $     995      $  (1,294)
 Total assets                       $ 384,022       $  16,160      $ 400,182


                                       9
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Segment Information (continued)

                                 At and for the Six Months Ended June 30, 2005
                                 ---------------------------------------------
                                    Specialty       Wound Care
                                    Infusion        Management      Totals
                                    ---------       ---------      ---------
 Revenues                           $ 144,514       $  13,838      $ 158,352
 (Loss) income from operations      $    (156)      $   2,223      $   2,067
 Total assets                       $ 245,300       $  19,775      $ 265,075

                                 At and for the Six Months Ended June 30, 2004
                                 ---------------------------------------------
                                    Specialty       Wound Care
                                    Infusion        Management      Totals
                                    ---------       ---------      ---------
 Revenues                           $ 116,784       $  13,214      $ 129,998
 Income from operations             $   3,075       $   1,420      $   4,495
 Total assets                       $ 384,022       $  16,160      $ 400,182

Note 5. Employee and Facility Termination Costs

      The Company adheres to SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which establishes fair value as the objective for
initial measurement of liabilities related to exit or disposal activities and
requires that such liabilities be recognized when incurred.

      In the first quarter of 2003, the Company consolidated its pharmacy
operations in California which resulted in the termination of a total of 25
employees and the vacating of a leased facility. The Company recorded charges
related to this activity of $0.4 million in 2004 and $1.6 million in 2003.

      Additionally, as previously disclosed, Curative's corporate headquarters
and corporate functions are being consolidated into the Company's office located
in Nashua, New Hampshire. As a result, in the fourth quarter of 2004, the
Company recorded severance charges for the consolidation of approximately $0.7
million related to the termination of 19 employees and facility termination
costs of $0.1 million. The Company recorded costs of approximately $3 thousand
and $0.8 million in the first and second quarters of 2005, respectively, related
to its headquarters consolidation. As of June 30, 2005, the consolidation has
been substantially completed.

      The following provides a reconciliation of the related accrued costs
associated with the pharmacy consolidation and headquarters consolidation, which
are included in Selling, General and Administrative expenses in the accompanying
condensed consolidated financial statements, at and for the three and six months
ended June 30 (in thousands):

<TABLE>
<CAPTION>
                                       At and for the Three Months Ended June 30, 2005
                                    ------------------------------------------------------
                                    Beginning   Costs Charged    Costs Paid or    Ending
                                     Balance      To Expense   otherwise settled  Balance
                                    ---------   -------------  -----------------  --------
<S>                                   <C>            <C>            <C>            <C>
   Employee termination costs         $  257         $  590         $  251         $  596
   Facility termination costs            572            241             95            718
                                      ------         ------         ------         ------
                                      $  829         $  831         $  346          1,314
                                      ======         ======         ======         ======
</TABLE>


                                       10
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Employee and Facility Termination Costs (continued)

<TABLE>
<CAPTION>
                                       At and for the Three Months Ended June 30, 2004
                                    ------------------------------------------------------
                                    Beginning   Costs Charged    Costs Paid or    Ending
                                     Balance      To Expense   otherwise settled  Balance
                                    ---------   -------------  -----------------  --------
<S>                                   <C>            <C>            <C>            <C>
   Employee termination costs         $   39         $   --         $   --         $   39
   Facility termination costs            371             --             60            311
                                      ------         ------         ------         ------
                                      $  410         $   --         $   60            350
                                      ======         ======         ======         ======

<CAPTION>

                                       At and for the Six Months Ended June 30, 2005
                                    ------------------------------------------------------
                                    Beginning   Costs Charged    Costs Paid or    Ending
                                     Balance      To Expense   otherwise settled  Balance
                                    ---------   -------------  -----------------  --------
<S>                                   <C>            <C>            <C>            <C>
   Employee termination costs         $  666         $  593         $  663         $  596
   Facility termination costs            660            241            183            718
                                      ------         ------         ------         ------
                                      $1,326         $  834         $  846          1,314
                                      ======         ======         ======         ======

<CAPTION>

                                         At and for the Six Months Ended June 30, 2004
                                    ------------------------------------------------------
                                    Beginning   Costs Charged    Costs Paid or    Ending
                                     Balance      To Expense   otherwise settled  Balance
                                    ---------   -------------  -----------------  --------
<S>                                   <C>            <C>            <C>            <C>
   Employee termination costs         $   39         $   --         $   --         $   39
   Facility termination costs            431             --            120            311
                                      ------         ------         ------         ------
                                      $  470         $   --         $  120            350
                                      ======         ======         ======         ======
</TABLE>

      In 2005, the Company expects to pay approximately $1.1 million of the
costs accrued as of June 30, 2005 and the remainder through 2007.

Note 6. Derivative Instruments, Hedging Activities and Debt

      The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
These statements require that all derivative instruments be recorded on the
consolidated balance sheets at their respective fair values as either assets or
liabilities.

      In April 2004 and in conjunction with the Company's issuance of the Notes,
which bear interest at 10.75%, payable semi-annually, the Company entered into a
$90.0 million notional amount interest rate swap agreement. This agreement was
used by the Company to reduce interest expense and modify exposure to interest
rate risk by converting its fixed rate debt to a floating rate liability. Under
the agreement, the Company received, on the portion of the senior subordinated
notes hedged, 10.75% fixed rate amounts in exchange for floating interest rate
(the 6-month London Interbank Offered Rate ("LIBOR") rate plus a premium)
payments over the life of the agreement without an exchange of the underlying
principal amount.


                                       11
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Derivative Instruments, Hedging Activities and Debt (continued)

      The swap was a cash flow hedge. Due to hedge ineffectiveness, measured by
comparing the change in the fair value of debt caused only by changes in the
LIBOR yield curve to the change in the value of the swap, changes in fair value
of the swap are recognized in earnings, and the carrying value of the Company's
debt is not marked to fair value. The changes in fair value for the three and
six months ended June 30, 2005 of $2.5 million, net of a $0.5 million
termination payment, and $0.5 million, respectively, were recorded in other
income on the statement of operations.

      In June 2005, the Company exercised its right to terminate its interest
rate swap agreement and, as a result, the Company paid a $0.5 million in fair
market value to National City Bank in June of 2005. The swap was scheduled to
mature on May 2, 2011. No early termination penalties were incurred by the
Company.

      Also in April 2004, the Company restructured its previous credit facility
with GE Capital, as agent and lender to a $40.0 million senior secured revolving
credit facility to support permitted acquisitions and future working capital and
general corporate needs. The amended and restated revolving credit facility is
an asset backed facility, with availability based upon the Company's balance of
eligible accounts receivable and inventory. As of June 30, 2005, the Company had
approximately $8.1 million of availability under its revolving credit facility.
The facility also contains certain financial covenants which are measured
quarterly during the term of the facility which expires on April 23, 2009.
Effective June 30, 2005, the Company and GE Capital executed a waiver agreement
to the revolving credit facility related to the financial covenants of total
leverage ratio and senior secured leverage ratio as the Company was not in
compliance with those covenants. The waiver agreement also amended the Company's
total leverage ratio requirement for the quarters ended March 31, 2006 and June
30, 2006. As of June 30, 2005, the Company was in compliance with all other
financial covenants.

Note 7. Deferred Taxes

      In the second quarter of 2005, the Company recorded a valuation allowance
against its deferred tax assets of approximately $1.9 million to reflect the
uncertainty of realization of those assets. The resulting tax rate for the six
months ended June 30, 2005 was (12.71%). The tax rate reconciliation is as
follows:

              Federal statutory rate                     (34.00%)
              Valuation allowance                         20.68%
              Other                                        0.61%
                                                         -------
              Effective tax rate                         (12.71%)
                                                         =======

Note 8. Note Guarantees

      On April 23, 2004, the Company issued the Notes under an Indenture (the
"Indenture"), dated April 23, 2004, among the Company, its subsidiaries and
Wells Fargo Bank, National Association. The Notes are jointly and severally
guaranteed by all of the Company's existing and future restricted subsidiaries
("Restricted Subsidiaries"), as defined in the Indenture, on a full and
unconditional basis, and no separate consideration will be received for the
issuance of these guarantees. However, under certain circumstances, the Company
may be permitted to designate any of its Restricted Subsidiaries as Unrestricted
Subsidiaries.


                                       12
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Note Guarantees (continued)

      The Company has no assets or operations independent of its Restricted
Subsidiaries. Furthermore, as of April 23, 2004, there were no significant
restrictions on the ability of any Restricted Subsidiary to transfer to the
Company, without consent of a third party, any of such Restricted Subsidiary's
assets, whether in the form of loans, advances or cash dividends.

Note 9. Recent Developments

California Medi-Cal Reimbursement Reduction

      Approximately 9% and 7% of the Company's total revenues for the three and
six months ended June 30, 2005, respectively, were derived from blood-clotting
products reimbursed by California state funded health programs. The California
state legislature in 2003 passed legislation that modified the reimbursement
methodology for blood-clotting factor products under various California state
funded health programs. Under the new reimbursement methodology, blood-clotting
factor products are reimbursed based upon Average Selling Price ("ASP"), as
provided by the manufacturers, plus 20%.

      In addition, payments for California's Medicaid program ("Medi-Cal") and
certain other state-funded health programs were to be reduced by 5% for services
provided on and after January 1, 2004. On December 23, 2003, the United States
District Court for the Eastern District of California issued an injunction
enjoining that scheduled 5% Medi-Cal reimbursement rate cut. The California
Department of Health Services ("DHS") appealed the decision to the federal Ninth
Circuit Court of Appeals, and oral argument was heard by the Ninth Circuit on
December 8, 2004. An exact date when the decision will be issued cannot be
predicted. The length of the injunction and the ultimate outcome of this
litigation are uncertain at this time. The court order enjoining the 5% Medi-Cal
rate reduction did not apply to other state funded programs for hemophilia
patients, and California implemented the 5% reduction for these other programs.
However, the 5% reduction as applied to the other state funded programs was
repealed on or about July 31, 2004 for services provided on and after July 1,
2004.

      Effective June 1, 2004, Medi-Cal implemented the ASP reimbursement
methodology for blood-clotting factor products. The change amounted to an
approximate 30-40% cut from rates previously in effect. The implementation of
the reduction in the reimbursement from Medi-Cal, and changes in regulations
governing such reimbursement, has adversely impacted the Company's revenues and
profitability from the sale of products by the Company or by retail pharmacies
to which it provides products or services for hemophilia patients who are
Medi-Cal beneficiaries or beneficiaries of other state funded programs for
hemophilia patients.

      In December 2004, the Company and certain named individual plaintiffs
entered into a Settlement Agreement which resolved both a lawsuit previously
filed on behalf of two individual Medi-Cal recipients with hemophilia in the
United States District Court for the Eastern District of California against the
State of California relating to the implementation of the new ASP reimbursement
methodology, and a lawsuit previously filed by the Company in the Superior Court
for the County of Sacramento relating to, among other things, the State of
California's failure to comply with certain applicable federal procedural
requirements relating to the reimbursement rates. In return for dismissal of
both lawsuits, DHS agreed to process, on a priority basis, all pending and
future Medi-Cal, California Children's Services and Genetically Handicapped
Persons Program claims submitted by the Company. In addition, DHS agreed to
expedite its efforts to implement electronic billing and payment for
blood-clotting factor claims.


                                       13
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Recent Developments (continued)

      In addition, the California legislature recently approved a proposal by
the Governor of California to expand the Medi-Cal managed care program into 13
additional counties and to phase in mandatory enrollment for parents and
children who are Medi-Cal beneficiaries. The Governor's proposal for mandatory
enrollment of seniors and disabled individuals was rejected by the legislature,
except for those individuals who may reside in an expansion county where a
County Organized Health System ("COHS") model is proposed. Under the COHS model,
all eligible Medi-Cal beneficiaries are mandatorily enrolled into the managed
care plan, including seniors and persons with disabilities. This proposal may be
reconsidered by the Legislature in August of 2005. The Company understands there
may be significant concern by various constituencies over mandatory enrollment
of medically fragile populations, and the outcome of these proposals is
uncertain at this time.

Change in Medicare Reimbursement Methodology

      Effective January 1, 2005, the Medicare reimbursement methodology for
blood-clotting factor products changed to ASP plus 6% plus a $0.14 per unit
dispensing fee. Under the previous methodology, the Company was reimbursed at
95% of average wholesale price ("AWP"). The Company anticipates that the new
methodology will result in reduced reimbursement of approximately 12%.

Note 10. Legal Proceeding

      In the normal course of its business, the Company may be involved in
lawsuits, claims, audits and investigations, including any arising out of
services or products provided by or to the Company's operations, personal injury
claims and employment disputes, the outcome of which, in the opinion of
management, will not have a material adverse effect on the Company's financial
position, cash flows or results of operations.

Prescription City Litigation

      As previously disclosed in a Form 8-K filed on July 27, 2005, on July 26,
2005, the Company announced that it has reached a settlement with Prescription
City, Inc. in connection with a complaint filed by the Company in November 2003
seeking rescission, compensatory and punitive damages and other relief. Under
the terms of the settlement, the Company received $4.5 million in cash and was
released from its obligation to pay a $1.0 million promissory note entered into
in connection with the asset purchase of Prescription City, Inc. At June 30,
2005, the $4.5 million in cash was recorded in prepaids and other current assets
and the $1.0 million promissory note was forgiven as a result of the settlement,
resulting in a $5.5 million decrease to goodwill.

      Curative acquired certain assets of Prescription City, Inc., formerly a
Spring Valley, New York specialty pharmacy business, on June 10, 2003. The asset
purchase was structured to provide indemnification, representations and
warranties by the sellers. A search warrant relating to a criminal investigation
was issued by a U.S. Magistrate Judge, Southern District of New York, executed
on November 4, 2003. Curative was not a target of the investigation and
cooperated fully with the U.S. Attorney's Office in its investigation.


                                       14
<PAGE>

                 Curative Health Services, Inc. and Subsidiaries

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Recently Issued Accounting Standard

      In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123(R)") which eliminated the alternative of
accounting for share-based compensation transactions under the intrinsic value
method of APB No. 25, "Accounting for Stock Issued to Employees." Instead, SFAS
No. 123(R) requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. The grant date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments.

      The Company expects to adopt SFAS No. 123(R) on January 1, 2006. The
adoption of SFAS No. 123(R)'s fair value method will have a significant impact
on the Company's results of operations, although it will have no impact its
overall financial position.


                                       15
<PAGE>

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

Overview

      Curative Health Services, Inc. ("Curative" or the "Company"), through its
Specialty Infusion and Wound Care Management business units, seeks to deliver
high-quality care and positive clinical outcomes that result in high patient
satisfaction for patients experiencing serious acute or chronic medical
conditions.

      Through its Specialty Infusion business unit, the Company provides
intravenous and injectable biopharmaceutical and compounded pharmaceutical
products and comprehensive infusion services to patients with chronic and
critical disease states. All patient care is delivered through a national
footprint of community-based branches. Each local branch has an experienced
multidisciplinary team of pharmacists, nurses, reimbursement specialists and
patient service representatives who comprehensively manage all aspects of a
patient's infusion and related support needs. In its Specialty Infusion
operations, the Company purchases biopharmaceutical and other pharmaceutical
products from suppliers and contracts with insurance companies and other payors
to provide its services, which include coordination of patient care, 24-hour
nursing and pharmacy availability, patient education and reimbursement billing
and collection services. The Company's Specialty Infusion revenues are derived
primarily from fees paid by the payors under these contracts for the
distribution of these biopharmaceutical and other pharmaceutical products and
for the injection or infusion services provided. Additional revenues are
acquired through biopharmaceutical and pharmaceutical product distribution and
support services under contracts with retail pharmacies for which the Company
receives related service fees. The products distributed and the injection or
infusion therapies offered by Curative are used by patients with chronic or
severe conditions such as hemophilia, RSV, immune system disorders, chronic or
severe infections, nutritionally compromised and other severe conditions
requiring nutritional support, cancer, rheumatoid arthritis, hepatitis C and
multiple sclerosis. Examples of biopharmaceutical products used by Curative's
patients include hemophilia clotting factor, intravenous immune globulins
("IVIG"), Synagis(R) and Remicade(R). Examples of pharmaceutical products used
by Curative's patients include compounded pharmaceuticals, such as total
parenteral nutrition ("TPN") products, anti-infectives, chemotherapy agents and
pain management products. As of June 30, 2005, the Company had approximately 425
payor contracts and provided products or services in approximately 45 states.

      The following provides approximate percentages of the Specialty Infusion
business unit's patient revenues for the three and six months ended June 30 and
the year ended December 31:

<TABLE>
<CAPTION>
                          Three Months Ended           Six Months Ended            Year Ended
                            June 30, 2005               June 30, 2005           December 31, 2004
                       -------------------------     ---------------------    ----------------------
<S>                             <C>                         <C>                       <C>
Private Payors                  66.0%                       60.5%                     53.4%
Medicaid                        24.8%                       32.1%                     39.5%
Medicare                         9.2%                        7.4%                      7.1%
</TABLE>

      Curative's Wound Care Management business unit is a leading provider of
wound care services specializing in chronic wound care management. It manages,
on behalf of hospital clients, a nationwide network of Wound Care Center(R)
programs that offer a comprehensive range of services across a continuum of care
for treatment of chronic wounds. The Company's Wound Management ProgramSM
consists of diagnostic and therapeutic treatment procedures that are designed to
meet each patient's specific wound care needs on a cost-effective basis. The
treatment procedures are designed to achieve positive results for wound healing
based on significant experience in the field. The Company maintains a
proprietary database of patient results that it has collected since 1988
containing over 510,000 patient cases as of June 30, 2005. The treatment
procedures, which are based on extensive patient data, have allowed the Company
to achieve an overall rate of healing of approximately 89% for patients
completing therapy. As of June 30, 2005, the Wound Care Center(R) network
consisted of 108 outpatient clinics (99 operating and 9 contracted) located on
or near campuses of acute care hospitals in approximately 30 states.


                                       16
<PAGE>

      The Wound Care Management business unit currently operates two types of
Wound Care Center(R) programs with hospitals: a management model and an "under
arrangement" model, with a primary focus on developing management models. In the
management model, Wound Care Management provides management and support services
for a chronic wound care facility owned or leased by the hospital and staffed by
employees of the hospital, and generally receives a fixed monthly management fee
or a combination of a fixed monthly management fee and a variable case
management fee. In the "under arrangement" model, Wound Care Management provides
management and support services, as well as the clinical and administrative
staff, for a chronic wound care facility owned or leased by the hospital, and
generally receives fees based on the services provided to each patient.

Critical Accounting Policies and Estimates

      Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, management evaluates its estimates
and judgments, including those related to revenue recognition, bad debts,
inventories, income taxes and intangibles. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Management believes
the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements:

Revenue recognition

      Specialty Infusion revenues are recognized, net of any contractual
allowances, when the product is shipped to a patient, retail pharmacy or a
physician's office, or when the service is provided. Wound Care Management
revenues are recognized after the management services are rendered and are
billed monthly in arrears.

Trade receivables

      Considerable judgment is required in assessing the ultimate realization of
receivables, including the current financial condition of the customer, age of
the receivable and the relationship with the customer. The Company estimates its
allowances for doubtful accounts using these factors. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. In
circumstances where the Company is aware of a specific customer's inability to
meet its financial obligations (e.g., bankruptcy filings), a specific reserve
for bad debts is recorded against amounts due to reduce the receivable to the
amount the Company reasonably believes will be collected. For all other
customers, the Company has reserves for bad debt based upon the total accounts
receivable balance. Although the Company believes its reserve for accounts
receivable at June 30, 2005 is reasonable, there can be no assurance that
additional reserves will not be needed in the future. The recording of any such
reserve may have a negative impact on the Company's operating results.

Inventories

      Inventories are carried at the lower of cost or market on a first in,
first out basis. Inventories consist of high-cost biopharmaceutical and
pharmaceutical products that, in many cases, require refrigeration or other
special handling. As a result, inventories are subject to spoilage or shrinkage.
On a quarterly basis, the Company performs a physical inventory and determines
whether any shrinkage or spoilage adjustments are needed. Although the Company
believes its inventories balance at June 30, 2005 is reasonably accurate, there
can be no assurance that spoilage or shrinkage adjustments will not be needed in
the future. The recording of any such reserve may have a negative impact on the
Company's operating results.


                                       17
<PAGE>

Deferred income taxes

      The Company had approximately $6.0 million in deferred income tax assets
at June 30, 2005 ($4.0 million represented a current asset and $2.0 million was
recorded in other long-term assets on the accompanying balance sheet) and
approximately $4.3 million in deferred income tax liabilities. The deferred
income tax assets were recorded net of a second quarter 2005 valuation allowance
of approximately $1.9 million (see Note 7). The Company has considered future
income expectations and prudent tax strategies in assessing the need for a
valuation allowance. In the event the Company determines in the future that it
needs to record an additional valuation allowance, an adjustment to deferred
income tax assets would be charged against income in the period of
determination.

Goodwill and intangibles

      Goodwill represents the excess of purchase price over the fair value of
net assets acquired. Intangibles consist of separately identifiable intangibles,
such as pharmacy and customer relationships and covenants not to compete. The
Company accounts for goodwill and intangible assets in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets," which requires goodwill and
intangible assets with indefinite lives to not be amortized but rather to be
reviewed annually, or more frequently if impairment indicators arise, for
impairment. Separable intangible assets that are not deemed to have an
indefinite life are amortized over their useful lives. In assessing the
recoverability of the Company's goodwill and intangibles, the Company must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or assumptions
change in the future, the Company may need to record an impairment charge for
these assets. An impairment charge would reduce operating income in the period
it was determined that the charge was needed. For example, due primarily to
changes in the economics of the Specialty Infusion business unit, including the
changes in reimbursement methodology that occurred in 2004, the Company recorded
a non-cash impairment charge of $134.7 million in goodwill and $0.1 million in
other intangible assets, respectively, in the fourth quarter of 2004. The
Company will continue to monitor its goodwill and intangibles for impairment
indicators.


                                       18
<PAGE>

Key Performance Indicators

      The following provides a summary of some of the key performance indicators
that may be used to assess the Company's results of operations. These
comparisons are not necessarily indicative of future results (dollars in
thousands).

<TABLE>
<CAPTION>
                                                   For the Six Months Ended June 30
                                             --------------------------------------------
                                                                        $           %
                                               2005        2004       Change      Change
                                             --------    --------    --------    --------
<S>                                          <C>         <C>         <C>               <C>
   Specialty Infusion revenues               $144,514    $116,784    $ 27,730          24%
   Wound Care Management revenues              13,838      13,214         624           5%
                                             --------    --------    --------
   Total revenues                            $158,352    $129,998    $ 28,354          22%

   Specialty Infusion revenues to total            91%         90%
   Wound Care Management revenues to total          9%         10%
                                             --------    --------
   Total                                          100%        100%

   Specialty Infusion gross margin           $ 19,679    $ 23,373    $ (3,694)        (16%)
   Wound Care Management gross margin           7,507       7,315         192           3%
                                             --------    --------    --------
    Total gross margin                       $ 27,186    $ 30,688    $ (3,502)        (11%)

   Specialty Infusion gross margin %               14%         20%
   Wound Care Management gross margin %            54%         55%
   Total gross margin %                            17%         24%

   Specialty Infusion SG&A                   $ 11,186    $  9,219    $  1,967          21%
   Wound Care Management SG&A                   1,675       2,047        (372)        (18%)
   Corporate SG&A                               9,253       9,870        (617)         (6%)
   Charges(1)                                   3,005       5,057      (2,052)        (41%)
                                             --------    --------    --------
   Total SG&A                                $ 25,119    $ 26,193    $ (1,074)         (4%)

   Operating margin                          $  2,067    $  4,495    $ (2,428)        (54%)
   Operating margin %                               1%          3%
</TABLE>

--------------
(1)   The Company's charges are discussed under Results of Operations - Selling,
      General and Administrative.


                                       19
<PAGE>

Recent Developments

California Medi-Cal Reimbursement Reduction

      Approximately 9% and 7% of the Company's total revenues for the three and
six months ended June 30, 2005, respectively, were derived from blood-clotting
products reimbursed by California state funded health programs. The California
state legislature in 2003 passed legislation that modified the reimbursement
methodology for blood-clotting factor products under various California state
funded health programs. Under the new reimbursement methodology, blood-clotting
factor products are reimbursed based upon ASP, as provided by the manufacturers,
plus 20%.

      In addition, payments for Medi-Cal and certain other state-funded health
programs were to be reduced by 5% for services provided on and after January 1,
2004. On December 23, 2003, the United States District Court for the Eastern
District of California issued an injunction enjoining that scheduled 5% Medi-Cal
reimbursement rate cut. The DHS appealed the decision to the federal Ninth
Circuit Court of Appeals, and oral argument was heard by the Ninth Circuit on
December 8, 2004. An exact date when the decision will be issued cannot be
predicted. The length of the injunction and the ultimate outcome of this
litigation are uncertain at this time. The court order enjoining the 5% Medi-Cal
rate reduction did not apply to other state funded programs for hemophilia
patients, and California implemented the 5% reduction for these other programs.
However, the 5% reduction as applied to the other state funded programs was
repealed on or about July 31, 2004 for services provided on and after July 1,
2004.

      Effective June 1, 2004, Medi-Cal implemented the ASP reimbursement
methodology for blood-clotting factor products. The change amounted to an
approximate 30-40% cut from rates previously in effect. The implementation of
the reduction in the reimbursement from Medi-Cal, and changes in regulations
governing such reimbursement, has adversely impacted the Company's revenues and
profitability from the sale of products by the Company or by retail pharmacies
to which it provides products or services for hemophilia patients who are
Medi-Cal beneficiaries or beneficiaries of other state funded programs for
hemophilia patients.

      In December 2004, the Company and certain named individual plaintiffs
entered into a Settlement Agreement which resolved both a lawsuit previously
filed on behalf of two individual Medi-Cal recipients with hemophilia in the
United States District Court for the Eastern District of California against the
State of California relating to the implementation of the new ASP reimbursement
methodology, and a lawsuit previously filed by the Company in the Superior Court
for the County of Sacramento relating to, among other things, the State of
California's failure to comply with certain applicable federal procedural
requirements relating to the reimbursement rates. In return for dismissal of
both lawsuits, DHS agreed to process, on a priority basis, all pending and
future Medi-Cal, California Children's Services and Genetically Handicapped
Persons Program claims submitted by the Company. In addition, DHS agreed to
expedite its efforts to implement electronic billing and payment for
blood-clotting factor claims.

      In addition, the California legislature recently approved a proposal by
the Governor of California to expand the Medi-Cal managed care program into 13
additional counties and to phase in mandatory enrollment for parents and
children who are Medi-Cal beneficiaries. The Governor's proposal for mandatory
enrollment of seniors and disabled individuals was rejected by the legislature,
except for those individuals who may reside in an expansion county where a COHS
model is proposed. Under the COHS model, all eligible Medi-Cal beneficiaries are
mandatorily enrolled into the managed care plan, including seniors and persons
with disabilities. This proposal may be reconsidered by the Legislature in
August of 2005. The Company understands there may be significant concern by
various constituencies over mandatory enrollment of medically fragile
populations, and the outcome of these proposals is uncertain at this time.

Change in Medicare Reimbursement Methodology

      Effective January 1, 2005, the Medicare reimbursement methodology for
blood-clotting factor products changed to ASP plus 6% plus a $0.14 per unit
dispensing fee. Under the previous methodology, the Company was reimbursed at
95% of AWP. The Company anticipates that the new methodology will result in
reduced reimbursement of approximately 12%.


                                       20
<PAGE>

Results of Operations

Revenues

      The Company's revenues for the second quarter of 2005 increased $7.2
million, or 11%, to $71.6 million compared to $64.4 million for the second
quarter of 2004. For the first six months of 2005, revenues increased $28.4
million, or 22%, to $158.4 million from $130.0 million for the same period in
2004. The increases in revenues were the result of the 2004 acquisition of CCS,
offset by a reduction in hemophilia revenue related to the reduced reimbursement
from California state programs.

      Product revenues, attributed entirely to the Specialty Infusion business
unit, increased $6.8 million, or 12%, to $64.5 million in the second quarter of
2005 from $57.7 million in the second quarter of 2004. For the first six months
of 2005, product revenues increased $27.7 million, or 24%, to $144.5 million
compared to $116.8 million for the same period in 2004. The increases in product
revenues were primarily attributable to the 2004 acquisition of CCS, offset by a
reduction in hemophilia revenue related to the reduced reimbursement from
California state programs. As a percentage of Specialty Infusion's revenues,
hemophilia revenues and Synagis(R) sales for the prevention of RSV accounted for
42% and 4%, respectively, for the second quarter of 2005 and 34% and 19%,
respectively, for the first six months of 2005. As RSV occurs primarily during
the winter months, the major portion of the Company's Synagis(R) sales may be
higher during the first and fourth quarters of the calendar year which may
result in significant fluctuations in the Company's quarterly operating results.

      Service revenues, attributed entirely to the Wound Care Management
business unit, increased $0.3 million, or 5%, to $7.1 million in the second
quarter of 2005 from $6.7 million in the second quarter of 2004. For the first
six months of 2005, service revenues increased $0.6 million, or 5%, to $13.8
million compared to $13.2 million for the same period in 2004. For the second
quarter of 2005, the Company signed seven new Wound Care Management contracts
and no contracts were terminated. For the first six months of 2005, the Company
signed eleven new Wound Care Management contracts and one contract was
terminated.

Cost of Product Sales

      Cost of product sales, attributed entirely to the Specialty Infusion
business unit, increased $8.8 million, or 19%, to $55.4 million in the second
quarter of 2005 compared to $46.6 million in the second quarter of 2004. For the
first six months of 2005, cost of product sales increased $31.4 million, or 34%,
to $124.8 million compared to $93.4 million for the same period in 2004. The
increases in cost of product sales were primarily attributable to the 2004
acquisition of CCS and increased costs for IVIG products. As a percentage of
product revenues, cost of product sales for the second quarter of 2005 was 86%
compared to 81% for the same period in 2004 and 86% for the first six months of
2005 compared to 80% for the same period in 2004. The percentage increases for
2005 were primarily attributable to the acquisition of CCS which resulted in the
reduction of the percentage of the Company's revenues derived from hemophilia
products, which have a lower product cost as a percentage of revenue, as well as
the reduction in hemophilia revenue related to the reduced reimbursement from
California state programs.

Cost of Services

      Cost of services, attributed entirely to the Wound Care Management
business unit, increased $0.3 million, or 10%, to $3.3 million in the second
quarter of 2005 from $3.0 million in the second quarter of 2004. For the first
six months of 2005, cost of services increased $0.4 million, or 7%, to $6.3
million compared to $5.9 million for the same period in 2004. As a percentage of
service revenues, cost of services for the second quarter of 2005 was 46%
compared to 44% for the same period in 2004 and 46% for the first six months of
2005 compared to 45% for the same period in 2004.


                                       21
<PAGE>

Gross Margin

      Gross margin decreased $1.9 million, or 13%, to $13.0 million in the
second quarter of 2005 from $14.9 million for the second quarter of 2004.
Specialty Infusion's gross margin declined to $9.2 million for the second
quarter of 2005 from $11.1 million for the same period in 2004, a decrease of
$1.9 million, or 17%. As a percentage of its revenues, Specialty Infusion's
gross margin was 14% in the second quarter of 2005 as compared to 19% for the
same period in 2004. For the first six months of 2005, Specialty Infusion's
gross margin declined to $19.7 million from $23.4 million for the same period in
2004, a decrease of $3.7 million, or 16%. As a percentage of its revenues,
Specialty Infusion's gross margin was 14% for the first six months of 2005 as
compared to 20% for the same period in 2004. The decreases in gross margin
dollars and percentage for the three and six months ended June 30, 2005 were
attributed to lower average revenue per unit for hemophilia products as a result
of changes in reimbursement rates, lower average revenue per unit for IVIG at
pharmacies operating before the CCS acquisition due to a higher mix of managed
care business and a higher cost of service. These decreases were partially
offset by the inclusion of the gross margin from the CCS acquisition.

      Wound Care Management's gross margin was flat at $3.8 million for the
second quarter of 2005 compared to the same period in 2004. As a percentage of
its revenues, Wound Care Management's gross margin was 54% for the second
quarter of 2005 compared to 56% for the same period in 2004. For the first six
months of 2005, Wound Care Management's gross margin increased $0.2 million to
$7.5 million compared to $7.3 million for the same period in 2004. As a
percentage of its revenues, Wound Care Management's gross margin was 54% for the
first six months of 2005 as compared to 55% for the same period in 2004.

Selling, General and Administrative

      Selling, general and administrative expenses decreased by $2.5 million, or
16%, to $13.7 million for the second quarter of 2005 compared to $16.2 million
for the second quarter of 2004 and consisted of $5.6 million related to the
Specialty Infusion business unit, $0.9 million related to the Wound Care
Management business unit, $4.5 million related to corporate services and $2.7
million in charges related to the Company's corporate reorganization. The
decrease in selling, general and administrative expenses of $2.5 million was
primarily due to the charges of $2.7 million in the second quarter of 2005
compared to $4.9 million in charges in the same period of 2004 and cost savings
from reductions in workforce, offset by additional expenses, as a result of the
CCS acquisition. As a percentage of total Company revenues, selling, general and
administrative expenses were 19% for the second quarter of 2005 compared to 25%
for the same period in 2004.

      For the first six months of 2005, selling, general and administrative
expenses decreased by $1.1 million, or 4%, to $25.1 million from $26.2 million
for the same period in 2004 and consisted of $11.2 million related to the
Specialty Infusion business unit, $1.7 million related to the Wound Care
Management business unit, $9.2 million related to corporate services and $3.0
million in charges, primarily related to the Company's corporate reorganization.
The decrease in selling, general and administrative expenses of $1.1 million was
primarily due to the charges of $3.0 million for the first six months of 2005
compared to $5.0 million in charges in the same period of 2004 and cost savings
from reductions in workforce, offset by additional expenses, as a result of the
CCS acquisition. As a percentage of total Company revenues, selling, general and
administrative expenses were 16% for the first six months of 2005 compared to
20% for the same period in 2004.

Net Loss

      Net loss was $4.8 million, or ($0.37) per share, in the second quarter of
2005 compared to net loss of $3.1 million, or ($0.24) per share, for the same
period in 2004. For the first six months of 2005, net loss was $8.1 million, or
($0.63) per share, compared to net income of $2 thousand, or $0 per diluted
share, for the same period in 2004. The net losses for the second quarter and
first six months of 2005 were attributed to the increased interest expense
related to the Company's senior notes, the decreased gross margins for Specialty
Infusion and the charges taken related to the Company's corporate office
relocation. Net loss for the second quarter and the first six months of 2005
included a gain of approximately $2.5 million, or $0.14 per share, after tax,
and $0.5 million, or $0.3 per share, after tax, respectively, related to the
termination of the Company's interest rate swap agreement in June 2005 (see Note
6).


                                       22
<PAGE>

Liquidity and Capital Resources

      Working capital was $60.1 million at June 30, 2005 compared to $50.8
million at December 31, 2004. Total cash and cash equivalents at June 30, 2005
was $1.0 million. The ratio of current assets to current liabilities was 2.4 to
1 at June 30, 2005 and 1.8 to 1 at December 31, 2004.

      Cash flows used in operating activities for the six months ended June 30,
2005 totaled $6.2 million, primarily attributable to reductions in accounts
receivable of $3.4 million, inventories of $7.0 million, prepaids and other of
$1.6 million and accounts payable and accrued expenses of $15.2 million, offset
by the net loss for the period.

      Cash flows used in investing activities totaled $2.3 million, primarily
attributable to $2.2 million in fixed asset purchases, net of disposals.

      Cash flows provided by financing activities totaled $8.4 million
attributable to $6.9 million in borrowing on credit facilities and long-term
liabilities, net, and payment of deferred financing costs, offset by $1.5
million in proceeds from repayments of notes receivable from stockholders.

      At June 30, 2005, the Company experienced a net decrease in accounts
receivable of $5.1 million primarily attributable to reduced sales of Synagis(R)
which is a seasonal product. Days Sales Outstanding ("DSO") was 96 days at June
30, 2005, as compared to 88 days at December 31, 2004 and 86 days at March 31,
2005. At June 30, 2005, DSO for the Specialty Infusion business unit was 101
days and for the Wound Care Management business unit, DSO was 56 days, compared
to 89 days and 73 days, respectively, at December 31, 2004.

      As of June 30, 2005, the Company's current portion of long-term
liabilities of $5.0 million included $1.1 million representing the current
portion of the Department of Justice ("DOJ") obligation, $0.9 million
representing the current portion of a convertible note payable used in
connection with the purchase of Apex Therapeutic Care, Inc. ("Apex") in February
2002 and $3.0 million in a convertible note payable related to the purchase of
Home Care of New York, Inc. ("Home Care") in October 2002. At June 30, 2005, the
Company's long-term liabilities of $217.8 million included $185.0 million in
senior notes payable, $31.9 million in borrowed funds from the Company's
commercial lender and a $0.9 million promissory note representing the long-term
portion of the convertible note used in the purchase of Apex.

      The Company's current portion of long-term liabilities and long-term
liabilities increased $5.3 million to $222.8 million compared to $217.5 million
at December 31, 2004. The increase was primarily due to a higher revolver
balance at June 30, 2005 compared to December 31, 2004, offset by the release of
the obligation to pay a $1.0 million promissory note entered into in connection
with the asset purchase of Prescription City, Inc. (see Part II, Item 1, "Legal
Proceeding"). The higher revolver balance was reflective of the net loss as well
as the increase in DSO at June 30, 2005.

      The Company's longer term cash requirements include working capital for
the expansion of its Specialty Infusion business branch pharmacy network and
servicing of the Company's substantial debt. Other cash requirements are
anticipated for capital expenditures in the normal course of business, including
the acquisition of software, computers and equipment related to the Company's
management information systems. As of June 30, 2005, the Company had a $1.1
million obligation, payable over approximately one year, to the DOJ related to
the settlement of its litigation previously disclosed, as well as senior notes
bank debt and convertible and promissory notes totaling $221.6 million payable
over various periods through 2011.

      As of June 30, 2005, the Company had approximately $8.1 million of
availability under its revolving credit facility with GE Capital. The credit
facility contains both financial and non-financial covenants. The financial
covenants include a total leverage ratio, fixed charges coverage ratio, senior
secured leverage ratio, capital expenditures and accounts receivable days
outstanding limits. In the event of default under any of these covenants, the
Company may seek a waiver or amendment of the covenants. Effective June 30,
2005, the Company and GE Capital executed a waiver agreement related to the
covenants of total leverage ratio and senior secured leverage ratio as the
Company was not in compliance with those covenants. The waiver agreement also
amended the Company's total leverage ratio requirement for the quarters ended
March 31, 2006 and June 30, 2006. There can be no


                                       23
<PAGE>

assurance, however, that such a waiver or amendment that may be needed in the
future will be obtained. In the event of any such default, the lender may
suspend or terminate advances under the credit facility, or the lender may
accelerate the debt and demand immediate payment of any outstanding balance. An
acceleration of the debt under the Company's senior secured credit facility
would result in an event of default under the indenture for the Company's 10.75%
senior notes due 2011 as well. The Company was in compliance with the other
financial covenants, as amended, under the credit facility at June 30, 2005.

      The Company believes that, based on the above as well as its current
business plan, recent settlement with Prescription City whereby the Company
received $4.5 million in cash and was released from its $1.0 million promissory
note and an expected $3.4 million in refundable taxes, its operating cash flow
and existing credit facilities will be sufficient to meet working capital needs
for the servicing of its debt, approximately $19.9 million in interest expense,
paid semi-annually, related principally to the Company's outstanding senior
notes, the $3.0 million convertible note payable related to the purchase of Home
Care due in the fourth quarter of 2005 and the expansion of its branch network
of full-service pharmacies, including capital expenditure requirements of
approximately $5.0 million, over the next twelve months. On May 2, 2005, the
Company made the first 2005 semi-annual interest payment of approximately $9.75
million on the senior notes. The Company made the payment by drawing against its
revolving credit facility. The Company expects that the balance of its revolving
credit facility will decline over the next several months sufficiently enough to
provide liquidity for payment of the November 2005 interest coupon. However, any
continued increase in the Company's days sales outstanding could hamper the
Company's ability to service its debt or require the Company to slow its
business expansion plans. In such case, the Company may be required to increase
its credit facilities, issue equity, offer some combination of both debt and
equity, or consider other alternatives to meet its working capital needs.

Recently Issued Accounting Standard

      In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123(R)") which eliminated the alternative of
accounting for share-based compensation transactions under the intrinsic value
method of APB No. 25, "Accounting for Stock Issued to Employees." Instead, SFAS
No. 123(R) requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. The grant date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments.

      The Company expects to adopt SFAS No. 123(R) on January 1, 2006. The
adoption of SFAS No. 123(R)'s fair value method will have a significant impact
on the Company's results of operations, although it will have no impact its
overall financial position.


                                       24
<PAGE>

Cautionary Statement and Risk Factors

      The statements contained in this Quarterly Report on Form 10-Q include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA"). When used in this Quarterly Report
on Form 10-Q and in future filings by us with the Securities and Exchange
Commission, in our news releases, presentations to securities analysts or
investors, and in oral statements made by or with the approval of one of our
executive officers, the words or phrases "believes," "anticipates," "expects,"
"plans," "seeks," "intends," "will likely result," "estimates," "projects" or
similar expressions are intended to identify such forward-looking statements.
These statements are only predictions. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Actual events
or results may differ materially from the results discussed in the
forward-looking statements.

      The following text contains cautionary statements regarding our business
that investors and others should consider. This discussion is intended to take
advantage of the "safe harbor" provisions of the PSLRA. Except to the extent
otherwise required by federal securities laws, we do not undertake to address or
update forward-looking statements in future filings with the SEC or
communications regarding our business or operating results, and do not undertake
to address how any of these factors may have caused results to differ from
discussions or information contained in previous filings or communications. You
should not place undue reliance on forward-looking statements, which speak only
as of the date they are made. In addition, any of the matters discussed below
may have affected past, as well as current, forward-looking statements about
future results so that our actual results in the future may differ materially
from those expressed in prior communications.

Risks Related to our Business

Our substantial level of indebtedness could adversely affect our financial
condition and prevent us from fulfilling our debt obligations.

      As of June 30, 2005, we had approximately $222.8 million of total
indebtedness which included $185.0 million aggregate principal amount of our
10.75% Senior Notes due 2011 (the "Notes") and our credit facility of $31.9
million with General Electric Capital Corporation. Subject to restrictions in
the indenture related to the Notes and our credit facility, we may incur
additional indebtedness.

      Our high level of indebtedness could have important consequences. For
example, it could:

      o     make it more difficult for us to satisfy our obligations on the
            Notes or under our revolving credit facility;

      o     require us to dedicate a substantial portion of our cash flow from
            operations to interest and principal payments on our indebtedness,
            reducing the availability of our cash flow for other purposes, such
            as capital expenditures, acquisitions and working capital;

      o     limit our flexibility in planning for, or reacting to, changes in
            our business and the industry in which we operate;

      o     increase our vulnerability to general adverse economic and industry
            conditions;

      o     place us at a disadvantage compared to our competitors that have
            less debt;

      o     expose us to fluctuations in the interest rate environment because
            the Company's revolving credit facility is at a variable rate of
            interest; and

      o     limit our ability to borrow additional funds.


                                       25
<PAGE>

      We expect to obtain the money to pay our expenses and to pay the interest
on the Notes, our revolving credit facility and other debt from cash flow from
our operations and from additional loans under our revolving credit facility.
Our ability to meet our expenses thus depends on our future performance, which
will be affected by financial, business, economic and other factors. For
example, in 2004, our business was adversely affected by reimbursement
reductions in the State of California for the hemophilia related products we
sell. We will not be able to control many of these factors, such as economic
conditions in the markets where we operate and pressure from competitors. We
cannot be certain that our cash flow will be sufficient to allow us to pay
principal and interest on our debt (including the Notes) and meet our other
obligations, such as those relating to the expansion of our branch pharmacy
network. If we do not have enough money, we may be required to refinance all or
part of our existing debt (including the Notes), sell assets or borrow more
money. We cannot guarantee that we will be able to do so on terms acceptable to
us. In addition, the terms of existing or future debt agreements, including our
revolving credit facility and the indenture, may restrict us from adopting any
of these alternatives. The failure to generate sufficient cash flow or to
achieve such alternatives could significantly adversely affect the value of the
Notes and our ability to pay principal of and interest on the Notes.

Our substantial outstanding debt subjects us to covenant default risk under our
senior secured credit facility.

      We are highly leveraged. If we are unable to achieve our forecasted
operating results, we may violate covenants under our senior secured credit
facility which include a total leverage ratio, fixed charges coverage ratio,
senior secured leverage ratio, capital expenditures and accounts receivable days
outstanding limits. In the event we default under any of these covenants, we may
seek a waiver or amendment of the covenants. Effective December 31, 2004, the
Company executed an amendment to its revolving credit facility to amend the
financial covenants of total leverage ratio and fixed charges, in addition to
other changes made to the credit agreement. Effective June 30, 2005, the Company
and GE Capital executed a waiver agreement to the revolving credit facility
related to the financial covenants of total leverage ratio and senior secured
leverage ratio as the Company was not in compliance with those covenants. The
waiver agreement also amended the Company's total leverage ratio requirement for
the quarters ended March 31, 2006 and June 30, 2006. The other financial
covenants were amended through December 31, 2005 and may need to be amended
again depending on the Company's operating results. There can be no assurance,
however, that we will be able to obtain such a waiver or amendment. In the event
we are unable to obtain a waiver or amendment to remedy any such default, the
lender may suspend or terminate advances under the credit facility, or the
lender may accelerate the debt and demand immediate payment of any outstanding
balance. An acceleration of the debt under our senior secured credit facility
would result in an event of default under the indenture for the Notes as well.

If we fail to comply with the terms of our settlement agreement with the
government, we could be subject to additional litigation or other governmental
actions which could be harmful to our business.

      On December 28, 2001, we entered into a settlement with the U.S.
Department of Justice ("DOJ"), the U.S. Attorney for the Southern District of
New York, the U.S. Attorney for the Middle District of Florida and the U.S.
Department of Health and Human Services, Office of the Inspector General, in
connection with all federal investigations and legal proceedings related to
whistleblower lawsuits previously pending against us in the U.S. District Court
for the Southern District of New York and the U.S. District Court for the
District of Columbia. These lawsuits included allegations that we improperly
caused our hospital customers to seek reimbursement for a portion of our
management fees that included costs related to advertising and marketing
activities by our personnel and allegations that we violated the federal
anti-kickback law and the federal False Claims Act. Under the terms of the
settlement, the lawsuits were dismissed, the United States and the
whistleblowers released us from the claims asserted in the lawsuits, and we
agreed to pay to the United States a $9.0 million initial payment, with an
additional $7.5 million to be paid over the next four years. As of June 30,
2005, a balance of approximately $1.1 million was outstanding on this
obligation. Pursuant to the settlement, we have been required to fulfill certain
additional obligations, including abiding by a five-year Corporate Integrity
Agreement, avoiding violations of law and providing certain information to the
DOJ from time to time. As of December 17, 2003, we were released from part of
our obligations under the Corporate Integrity Agreement. The independent review
organization that conducts the audit of our records pursuant to the Corporate
Integrity Agreement is no longer required to conduct the general compliance
review. If we fail or if we are accused of failing to comply with the terms of
the settlement, we may be subject to additional litigation or other governmental
actions, including our Wound Care Management business unit being barred from
participating in the Medicare program


                                       26
<PAGE>

and other federal health care programs. In addition, as part of the settlement,
we consented to the entry of a judgment against us for $28.0 million, less any
amounts previously paid under the settlement, that would be imposed only if we
fail to comply with the terms of the settlement, which, if required to be paid,
could have a material adverse effect on our financial position. In July 2002, we
settled a shareholders' class action suit for $10.5 million that had been
consolidated from four lawsuits involving allegations stemming from the
whistleblower lawsuits and DOJ investigations.

We are involved in litigation which may harm the value of our business.

      In the normal course of our business, we are involved in lawsuits, claims,
audits and investigations, including any arising out of services or products
provided by or to our operations, personal injury claims, employment disputes
and contractual claims, the outcome of which, in our opinion, should not have a
material adverse effect on our financial position and results of operations.
However, we may become subject to future lawsuits, claims, audits and
investigations that could result in substantial costs and divert our attention
and resources. In addition, since our current growth strategy includes
acquisitions, among other things, we may become exposed to legal claims for the
activities of an acquired business prior to the respective acquisition.

Our industry is subject to extensive government regulation, and non-compliance
by us, our suppliers, our customers or our referral sources could harm our
business.

      The marketing, labeling, dispensing, storing, provision, selling, pricing
and purchasing of drugs, health supplies and health services, including the
biopharmaceutical products we provide, are extensively regulated by federal and
state governments, and if we fail or are accused of failing to comply with laws
and regulations, our business could be harmed. Our business could also be harmed
if the suppliers, customers or referral sources we work with are accused of
violating laws or regulations. The applicable regulatory framework is complex,
and the laws are very broad in scope. Many of these laws remain open to
interpretation and have not been addressed by substantive court decisions. The
federal government or states in which we operate could, in the future, enact
more restrictive legislation or interpret existing laws and regulations in a
manner that could limit the manner in which we can operate our business and have
a negative impact on our business.

A substantial percentage of our revenue is attributable to the Medicaid and
Medicare programs. Our business has been significantly adversely impacted by
recent changes in Medi-Cal reimbursement policies and will continue to be
subject to changes in reimbursement policies and other legislative or regulatory
initiatives aimed at reducing costs associated with various government programs.

      In the year ended December 31, 2004, approximately 40% of our Specialty
Infusion business unit's revenues were derived from products and/or services
provided to patients covered under various state Medicaid programs, most of
which were from California, and approximately 7% of our Specialty Infusion
business unit's revenues were derived from products and/or services provided to
patients covered under the Medicare program. During the six months ended June
30, 2005, approximately 32% and 7% of our Specialty Infusion business unit's
revenues were derived from products and/or services provided to patients covered
under various state Medicaid and Medicare programs, respectively. As a result of
our acquisition of CCS, we expect the percentage of our revenues attributable to
federal and state programs to decrease. Such programs are highly regulated and
subject to frequent and substantial changes and cost-containment measures that
may limit and reduce payments to providers. In the recent past, many states have
been experiencing budget deficits that may require future reductions in health
care related expenditures. According to a Kaiser Family Foundation report issued
in October 2004, all 50 states and the District of Columbia implemented Medicaid
cost containment measures in fiscal year 2004, and each of these states planned
to put in additional spending constraints in fiscal year 2005. State cost
containment activity continued to focus heavily on reducing provider payments
and controlling prescription drug spending.

      In December 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 ("MMA") was signed into federal law, providing for a
Medicare prescription drug benefit and other changes to the Medicare program,
including changes to payment methodologies for products we distribute that are
covered by Medicare. Prior to MMA, Medicare reimbursement for many of the
products we distribute was based on 95% of the products' average


                                       27
<PAGE>

wholesale price ("AWP"). Under MMA, Medicare reimbursement for many of the
products we distribute, including most physician-administered drugs and
biologicals, was lowered to 80-85% of AWP effective January 1, 2004. This 2004
change did not affect Medicare reimbursement for blood-clotting factor products,
which continued to be reimbursed at 95% of AWP during 2004.

      Effective January 1, 2005, the Medicare reimbursement methodology for
blood-clotting factor products changed from an AWP-based system to one based
upon Average Selling Price ("ASP") which has lowered Medicare reimbursement. In
addition to the payment we receive from the Medicare program for blood-clotting
factor, beginning in January 2005, we receive a separate payment of $0.14 for
each unit of factor furnished to Medicare beneficiaries. It is possible that
states and/or commercial payors may adopt the new Medicare reimbursement
methodology. The conversion to a system based upon ASP could have a material
adverse effect on our business, financial condition and results of operations.
In addition, MMA changes the relationship between the Medicare and Medicaid
programs such that we may receive less reimbursement in the future for
individuals who receive benefits under both of these programs.

      In addition to these federal initiatives, many states are also making
modifications to the manner with which they reimburse providers of pharmacy
services. For example, in California, where approximately 12% and 7% of our
total revenues for the year ended December 31, 2004 and for the six months ended
June 30, 2005, respectively, were derived from blood-clotting products
reimbursed by California state funded health programs, the state legislature in
2003 passed legislation that modified the reimbursement methodology for
blood-clotting factor products under various California state funded health
programs. Under the new reimbursement methodology, blood-clotting factor
products are reimbursed based upon ASP, as provided by the manufacturers, plus
20%. In addition, payments for California's Medicaid program ("Medi-Cal") and
certain other state-funded health programs were to be reduced by 5% for services
provided on and after January 1, 2004. On December 23, 2003, the United States
District Court for the Eastern District of California issued an injunction
enjoining that scheduled 5% Medi-Cal reimbursement rate cut. The California
Department of Health Services ("DHS") appealed the decision to the federal Ninth
Circuit Court of Appeals, and oral argument was heard by the Ninth Circuit on
December 8, 2004. An exact date when the decision will be issued cannot be
predicted. The length of the injunction and the ultimate outcome of this
litigation are uncertain at this time. The court order enjoining the 5% Medi-Cal
rate reduction did not apply to other state funded programs for hemophilia
patients, and California implemented the 5% reduction for these other programs.
However, the 5% reduction as applied to the other state funded programs was
repealed on or about July 31, 2004 for services provided on and after July 1,
2004.

      Effective June 1, 2004, Medi-Cal implemented the ASP reimbursement
methodology for blood-clotting factor products. The change amounted to an
approximate 30-40% cut from rates previously in effect. The implementation of
the reduction in the reimbursement from Medi-Cal, and changes in regulations
governing such reimbursement, has adversely impacted our revenues and
profitability from the sale of products by us or by retail pharmacies to which
we provide products or services for hemophilia patients who are Medi-Cal
beneficiaries or beneficiaries of other state funded programs for hemophilia
patients.

      In December, 2004, we and certain named individual plaintiffs entered into
a Settlement Agreement which resolved both a lawsuit previously filed on behalf
of two individual Medi-Cal recipients with hemophilia in the United States
District Court for the Eastern District of California against the State of
California relating to the implementation of the new ASP reimbursement
methodology, and a lawsuit previously filed by us in the Superior Court for the
County of Sacramento relating to, among other things, the State of California's
failure to comply with certain applicable federal procedural requirements
relating to the reimbursement rates. In return for dismissal of both lawsuits,
DHS agreed to process, on a priority basis, all pending and future Medi-Cal,
California Children's Services and Genetically Handicapped Persons Program
claims submitted by us. In addition, DHS agreed to expedite its efforts to
implement electronic billing and payment for blood-clotting factor claims. There
can be no assurance, however, that the Company's accounts receivable collections
from the State of California will improve as the result of this settlement
agreement. A failure of the Company to improve its accounts receivable
collections from the State of California could have a material adverse effect on
the Company's business, financial condition and operating results.


                                       28
<PAGE>

      In addition, the California legislature recently approved a proposal by
the Governor of California to expand the Medi-Cal managed care program into 13
additional counties and to phase in mandatory enrollment for parents and
children who are Medi-Cal beneficiaries. The Governor's proposal for mandatory
enrollment of seniors and disabled individuals was rejected by the legislature,
except for those individuals who may reside in an expansion county where a
County Organized Health System ("COHS") model is proposed. Under the COHS model,
all eligible Medi-Cal beneficiaries are mandatorily enrolled into the managed
care plan, including seniors and persons with disabilities. This proposal may be
reconsidered by the Legislature in August of 2005. We understand there may be
significant concern by various constituencies over mandatory enrollment of
medically fragile populations, and the outcome of these proposals is uncertain
at this time.

      We are in the process of evaluating the impact various federal and state
legislative and related initiatives may have on our business, financial position
and results of operations.

Our growth strategy includes the expansion of our branch pharmacy network by the
opening of new branch pharmacy locations.

      An important element of the growth strategy of our Specialty Infusion
business unit is the expansion of our branch pharmacy network through the
opening of new branch locations. This expansion will involve significant
planning and execution processes, such as identifying new markets, leasing
facility space, hiring qualified personnel, obtaining payor contracts and
obtaining patient referrals. In addition, the Company will need to invest
capital in facility build out, computers, offices and other furniture and
equipment. It is expected that these branch pharmacies will incur losses during
their startup periods. Any failure by us to effectively execute this expansion
strategy, including the successful transition of expansion branches from loss
positions to profitability, could have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.

We have experienced rapid growth by acquisitions. If we are unable to manage our
growth effectively or purchase or integrate new companies, our business could be
harmed.

      Our growth strategy will likely strain our resources, and if we cannot
effectively manage our growth, our business could be harmed. In connection with
our growth strategy, we will likely experience an increase in the number of our
employees in our branch network, the size of our programs and the scope of our
operations. Our ability to manage this growth and to be successful in the future
will depend partly on our ability to retain skilled employees, enhance our
management team and improve our management information and financial control
systems.

      As part of our growth strategy, we may evaluate acquisition opportunities.
Acquisitions involve many risks, including the following:

      o     Since the specialty pharmacy industry is undergoing consolidation,
            we may experience difficulty in identifying suitable candidates and
            negotiating and consummating acquisitions on attractive terms, if at
            all.

      o     In the industry in which our Specialty Infusion business unit
            operates, there are customers who have a strong affiliation with
            their community-based representatives; accordingly, we may
            experience difficulty in retaining and assimilating the
            community-based representatives of companies we acquire.

      o     Because of the relationships between community-based representatives
            and customers in certain of our product lines, the loss of a single
            community-based representative may entail the loss of a significant
            amount of revenue.

      o     Our operational, financial and management systems may be
            incompatible with or inadequate to cost effectively integrate and
            manage the acquired business' systems. As a result, billing
            practices could be interrupted, and cash collections on the newly
            acquired business could be delayed pending conversion of patient
            files onto our billing systems and receipt of provider numbers from
            government payors.


                                       29
<PAGE>

      o     A growth strategy that involves significant acquisitions diverts our
            management's attention from existing operations.

      o     Acquisitions may involve significant transaction costs which we may
            not be able to recoup.

      o     We may not be able to integrate newly acquired businesses
            appropriately.

      In addition, we may become subject to litigation and other liabilities
resulting from the conduct of an acquired business prior to their acquisition by
us.

Our growth strategy may include acquisitions. If we fail to implement our
acquisition growth strategy as intended, or incur unknown liabilities for the
past practices of acquired companies, our results of operations could be
adversely affected.

      An element of the growth strategy of our Specialty Infusion business unit
may be expansion through the acquisition of complementary businesses. Our
competitors may acquire or seek to acquire many of the businesses that would
also be suitable acquisition candidates for us. This competition could limit our
ability to grow by acquisition or increase the cost of our acquisitions. There
can be no assurance that we will be able to acquire any complementary businesses
that meet our target criteria on satisfactory terms, or at all.

      We may acquire businesses with significant unknown or contingent
liabilities, including liabilities for failure to comply with health care or
reimbursement laws and regulations. We have policies to conform the practices of
acquired businesses to our standards and applicable laws and generally intend to
seek indemnification from prospective sellers covering these matters. We may,
however, incur material liabilities for past activities of acquired businesses.

      While we generally obtain contractual rights to indemnification from
owners of the businesses we acquire, our ability to realize on any
indemnification claims will depend on many factors, including, among other
things, the availability of assets of the indemnifying parties. These
indemnifying parties are often individuals who may not have the resources to
satisfy an indemnification claim.

We operate in a rapidly changing, consolidating and competitive environment. If
we are unable to adapt quickly to these changes, our business and results of
operations could be seriously harmed.

      The specialty infusion industry is experiencing rapid consolidation. We
believe that technological and regulatory changes will continue to attract new
entrants to the market. Industry consolidation among our competitors may
increase their financial resources, enabling them to compete more effectively
based on price and services offered. This could require us either to reduce our
prices or increase our service levels, or risk losing market share. Moreover,
industry consolidation may result in stronger competitors that are better able
to compete. If we are unable to effectively execute our growth strategy, our
ability to compete in a rapidly changing and consolidating specialty pharmacy
industry may be negatively impacted.

The anticipated benefits of combining Curative and CCS may not be realized.

      In April of 2004, we purchased CCS with the expectation that the
combination of both companies will result in various benefits including, among
other things, benefits relating to increased infrastructure of added pharmacies,
increased leverage with a greater number of payor contracts, an essential and
demonstrably cost-effective therapy offering, increased clinical backbone and
expertise, cost savings and operating efficiencies. There can be no assurance
that we will realize any of these benefits or that the acquisition will not
result in the deterioration or loss of significant business of the combined
company. Costs incurred and liabilities assumed in connection with the
acquisition, including pending and/or threatened disputes and litigation, could
have a material adverse effect on the combined company's business, financial
condition and operating results.


                                       30
<PAGE>

Curative may have difficulty and incur substantial costs in integrating CCS.

      Integrating Curative and CCS will be a complex, time-consuming and
expensive process. Before the acquisition, Curative and CCS operated
independently, each with its own business, products, customers, employees,
culture and systems. The combined company may face substantial difficulties,
costs and delays in integrating Curative and CCS. These factors may include:

      o     potential difficulty in leveraging the value of the separate
            technologies of the combined company;

      o     managing patient and payor overlap and potential pricing conflicts;

      o     costs and delays in implementing common systems and procedures;

      o     difficulty integrating differing distribution models;

      o     diversion of management resources from the business of the combined
            company;

      o     potential incompatibility of business cultures and philosophies;

      o     reduction or loss of revenue due to the potential for market
            confusion, hesitation and delay;

      o     retaining and integrating management and other key employees of the
            combined company; and

      o     coordinating infrastructure operations in an effective and efficient
            manner.

      We may seek to combine certain operations and functions using common
information and communication systems, operating procedures, financial controls
and human resource practices. We may be unsuccessful in implementing the
integration of these systems and processes.

      Any one or all of these factors may cause increased operating costs, worse
than anticipated financial performance or the loss of patients and payor
contracts. Many of these factors are also outside our control. The failure to
effectively and efficiently integrate Curative and CCS could have a material
adverse effect on our business, financial condition and operating results.

      In December 2004, we announced that our corporate headquarters and
corporate functions in Hauppauge, New York, would be consolidated into our
office located in Nashua, New Hampshire. The consolidation, which was
substantially completed as of June 30, 2005, required recruitment of qualified
personnel in the areas of finance, legal and marketing. There can be no
assurance that we will be able to attract and/or retain qualified personnel in
these areas. The failure to do so could have a material adverse effect on our
business, financial condition and operating results.

We may need additional capital to finance our growth and capital requirements,
which could prevent us from fully pursuing our growth strategy.

      In order to implement our present growth strategy, we may need substantial
capital resources and may incur, from time to time, short- and long-term
indebtedness, the terms of which will depend on market and other conditions. Due
to uncertainties inherent in the capital markets (e.g., availability of capital,
fluctuation of interest rates, etc.), we cannot be certain that existing or
additional financing will be available to us on acceptable terms, if at all.
Even if we are able to obtain additional debt financing, we may incur additional
interest expense, which may decrease our earnings, or we may become subject to
contracts that restrict our operations. As a result, we could be unable to fully
pursue our growth strategy. Further, additional financing may involve the
issuance of equity securities that would dilute the interests of our existing
shareholders and potentially decrease the market price of our common stock.


                                       31
<PAGE>

An impairment of the significant amount of goodwill on our financial statements
could adversely affect our results of operations.

      Our specialty infusion acquisitions resulted in the recording of a
significant amount of goodwill on our financial statements. The goodwill was
recorded because the fair value of the net assets acquired was less than the
purchase price. We may not realize the full value of this goodwill. As such, we
evaluate, at least on an annual basis, whether events and circumstances indicate
that all or some of the carrying value of goodwill is no longer recoverable, in
which case we would write off the unrecoverable goodwill as a charge against our
earnings. Due primarily to changes in the economics of the Specialty Infusion
business unit, including the changes in reimbursement methodology that occurred
in 2004, we recorded a non-cash impairment charge of $134.7 million in goodwill
and $0.1 million in other intangible assets, respectively, in the fourth quarter
of 2004. We will continue to monitor our goodwill and intangibles for impairment
indicators.

      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
any intangible assets that meet the criteria specified in the Statement of
Financial Accounting Standards No. 141, "Business Combinations," such as
marketing, customer or contract-based intangibles. The amount allocated to these
intangible assets could be amortized over a fairly short period, which may
negatively affect our earnings or the market price of our common stock.

      As of June 30, 2005, we had goodwill of approximately $114.5 million, or
43% of total assets.

Failure to achieve and maintain effective internal control over financial
reporting could have a material adverse effect on our business, results of
operations and stock price.

      We must continue to document and test our internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, which requires annual management assessments of the effectiveness of our
internal control over financial reporting and a report by our independent
registered public accounting firm attesting to these assessments. During this
process, management may identify control deficiencies and material weaknesses in
our internal control over financial reporting and in our disclosure controls and
procedures. Although management's evaluation concluded that our internal control
over financial reporting was effective as of December 31, 2004, we cannot
predict the outcome of testing in future periods. If we fail to maintain the
adequacy of our internal controls and disclosure controls, as such standards are
modified, supplemented or amended from time to time, we may not be able to
conclude on an ongoing basis that we have effective internal control over
financial reporting. If we cannot provide reliable financial reports, our
business and operating results could be harmed, investors could lose confidence
in our reported financial information and the trading price of our stock could
decline.

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

      The biopharmaceutical and pharmaceutical industries are susceptible to
product shortages. Some of the products that we distribute, such as factor VIII
blood-clotting products and IVIG, have experienced shortages in the past due to
the inability of suppliers to increase production to meet rising global demand.
Although such shortages have ended, demand continues to grow. We are currently
experiencing allocation restrictions of IVIG products. Suppliers were unable to
increase production to meet rising global demand. For the year ended December
31, 2004, approximately 32%, or $81.3 million, and for the six months ended June
30, 2005, approximately 23%, or $33.1 million, of our Specialty Infusion
business unit's revenues were derived from our sale of factor VIII. We purchase
the majority of our supplies of blood-clotting products from five suppliers:
Baxter Healthcare Corporation, Bayer Direct, ZLB Behring, Genetics Institute and
Grifols Biologicals, Inc. We believe that these five suppliers represent
substantially all of the production capacity for recombinant factor VIII. In the
event that one of these suppliers is unable to continue to supply us with
products, it is uncertain whether the remaining suppliers would be able to make
up any shortfall resulting from such inability. Our ability to take on
additional customers or to acquire other specialty pharmacy or infusion services
businesses with significant hemophilia customer bases could be affected
negatively in


                                       32
<PAGE>

the event we are unable to secure adequate supplies of our products from these
suppliers. In addition, MedImmune, Inc. is the sole source of Synagis(R), a
product used to treat RSV in infants. For the year ended December 31, 2004,
approximately 17%, or $43.7 million, and for the six months ended June 30, 2005,
approximately 19%, or $27.2 million, of our Specialty Infusion business unit's
revenues were derived from our sale of Synagis(R). MedImmune's failure to
provide us with an adequate supply of Synagis(R) product for any reason could
impair our ability to add and service patients. In particular, RSV occurs
primarily during the winter months and thus the demand for Synagis(R) is greater
during this time. A shortage in the supply of Synagis(R) or our failure to
adequately plan for the demand could adversely affect our financial results.
Under our existing arrangements with MedImmune, we are non-exclusive
distributors of Synagis(R) and MedImmune has no obligation to supply us with a
minimum amount of Synagis(R). We have recently been put on allocation of product
for IVIG by our largest supplier of IVIG product. Although we believe we will
have sufficient supply of IVIG to service our existing customers, we may not be
able to increase our market share of providing infusion services related to
IVIG. There can be no assurance as to when the allocation for IVIG products will
terminate. In addition, it is possible that we will experience price increases
for these products. Although we believe the price increase for these products
will be absorbed by our customers, there can be no assurance that we will be
successful in passing on any such price increase. If these products, or any of
the other drugs or products that we distribute, are in short supply for long
periods of time, our business could be harmed.

Some biopharmaceutical suppliers in the specialty pharmacy industry have chosen
to limit the number of distributors of their products. If we are not selected as
a preferred distributor of one or more of our core products, our business and
results of operations could be seriously harmed.

      We have identified a trend among some of our suppliers toward the
retention of a limited number of preferred distributors to market certain of
their biopharmaceutical products. If this trend continues, we cannot be certain
that we will be selected and retained as a preferred distributor or can remain a
preferred distributor to market these products. Although we believe we can
effectively meet our suppliers' requirements, there can be no assurance that we
will be able to compete effectively with other specialty pharmacy companies to
retain our position as a distributor of each of our core products. Adverse
developments with respect to this trend could have a material adverse effect on
our business and results of operations.

The seasonal nature of a portion of our business may cause significant
fluctuations in our quarterly operating results.

      For the year ended December 31, 2004, approximately 17%, or $43.7 million,
and for the six months ended June 30, 2005, approximately 19%, or $27.2 million,
of our Specialty Infusion business unit's revenues were derived from our sale of
Synagis(R). Synagis(R) is used to prevent RSV in infants. As RSV occurs
primarily during the winter months, the major portion of our Synagis(R) sales
may be higher during the first and fourth quarters of the calendar year which
may result in significant fluctuations in our quarterly operating results.

If we fail to cultivate new or maintain established relationships with the
physician referral sources, our revenues may decline.

      Our success, in part, is dependent upon referrals and our ability to
maintain good relationships with physician referral sources. Physicians
referring patients to us are not our employees and are free to refer their
patients to our competitors. If we are unable to successfully cultivate new
referral sources and maintain strong relationships with our current referral
sources, our revenues and profits may decline.

If additional providers obtain access to products we handle at more favorable
prices, our business could be harmed.

      Because we do not receive federal grants under the Public Health Service
Act, we are not eligible to participate directly in a federal pricing program
administered by the Federal Health Resources and Services Administration's
Public Health Service, which allows certain entities with such grants, such as
certain hospitals and hemophilia treatment centers, to obtain discounts on
drugs, including certain biopharmaceutical products (e.g., hemophilia-clotting
factor and IVIG) that represented 45% and 38% of our total Company revenues at
December 31,


                                       33
<PAGE>

2004 and for the six months ended June 30, 2005, respectively. To the best of
our knowledge, these entities benefit by being able to acquire, pursuant to this
federal program, products competitive with ours at prices lower than our cost
for the same products. Our customers, where eligible, may elect to obtain
hemophilia-clotting factor, or other products, from such lower-cost entities,
which could result in a reduction of revenue to us.

Recent investigations into reporting of average wholesale prices could reduce
our pricing and margins.

      Many government payors, including Medicare (in 2004) and many state
Medicaid programs, as well as a number of private payors, pay us directly or
indirectly based upon a drug's AWP. In fact, most of our Specialty Infusion
business unit's revenues result from reimbursement methodologies based on the
AWP of our products. The AWP for most drugs is compiled and published by
third-party price reporting services, such as First DataBank, Inc., from
information provided by manufacturers and/or wholesalers. Various federal and
state government agencies have been investigating whether the published AWP of
many drugs, including some that we distribute and sell, is an appropriate or
accurate measure of the market price of the drugs. There are also several
lawsuits pending against various drug manufacturers in connection with the
appropriateness of the manufacturers' AWP for a particular drug(s). These
government investigations and lawsuits involve allegations that manufacturers
reported artificially inflated AWPs of various drugs to third-party price
reporting services, which, in turn, reported these prices to its subscribers,
including many state Medicaid agencies who then included these AWPs in the
state's reimbursement policies.

      Moreover, as discussed above, as a result of MMA, Medicare reimbursement
for many of the products we distribute, including most physician-administered
drugs and biologicals, was lowered to 80-85% of AWP effective January 1, 2004.
Although this 2004 change did not affect Medicare reimbursement for
blood-clotting factor products, which continued to be reimbursed at 95% of AWP
in 2004, effective January 1, 2005, the Medicare reimbursement methodology for
blood-clotting factor products changed from an AWP-based system to a system
based upon ASP (plus, in the case of hemophilia products, 6% plus an additional
administrative fee most recently proposed by Centers for Medicare & Medicaid
Services ("CMS") to be $0.14 per unit), which has lowered Medicare
reimbursement. It is possible that states and/or commercial payors may adopt the
new Medicare reimbursement methodology. While we cannot predict the eventual
results of any law changes, government proposals, investigations or lawsuits, if
government or private payors revise their pricing based on new methods of
calculating AWP for products we supply, or implement reimbursement methodology
based on a value other than AWP, this could have a material adverse effect on
our business, financial condition and results of operations.

A reduction in the demand for our products and services could result in our
reducing the pricing and margins on certain of our products.

      A number of circumstances could reduce demand for our products and
services, including:

      o     customer shifts to treatment regimens other than those we offer;

      o     new treatments or methods of delivery of existing drugs that do not
            require our specialty products and services;

      o     the recall of a drug or adverse reactions caused by a drug;

      o     the expiration or challenge of a drug patent;

      o     competing treatment from a new drug, a new use of an existing drug
            or genetic therapy;

      o     drug companies ceasing to develop, supply and generate demand for
            drugs that are compatible with the services we provide;

      o     drug companies stopping outsourcing the services we provide or
            failing to support existing drugs or develop new drugs;


                                       34
<PAGE>

      o     governmental or private initiatives that would alter how drug
            manufacturers, health care providers or pharmacies promote or sell
            products and services;

      o     the loss of a managed care or other payor relationship covering a
            number of high-revenue customers; or

      o     the cure of a disease we service.

Our business involves risks of professional, product and hazardous substance
liability, and any inability to obtain adequate insurance may adversely affect
our business.

      The provision of health services entails an inherent risk of professional
malpractice, regulatory violations and other similar claims. Claims, suits or
complaints relating to health services and products provided by physicians,
pharmacists or nurses in connection with our Specialty Infusion and Wound Care
Management businesses may be asserted against us in the future.

      Our operations involve the handling of bio-hazardous materials. Our
employees, like those of all companies that provide services dealing with human
blood specimens, may be exposed to risks of infection from AIDS, hepatitis and
other blood-borne diseases if appropriate laboratory practices are not followed.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of accidental infection or
injury from these materials. In the event of such an accident, we could be held
liable for any damages that result, and such liability could harm our business.

      Our operations expose us to product and professional liability risks that
are inherent in managing the delivery of wound care services and the provision
and marketing of biopharmaceutical and pharmaceutical products. We currently
maintain professional and product liability insurance coverage of $15.0 million
in the aggregate. Because we cannot predict the nature of future claims that may
be made, there can be no assurance that the coverage limits of our insurance
would be adequate to protect us against any potential claims, including claims
based upon the transmission of infectious diseases, contaminated products,
negligent services or otherwise. In addition, we may not be able to obtain or
maintain professional or product liability insurance in the future on acceptable
terms, if at all, or with adequate coverage against potential liabilities.

We rely on key community-based representatives whose absence or loss could harm
our business.

      The success of our Specialty Infusion business unit depends upon our
ability to retain key employees known as community-based representatives, and
the loss of their services could adversely affect our business and prospects.
Our community-based representatives are our chief contacts and maintain the
primary relationship with our customers, and the loss of a single
community-based representative could result in the loss of a significant number
of customers. We do not have key person insurance on any of our community-based
representatives. In addition, our success depends upon, among other things, the
successful recruitment and retention of qualified personnel, and we may not be
able to retain all of our key management personnel or be successful in
recruiting additional replacements should that become necessary.

Our inability to maintain a number of important contractual relationships could
adversely affect our operations.

      Substantially all of the revenues of our Wound Care Management operations
are derived from management contracts with acute care hospitals. At June 30,
2005, we had 108 management contracts (99 operating and 9 contracted). The
contracts generally have initial terms of three to five years, and many have
automatic renewal terms unless specifically terminated. The contracts often
provide for early termination either by the client hospital if specified
performance criteria are not satisfied, or by us under various other
circumstances. Historically, some contracts have expired without renewal, and
others have been terminated by us or the client hospital for various reasons
prior to their


                                       35
<PAGE>

scheduled expiration. During 2004, one contract expired without renewal, and an
additional five contracts were terminated prior to their scheduled expiration.
During the six months ended June 30, 2005, no contracts expired without renewal,
and no contracts were terminated prior to the scheduled expiration. Hospital
contracts have been terminated for reasons such as hospital financial
difficulties, Medicare reimbursement changes which reduced hospital revenues and
the desire of the hospital to exit the business or manage it on its own. Our
continued success is subject to, among other things, our ability to renew or
extend existing management contracts and obtain new management contracts. Any
hospital may decide not to continue to do business with us following expiration
of its management contract, or earlier if such management contract is terminable
prior to expiration. In addition, any changes in the Medicare program or
third-party reimbursement levels which generally have the effect of limiting or
reducing reimbursement levels for health services provided by programs managed
by us could result in the early termination of existing management contracts and
could adversely affect our ability to renew or extend existing management
contracts and to obtain new management contracts. The termination or non-renewal
of a material number of management contracts could harm our business.

      In addition, a portion of the revenues of our Specialty Infusion
operations is derived from contractual relationships with retail pharmacies. Our
success is subject to, among other things, the continuation of these
relationships, and termination of one or more of these relationships could harm
our business.

Our business will suffer if we lose relationships with payors.

      We are partially dependent on reimbursement from non-governmental payors.
Many payors seek to limit the number of providers that supply drugs to their
enrollees. From time to time, payors with whom we have relationships require
that we and our competitors bid to keep their business and, therefore, due to
the uncertainties involved in any bidding process, we either may not be retained
or may have to reduce our margins to retain business. The loss of a significant
number of payor relationships, or an adverse change in the financial condition
of a significant number of payors, could result in the loss of a significant
number of patients and harm our business.

Changes in reimbursement rates which cause reductions in the revenues of our
operations have adversely affected our Wound Care Management business unit.

      As a result of the Balanced Budget Act of 1997, the CMS implemented the
Outpatient Prospective Payment System ("OPPS") for most hospital outpatient
department services furnished to Medicare patients beginning August 2000. Under
OPPS, a predetermined rate is paid to each hospital for clinical services
rendered, regardless of the hospital's cost. We believe the new payment system
does not provide comparable reimbursement for services previously reimbursed on
a reasonable cost basis, and we believe the payment rates for many services are
insufficient for many of our hospital customers, resulting in revenue and income
shortfalls for the Wound Care Center(R) programs we manage on behalf of the
hospitals. As a result, during 2004 and 2003, we renegotiated and modified many
of our management contracts related to our Wound Care Management business unit,
which has resulted in reduced revenue and income to us from those modified
contracts and, in numerous cases, contract termination. These renegotiations
resulted in reduced revenues of approximately $1.0 million in the year ended
December 31, 2004. In addition, we lost approximately $0.4 million in revenues
in the year ended December 31, 2004 as the result of contract terminations. We
expect that contract renegotiation and modification with many of our hospital
customers will continue, and this could result in reduced revenues and income to
us from those contracts and even contract terminations. These results could harm
our business.

      The Wound Care Center(R) programs managed by our Wound Care Management
business unit on behalf of acute care hospitals are generally treated as
"provider based entities" for Medicare reimbursement purposes. This designation
is required for the hospital-based program to be covered under the Medicare
outpatient reimbursement system. With OPPS, Medicare published criteria for
determining when programs may be designated "provider based entities." Programs
that existed prior to October 1, 2000 were grandfathered by CMS to be "provider
based entities" until the start of the hospital's next cost-reporting period
beginning on or after July 1, 2003. At that time, the hospital could have
submitted an attestation to the appropriate CMS Regional Office, attesting that
the program met all the requirements for provider-based designation. Programs
that started on or after October 1, 2000 could have voluntarily applied for
provider based designation status. We timely advised each of our hospital
clients of the mandatory


                                       36
<PAGE>

application procedures. Although we believe that the programs we manage
substantially meet the current criteria to be designated "provider based
entities," a widespread denial of such designation could harm our business.

We are subject to pricing pressures and other risks involved with third-party
payors.

      In recent years, competition for patients, efforts by traditional
third-party payors to contain or reduce health care costs, and the increasing
influence of managed care payors, such as health maintenance organizations, have
resulted in reduced rates of reimbursement. Commercial payors, such as managed
care organizations and traditional indemnity insurers, increasingly are
requesting fee structures and other arrangements providing for health care
providers to assume all or a portion of the financial risk of providing care.
Changes in reimbursement policies of governmental third-party payors, including
policies relating to Medicare, Medicaid and other federally funded programs,
could reduce the amounts reimbursed to our customers for our products and, in
turn, the amount these customers would be willing to pay for our products and
services, or could directly reduce the amounts payable to us by such payors. The
lowering of reimbursement rates, increasing medical review of bills for services
and negotiating for reduced contract rates could harm our business. Pricing
pressures by third-party payors may continue, and these trends may adversely
affect our business.

      Also, continued growth in managed care and capitated plans have pressured
health care providers to find ways of becoming more cost competitive. Managed
care organizations have grown substantially in terms of the percentage of the
population they cover and in terms of the portion of the health care economy
they control. Managed care organizations have continued to consolidate to
enhance their ability to influence the delivery of health care services and to
exert pressure to control health care costs. A rapid increase in the percentage
of revenue derived from managed care payors or under capitated arrangements
without a corresponding decrease in our operating costs could harm our business.

There is substantial competition in the specialty pharmacy, home infusion and
wound care services industries, and we may not be able to compete successfully.

      Our Specialty Infusion business unit faces competition from other
specialty infusion, specialty pharmacy, home infusion and disease management
entities, general health care facilities and service providers,
biopharmaceutical companies, pharmaceutical companies as well as other
competitors. Many of these companies have substantially greater capital
resources, marketing staffs and experience in commercializing products and
services than we have, and may be able to obtain better pricing from suppliers
of products we purchase and distribute. The principal competition with our Wound
Care Management business unit consists of specialty clinics that have been
established by some hospitals or physicians. Additionally, there are some
private companies which provide wound care services through a hyperbaric oxygen
therapy program format. Furthermore, recently developed technologies, or
technologies that may be developed in the future, are or may be the basis for
products which compete with our specialty infusion business or chronic wound
care services. We may not be able to enter into co-marketing arrangements with
respect to these products or maintain pricing arrangements with suppliers that
preserve margins, and we may not be able to compete effectively against such
companies in the future.

If we are unable to effectively adapt to changes in the health care industry,
our business will be harmed.

      Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. We anticipate that
Congress and state legislatures may continue to review and assess alternative
health care delivery and payment systems and may in the future propose and adopt
legislation effecting fundamental changes in the health care delivery system as
well as changes to Medicare's coverage and payments of the drugs and services we
provide.

      As discussed above, in December 2003, MMA was signed into law,
substantially changing the Medicare reimbursement system insofar as it pertains
to biopharmaceuticals and drugs, as well as enacting various other changes to
the Medicare program. It is possible that MMA, as well as any future legislation
enacted by Congress or state legislatures, could harm our business or could
change the operating environment of our targeted customers (including hospitals
and managed care organizations). Health care industry participants may react to
such legislation by curtailing


                                       37
<PAGE>

or deferring expenditures and initiatives, including those relating to our
programs and services. It is possible that the changes to the Medicare program
reimbursement may serve as precedent to possible changes in other payors'
reimbursement policies in a manner adverse to us. In addition, MMA and its
related regulatory changes could encourage integration or reorganization of the
health care delivery system in a manner that could materially and adversely
affect our ability to compete or to continue our operations without substantial
changes.

There are a number of state and federal laws and regulations that apply to our
operations which could harm our business.

      A number of state and federal laws and regulations apply to, and could
harm, our business. These laws and regulations include, among other things, the
following:

      o     The federal "anti-kickback law" prohibits the offering or
            solicitation of remuneration in return for the referral of patients
            covered by almost all governmental programs, or the arrangement or
            recommendation of the purchase of any item, facility or service
            covered by those programs. The Health Insurance Portability and
            Accountability Act of 1996, or HIPAA, created new violations for
            fraudulent activity applicable to both public and private health
            care benefit programs and prohibits inducements to Medicare or
            Medicaid eligible patients to influence their decision to seek
            specific items and services reimbursed by the government or to
            choose a particular provider. The potential sanctions for violations
            of these laws include significant fines, exclusion from
            participation in Medicare and Medicaid and criminal sanctions.
            Although some "safe harbor" regulations attempt to clarify when an
            arrangement may not violate the anti-kickback law, our business
            arrangements and the services we provide may not fit within these
            safe harbors. Failure to satisfy a safe harbor requires further
            analysis of whether the parties violated the anti-kickback law. In
            addition to the anti-kickback law, many states have adopted similar
            kickback and/or fee-splitting laws, which can affect the financial
            relationships we may have with our customers, physicians, vendors,
            other retail pharmacies and patients. The finding of a violation of
            the federal laws or one of these state laws could harm our business.

      o     The Department of Health and Human Services issued final regulations
            implementing the Administrative Simplification Provisions of HIPAA
            concerning the maintenance, transmission, and security of
            individually identifiable health information. The privacy
            regulations, with which compliance was required as of April 2003,
            impose on covered entities (including hospitals, pharmacies and
            other health care providers) significant new restrictions on the use
            and disclosure of individually identifiable health information. The
            security regulations, with which compliance was required as of April
            2005, impose on covered entities certain administrative, technical,
            and physical safeguard requirements with respect to individually
            identifiable health information maintained or transmitted
            electronically. The regulations establishing electronic transaction
            standards that all health care providers must use when
            electronically submitting or receiving individually identifiable
            health information in connection with certain health care
            transactions became effective October 2002, but Congress extended
            the compliance deadline until October 2003 for organizations, such
            as ours, that submitted a request for an extension. As a result of
            these HIPAA regulations, we have taken the appropriate actions to
            ensure that patient data kept on our computer networks are in
            compliance with these regulations. We believe that we are now
            substantially in compliance with the HIPAA electronic standards and
            are capable of delivering HIPAA standard transactions
            electronically. In addition, if we choose to distribute drugs
            through new distribution channels, such as the Internet, we will
            have to comply with government regulations that apply to those
            distribution channels, which could harm our business. In addition to
            HIPAA, a number of states have adopted laws and/or regulations
            applicable to the use and disclosure of patient health information
            that are more stringent than comparable provisions under HIPAA. The
            finding of a violation of HIPAA or one of these state laws could
            harm our business.

      o     The Ethics in Patient Referrals Act of 1989, as amended, commonly
            referred to as the "Stark Law," prohibits physician referrals to
            entities with which the physician or his or her immediate family
            members have a "financial relationship" and prohibits the entity
            receiving the referral from presenting a claim to


                                       38
<PAGE>

            Medicare or Medicaid programs for services furnished under the
            referral. On March 26, 2004, the CMS issued the second phase of its
            final regulations, addressing physician self-referrals, which became
            effective July 24, 2004. A violation of the Stark Law is punishable
            by civil sanctions, including significant fines, a denial of payment
            or a requirement to refund certain amounts collected, and exclusion
            from participation in Medicare and Medicaid. A number of states have
            adopted laws and/or regulations that contain provisions that track,
            or are otherwise similar to, the Stark Law. The finding of a
            violation of the Stark Law or one or more of these state laws could
            harm our business.

      o     State laws prohibit the practice of medicine, pharmacy and nursing
            without a license. To the extent that we assist patients and
            providers with prescribed treatment programs, a state could consider
            our activities to constitute the practice of medicine. Our nurses
            must obtain state licenses to provide nursing services to some of
            our patients. In addition, in some states, coordination of nursing
            services for patients could necessitate licensure as a home health
            agency and/or could necessitate the need to use licensed nurses to
            provide certain patient-directed services. If we are found to have
            violated those laws, we could face civil and criminal penalties and
            be required to reduce, restructure or even cease our business in
            that state.

      o     Pharmacies (retail, mail-order and wholesale) as well as pharmacists
            often must obtain state licenses to operate and dispense drugs.
            Pharmacies must also obtain licenses in some states in order to
            operate and provide goods and services to residents of those states.
            In addition, our pharmacies may be required by the federal Drug
            Enforcement Agency, as well as by similar state agencies, to obtain
            registration to handle controlled substances, including certain
            prescription drugs, and to follow specified labeling and
            recordkeeping requirements for such substances. If we are unable to
            maintain our pharmacy licenses, or if states place burdensome
            restrictions or limitations on non-resident pharmacies, this could
            limit or otherwise affect our ability to operate in some states,
            which could harm our business.

      o     Federal and state investigations and enforcement actions continue to
            focus on the health care industry, scrutinizing a wide range of
            items such as joint venture arrangements, referral and billing
            practices, product discount arrangements, home health care services,
            dissemination of confidential patient information, promotion of
            off-label drug indications use, clinical drug research trials and
            gifts for patients or referral sources. From time to time, and like
            others in the health care industry, we receive requests for
            information from government agencies in connection with their
            regulatory or investigative authority.

      o     We are subject to federal and state laws prohibiting entities and
            individuals from knowingly and willfully making claims to Medicare
            and Medicaid and other governmental programs and third-party payors
            that contain false or fraudulent information. The federal False
            Claims Act encourages private individuals to file suits on behalf of
            the government against health care providers such as us. As such
            suits are generally filed under seal with a court to allow the
            government adequate time to investigate and determine whether it
            will intervene in the action, the implicated health care providers
            are often unaware of the suit until the government has made its
            determination and the seal is lifted. Violations or alleged
            violations of such laws, and any related lawsuits, could result in
            significant financial or criminal sanctions (including treble
            damages) or exclusion from participation in the Medicare and
            Medicaid programs. Some states also have enacted statutes similar to
            the False Claims Act which may provide for large penalties,
            substantial fines and treble damages if violated.

There is a delay between our performance of services and our reimbursement.

      Billing and collection for our services is a complex process requiring
constant attention and involvement by senior management and ongoing enhancements
to information systems and billing center operating procedures.

      The health care industry is characterized by delays that typically range
from three to nine months between when services are provided and when the
reimbursement or payment for these services is received. This makes working
capital management, including prompt and diligent billing and collection, an
important factor in our results of


                                       39
<PAGE>

operations and liquidity. Trends in the industry may further extend the
collection period and impact our working capital.

      We are paid for our services by various payors, including patients,
insurance companies, Medicare, Medicaid and others, each with distinct billing
requirements. We recognize revenue when we provide services to patients.
However, our ability to collect these receivables depends, in part, on our
submissions to payors of accurate and complete documentation. In order for us to
bill and receive payment for our services, the physician and the patient must
provide appropriate billing information. Following up on incorrect or missing
information generally slows down the billing process and the collection of
accounts receivable. Failure to meet the billing requirements of the different
payors could have a significant impact on our revenues, profitability and cash
flow.

      Further, even if our billing procedures comply with all third party-payor
requirements, some of our payors may experience financial difficulties or may
otherwise not pay accounts receivable when due, which could result in increased
write-offs or provisions for doubtful accounts. There can be no assurance that
we will be able to maintain our current levels of collectibility or that
third-party payors will not experience financial difficulties. If we are unable
to collect our accounts receivable on a timely basis, our revenues,
profitability and cash flow could be adversely affected.

We rely heavily on a limited number of shipping providers, and our business
could be harmed if their rates are increased or our providers are unavailable.

      A significant portion of our revenues result from the sale of drugs we
deliver to our patients, and a significant amount of our products are delivered
by overnight mail or courier or through our retail pharmacies. The costs
incurred in shipping are not passed on to our customers and, therefore, changes
in these costs directly impact our margins. We depend heavily on these
outsourced shipping services for efficient, cost-effective delivery of our
products. The risks associated with this dependence include: any significant
increase in shipping rates; strikes or other service interruptions by these
carriers; and spoilage of high-cost drugs during shipment since our drugs often
require special handling, such as refrigeration.

If we do not maintain effective and efficient information systems, our
operations may be adversely affected.

      Our operations depend, in part, on the continued and uninterrupted
performance of our information systems. Failure to maintain reliable information
systems or disruptions in our information systems could cause disruptions in our
business operations, including billing and collections, loss of existing
patients and difficulty in attracting new patients, patient and payor disputes,
regulatory problems, increases in administrative expenses or other adverse
consequences, any or all of which could have a material adverse effect on our
operations.

Risks Related to our Outstanding Debt and Equity Securities

The Notes are unsecured.

      The Notes are not secured by any of our or our subsidiaries' assets. The
indenture governing the Notes permits us and our subsidiaries to incur secured
indebtedness, including pursuant to our revolving credit facility, purchase
money instruments and other forms of secured indebtedness. As a result, the
Notes and the guarantees will be effectively subordinated to all of our and the
guarantors' secured obligations to the extent of the value of the assets
securing such obligations. As of June 30, 2005, we had approximately $31.9
million of secured indebtedness.

      If we or the subsidiary guarantors were to become insolvent or otherwise
fail to make payment on the Notes or the guarantees, the holders of any of our
and the subsidiary guarantors' secured obligations would be paid first and would
receive payments from the assets securing such obligations before the holders of
the Notes would receive any payments. The holders of the Notes may, therefore,
not be fully repaid if we or the subsidiary guarantors become insolvent or
otherwise fail to make payment on the Notes.


                                       40
<PAGE>

We may not be able to satisfy our obligations to holders of the Notes upon a
change of control.

      Upon the occurrence of a "change of control," as defined in the indenture,
each holder of the Notes will have the right to require us to purchase its Notes
at a price equal to 101% of the principal amount, together with any accrued and
unpaid interest. Our failure to purchase, or give notice of purchase of, such
Notes would be a default under the indenture, which would, in turn, be a default
under our revolving credit facility. In addition, a change of control may
constitute an event of default under our revolving credit facility. A default
under our revolving credit facility would result in an event of default under
the indenture if the lenders accelerate the debt under our revolving credit
facility.

      If a change of control occurs, we may not have enough assets to satisfy
all obligations under our revolving credit facility and the indenture related to
the Notes. Upon the occurrence of a change of control, we could seek to
refinance the indebtedness under our revolving credit facility and the Notes or
obtain a waiver from the lenders or holders of the Notes. There can be no
assurance, however, that we would be able to obtain a waiver or refinance our
indebtedness on commercially reasonable terms, if at all.

There is no established trading market for the Notes, and holders of these Notes
may not be able to sell them quickly or at the price that they paid.

      The Notes are a new issue of securities, and there is no established
trading market for the Notes. We do not intend to apply for the Notes to be
listed on any securities exchange or to arrange for quotation on any automated
dealer quotation systems. The initial purchaser has advised us that it intends
to make a market in the Notes, but the initial purchaser is not obligated to do
so. The initial purchaser may discontinue any market making in the Notes at any
time, in its sole discretion. As a result, there can be no assurance as to the
liquidity of any trading market for the Notes.

      There also can be no assurance that holders of the Notes will be able to
sell such Notes at a particular time or that the prices that holders of such
Notes will receive when these Notes are sold will be favorable. Further, there
can be no assurance as to the level of liquidity of the trading market for these
Notes. Future trading prices of the outstanding Notes will depend on many
factors, including:

      o     our operating performance and financial condition;

      o     the interest of securities dealers in making a market; and

      o     the market for similar securities.

      Historically, the market for non-investment grade debt has been subject to
disruptions that have caused volatility in prices. It is possible that the
market for the Notes will be subject to disruptions. Any disruptions may have a
negative effect on noteholders, regardless of our prospects and financial
performance.

Any guarantees of the Notes by our subsidiaries may be voidable, subordinated or
limited in scope under laws governing fraudulent transfers and insolvency.

      Under federal and foreign bankruptcy laws and comparable provisions of
state and foreign fraudulent transfer laws, a guarantee of the Notes by a
guarantor could be voided if, among other things, at the time the guarantor
issued its guarantee, such guarantor:

      o     intended to hinder, delay or defraud any present or future creditor;
            or

      o     received less than reasonably equivalent value or fair consideration
            for the incurrence of such indebtedness and:

            o     was insolvent or rendered insolvent by reason of such
                  incurrence;


                                       41
<PAGE>

            o     was engaged in a business or transaction for which such
                  guarantor's remaining assets constituted unreasonably small
                  capital; or

            o     intended to incur, or believed that it would incur, debts
                  beyond its ability to pay such debts as they mature.

      The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, a guarantor in the United States would be
considered insolvent if:

      o     the sum of its debts, including contingent liabilities, was greater
            than the saleable value of all of its assets;

      o     the present fair saleable value of its assets was less than the
            amount that would be required to pay its probable liabilities on its
            existing debts, including contingent liabilities, as they become
            absolute and mature; or

      o     it could not pay its debts as they become due.

Possible volatility of stock price in the public market.

      The market price of our common stock has experienced, and may continue to
experience, substantial volatility. Over the past eight quarters ended June 30,
2005, the market price of our common stock ranged from a low of $1.44 in the
second quarter of 2005 to a high of $18.86 in the third quarter of 2003. Many
factors have influenced the common stock price in the past, including
fluctuations in our earnings and changes in our financial position, management
changes, low trading volume, and negative publicity and uncertainty resulting
from the legal actions brought against us. In addition, the securities markets
have, from time to time, experienced significant broad price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. All of these factors could adversely affect the market price of our
common stock. Our listing on Nasdaq is dependent on maintaining certain
criteria, including with respect to a minimum bid price and minimum value of
publicly held shares, and certain other factors. Changes in our stock price and
other variations in market factors may cause us not to comply with such
requirements and, in any such event, trading of our common stock on the Nasdaq
National Market System could be terminated.

Provisions of our articles of incorporation and Minnesota law may make it more
difficult for a person to receive a change-in-control premium.

      Our Board's ability to designate and issue up to 10 million shares of
preferred stock and issue up to 50 million shares of common stock could
adversely affect the voting power of the holders of common stock, and could have
the effect of making it more difficult for a person to acquire, or could
discourage a person from seeking to acquire, control of the Company. If this
occurred, a person could lose the opportunity to receive a premium on the sale
of his or her shares in a change of control transaction.

      In addition, the Minnesota Business Corporation Act contains provisions
that would have the effect of restricting, delaying or preventing altogether
certain business combinations with any person who becomes an interested
stockholder. Interested stockholders include, among others, any person who,
together with affiliates and associates, acquires 10% or more of a corporation's
voting stock in a transaction which is not approved by a duly constituted
committee of the Board of the corporation. These provisions could also limit a
person's ability to receive a premium in a change of control transaction.


                                       42
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      The Company currently does not have market risk sensitive instruments
entered into for trading purposes and does not have operations subject to risks
of material foreign currency fluctuations. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines, and does not expect any material loss
with respect to its investment portfolio. The Company does not enter into
derivative instruments other than for cash flow hedging purposes and does not
speculate using derivative instruments.

      For non-trading purposes, the Company is subject to interest rate risk
under its current revolving credit facility. In conjunction with the acquisition
of CCS on April 23, 2004, the Company restructured its previous credit facility
with GE Capital to provide for a $40.0 million senior secured revolving credit
facility. Loans under this credit facility may, at the Company's option, be
obtained as Base Rate loans, LIBOR loans or any combination thereof. This credit
facility will terminate on April 23, 2009.

      The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal amounts outstanding and related
weighted average interest rates at June 30, 2005 and for each of the next five
years ended December 31 and thereafter. The following table provides information
about the Company's financial instruments (dollars in millions):

<TABLE>
<CAPTION>
                                                                          Outstanding Balances
                                 June 30, 2005                                December 31,
                              ---------------------   --------------------------------------------------------------
                                           Fair                                                              There-
                                Balance    Value      2005        2006       2007      2008        2009      after
                              ---------------------   --------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Liability:
Long-term debt (Senior Notes)
     Fixed rate ($US)(1)        $ 185.0    $ 141.5    $ 185.0    $ 185.0    $ 185.0    $ 185.0    $ 185.0    $ 185.0
     Average interest rate(1)     10.75%     10.75%     10.75%     10.75%     10.75%     10.75%     10.75%     10.75%
---------------------------------------------------   --------------------------------------------------------------
Long-term debt (Revolver)
     Variable rate ($US)(2)     $  31.9    $  31.9    $  31.9    $  31.9    $  31.9    $  31.9
     Average interest rate(2)      6.93%      6.93%      7.85%      8.18%      8.26%      8.34%   $    --    $    --
---------------------------------------------------   --------------------------------------------------------------
 Convertible note used in
purchase of Apex                $   1.7    $   1.7    $   1.3    $   0.4
     Average interest rate(3)       4.4%       4.4%       4.4%       4.4%   $    --    $    --    $    --    $    --
---------------------------------------------------   --------------------------------------------------------------
Convertible note used in
purchase of Home Care           $   3.0    $   3.0
     Average interest rate(3)       3.0%       3.0%   $    --    $    --    $    --    $    --    $    --    $    --
---------------------------------------------------   --------------------------------------------------------------
Department of Justice           $   1.1    $   1.1    $    --    $    --    $    --    $    --    $    --    $    --
obligation
     Average interest rate(3)       6.0%       6.0%
---------------------------------------------------   --------------------------------------------------------------
</TABLE>

(1)   The Senior Notes mature in May of 2011 and bear interest at a fixed rate
      of 10.75%.

(2)   The average interest rates are based on the LIBOR forward yield curves at
      June 30, 2005 plus the applicable 3.5% premium. The senior secured
      revolving credit facility terminates on April 23, 2009. The LIBOR interest
      rate in effect at June 30, 2005 was the 30-day LIBOR rate of 3.43% plus
      3.5%. On a monthly basis, a Base Rate of prime plus 2.25% is applied to
      the difference between the LIBOR period loan and the actual outstanding
      balance of the revolving facility. As of June 30, 2005, the prime rate in
      effect was 6.25%. In addition to the LIBOR and Base Rate interest rate,
      there is a monthly unused line fee of between 0.5% and 0.75% of the unused
      balance on the facility.

(3)   Average interest rates are contractual amounts.


                                       43
<PAGE>

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), the Company evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange")). Based upon that evaluation, the CEO and CFO concluded that, as of
the end of the period covered by this report, the Company's disclosure controls
and procedures were effective.

      Any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system
will be met. In addition, the design of any control system is based, in part,
upon certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there is only reasonable
assurance that the Company's controls will succeed in achieving their goals
under all potential future conditions.

Changes in Internal Controls

      In connection with the Company's headquarters consolidation, which was
substantially completed as of June 30, 2005, there were significant changes to
the Company's personnel and the duties and responsibilities of the financial
close and control activities. The Company believes that these changes did not
materially affect, and are not reasonably likely to materially affect, the
Company's internal control over financial reporting (as defined in Rule 13
a-15(f) under the Exchange Act).

      Other than the above, there have been no changes in the Company's internal
control over financial reporting that occurred during the Company's most
recently completed fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

      Management's evaluation of the effectiveness of its internal control over
financial reporting as of December 31, 2004, which was included in the Company's
Annual Report on Form 10-K for fiscal 2004, was not inclusive of the Critical
Care Systems, Inc. acquisition, which is included in the 2004 consolidated
financial statements of the Company and constituted approximately 15% of total
assets as of December 31, 2004 and approximately 29% and 10% of revenues and net
loss, respectively, for the year then ended.


                                       44
<PAGE>

Curative Health Services, Inc. and Subsidiaries

Part II Other Information

Item 1. Legal Proceeding

      In the normal course of our business, we are involved in lawsuits, claims,
audits and investigations, including any arising out of services or products
provided by or to our operations, personal injury claims and employment
disputes, the outcome of which, in the opinion of management, will not have a
material adverse effect on our financial position, cash flows or results of
operations.

Prescription City Litigation

      As previously disclosed in a Form 8-K filed on July 27, 2005, on July 26,
2005, the Company announced that it has reached a settlement with Prescription
City, Inc. in connection with a complaint filed by the Company in November 2003
seeking rescission, compensatory and punitive damages and other relief. Under
the terms of the settlement, the Company received $4.5 million in cash and is
released from its obligation to pay a $1.0 million promissory note entered into
in connection with the asset purchase of Prescription City, Inc.

      Curative acquired certain assets of Prescription City, Inc., formerly a
Spring Valley, New York specialty pharmacy business, on June 10, 2003. The asset
purchase was structured to provide indemnification, representations and
warranties by the sellers. A search warrant relating to a criminal investigation
was issued by a U.S. Magistrate Judge, Southern District of New York, executed
on November 4, 2003. Curative was not a target of the investigation and
cooperated fully with the U.S. Attorney's Office in its investigation.

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

      The Company held its 2005 annual meeting of stockholders on June 1, 2005.
Proxies for the meeting were solicited pursuant to Section 14 of the Securities
Exchange Act of 1934, as amended, and there was no solicitation in opposition to
management's nominees as listed in the proxy statement. There were present at
the annual meeting in person or by proxy the holders of 12,309,031 votes. At the
meeting, the stockholders elected all nine members of the Company's Board of
Directors to serve for a term of one year.

      Elected members of the Board of Directors: (Shares voted affirmative in
parenthesis)

                                      Affirmative    Withheld/Against
                                      -----------    ----------------

             Paul S. Auerbach, MD    (11,511,487)         797,544
             Daniel E. Berce         (11,511,005)         798,026
             Peter M. DeComo         (11,675,145)         633,886
             Lawrence P. English     (11,457,398)         851,633
             Joseph L. Feshbach      (11,636,626)         672,405
             Timothy I. Maudlin      (10,403,174)       1,905,857
             Paul F. McConnell       (11,667,197)         641,834
             Gerard Moufflet         (11,662,939)         646,092
             John C. Prior           (11,665,972)         643,059

      The stockholders also approved the ratification of the appointment of
Ernst & Young LLP as the Company's independent registered public accounting
firm. Number of votes for were 12,158,996, against 133,491 and 16,544 abstained.


                                       45
<PAGE>

Item 5 Other Information

      As previously disclosed in a Form 8-K filed on July 13, 2005, effective as
of July 8, 2005, Mr. Joseph Feshbach resigned as a member of the Company's Board
of Directors in order to focus his full attention on a recently launched
business venture.

Item 6. Exhibits

      2.1   Plan of Merger, dated as of August 15, 2003, by and among Curative
            Health Services, Inc., Curative Holding Co., and Curative Health
            Services Co. (incorporated by reference to Exhibit 2.1 to the
            Company's Current Report on Form 8-K, filed August 19, 2003, of
            Curative Health Services, Inc., the predecessor company)

      2.2   Stock Purchase Agreement relating to Critical Care Systems, Inc., by
            and among Curative Health Services, Inc., Critical Care Systems,
            Inc. and each of the persons listed therein, dated February 24, 2004
            (incorporated by reference to Exhibit 2.1 to the Company's Current
            Report on Form 8-K, filed April 30, 2004)

      2.3   Letter Agreement supplementing the Stock Purchase Agreement, dated
            April 23, 2004, by and between Curative Health Services, Inc. and
            Christopher J. York, as Seller's Representative (incorporated by
            reference to Exhibit 2.2 to the Company's Current Report on Form
            8-K, filed April 30, 2004)

      3.1   Amended and Restated Articles of Incorporation of Curative Health
            Services, Inc. (incorporated by reference to Exhibit 3.1 to the
            Company's Current Report on Form 8-K, filed August 19, 2003) 3.2
            By-Laws of Curative Health Services, Inc. (incorporated by reference
            to Exhibit 3.2 to the Company's Current Report on Form 8-K, filed
            August 19, 2003)

      4.1   Rights Agreement, dated as of October 25, 1995, between Curative
            Technologies, Inc. and Wells Fargo Bank Minnesota, National
            Association, as Rights Agent (incorporated by reference to Exhibit 4
            of the Company's Current Report on Form 8-K, dated November 6, 1995)

      4.2   Indenture, dated April 23, 2004, by and among Curative Health
            Services, Inc., certain of its subsidiaries as Guarantors and Wells
            Fargo Bank, N.A., as Trustee (incorporated by reference to Exhibit
            4.1 to the Company's Current Report on Form 8-K, filed April 30,
            2004)

      4.3   Registration Rights Agreement, dated April 23, 2004, by and among
            Curative Health Services, Inc., certain of its subsidiaries as
            Guarantors and UBS Securities LLC (incorporated by reference to
            Exhibit 4.2 to the Company's Current Report on Form 8-K, filed April
            30, 2004)

      4.4   Specimen of 144A Notes (incorporated by reference to Exhibit 4.3 to
            the Company's Current Report on Form 8-K, filed April 30, 2004)

      4.5   Specimen of Regulation S Notes (incorporated by reference to Exhibit
            4.4 to the Company's Current Report on Form 8-K, filed April 30,
            2004)

      4.6   Specimen of Guarantees (incorpora ted by reference to Exhibit 4.5 to
            the Company's Current Report on Form 8-K, filed April 30, 2004)

      4.7   Specimen of Registered Notes (incorporated by reference to Exhibit
            4.6 to the Company's Quarterly Report on Form 10-Q, filed November
            9, 2004)

      10.1  Waiver Agreement entered into among the Company, its subsidiaries
            and General Electric Capital Corporation, effective as of June 30,
            2005.

      10.2  Compensation Agreement, dated as of May 27, 2005, between the
            Company and Thomas Axmacher.


                                       46
<PAGE>

Item 6. Exhibits (continued)

      31.1  Certification of the Chief Executive Officer pursuant to Rule
            13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

      31.2  Certification of the Chief Financial Officer pursuant to Rule
            13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

      32.1  Certification of the Chief Executive Officer, pursuant to 18 U.S.C.
            Section 1350, as adopted pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002

      32.2  Certification of the Chief Financial Officer, pursuant to 18 U.S.C.
            Section 1350, as adopted pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002

      The Company has excluded from the exhibits filed with this report
instruments defining the rights of holders of long-term convertible debt of the
Company where the total amount of the securities authorized under such
instruments does not exceed 10% of its total assets. The Company hereby agrees
to furnish a copy of any of these instruments to the SEC upon request.


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<PAGE>

SIGNATURES

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

Date:  August 9, 2005

                                         CURATIVE HEALTH SERVICES, INC.
                                         (Registrant)


                                         By: /s/   Paul F. McConnell
                                             -----------------------
                                                   Paul F. McConnell
                                                   Chief Executive Officer
                                                   (Principal Executive Officer)

                                         By: /s/   Thomas Axmacher
                                             -----------------------
                                                   Thomas Axmacher
                                                   Chief Financial Officer
                                                   (Principal Financial Officer)


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