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  UNITED STATES
    SECURITIES AND EXCHANGE COMMISSION
    Washington, D.C. 20549
 
 FORM 10-K
 
 (Mark
          One)ANNUAL
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
          OF 1934FOR
          THE FISCAL YEAR ENDED SEPTEMBER 30, 2003ORTRANSITION
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
          OF 1934 
 For the transition
    period from ________________to________________
 
 Commission File Number
    0-33217
 
 NEIGHBORCARE,
          INC.(Exact
          name of Registrant as specified in its charter) 
 Pennsylvania
      7
          East Lee StreetBaltimore, MD  21202
      06-1132947(State
          or other jurisdiction of
          incorporation or organization)
      (Address
          of principal executive
          offices including zip code)
      (I.R.S.
          Employer
          Identification Number) 
 (410) 752-2600
 (Registrants
    telephone number, including area code)
 
 Securities registered
    pursuant to Section 12(b) of the Act:
 
 NONE
 
 Securities registered
    pursuant to Section 12(g) of the Act:
 
 Title of each class
 
  
 Common Stock, par
    value $.02 per share 
    Preferred Share Purchase Rights, no par value per share
 
 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    NO
 
 Indicate by
    check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
    S-K (subsection 229.405 of this chapter) is not contained herein, and will
    not be contained, to the best of registrants knowledge, in definitive
    proxy or information statements incorporated by reference in Part III of this
    Form 10-K or any amendment to this Form 10-K.
 
 The aggregate
       market value of voting and non-voting common stock held by non-affiliates

    of the registrant is $499,529,659(1). As of December 17, 2003,
     43,093,682 shares of the registrants common stock were outstanding
     and  260,493 shares are to be issued in connection with the registrants
     joint  plan of reorganization confirmed by the Bankruptcy Court on September
     20,
    2001.
 
 Indicate by
    check mark whether the registrant is an accelerated filer (as defined by Rule
    12b-2 of the Act)
 
 YES    NO
 
 APPLICABLE ONLY TO REGISTRANTS INVOLVED
    IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
 Indicate by
    check mark whether the registrant has filed all documents and reports required
    to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of
    1934 subsequent to the distribution of securities under a plan confirmed by
    a court.
 
 YES    NO
 
 DOCUMENTS INCORPORATED
    BY REFERENCE
 
 NONE
 
 (1)
      The
          aggregate market value of the voting and non-voting common stock set
          forth above equals the number of shares of the registrants common
          stock outstanding, reduced by the number of shares of common stock held
          by officers, directors and shareholders owning in excess of 10% of the
          registrants common stock, multiplied by the last reported sale
          price for the registrants common stock on the last business day
          of the registrants most recently completed second fiscal quarter
          (i.e., March 31, 2003) ($14.86). The information provided shall in no
          way be construed as an admission that any officer, director or 10% shareholder
          of the registrant may or may not be deemed an affiliate of the registrant
          or that he/it is the beneficial owner of the shares reported as being
          held by him/it, and any such inference is hereby disclaimed. The information
          provided herein is included solely for record keeping purposes of the
          Securities and Exchange Commission. 
    INDEX
  
  PageCautionary
               Statements Regarding Forward-Looking Statements
      1Risk
          Factors
      2PART
          IITEM
          1:
      BUSINESS
      12ITEM
          2:
      PROPERTIES
      34ITEM
          3:
      LEGAL
          PROCEEDINGS
      36ITEM
          4:
      SUBMISSION
          OF MATTERS TO A VOTE OF SECURITY HOLDERS
      37ITEM
          4A:
      EXECUTIVE
          OFFICERS OF THE REGISTRANT
      37PART
          IIITEM
          5:
      MARKET
          FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
      38ITEM
          6:
      SELECTED
          FINANCIAL DATA
      40ITEM
          7:
      MANAGEMENTS
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      42ITEM
          7A:
      QUANTITATIVE
          AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      70ITEM
          8:
      FINANCIAL
          STATEMENTS AND SUPPLEMENTARY DATA
      72ITEM
          9:
      CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
      120ITEM
          9A:
      CONTROLS
          AND PROCEDURES
      120PART
          IIIITEM
          10:
      DIRECTORS
          AND EXECUTIVE OFFICERS OF THE REGISTRANT
      121ITEM
          11:
      EXECUTIVE
          COMPENSATION
      125ITEM
          12:
      SECURITY
          OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
          MATTERS
      133ITEM
          13:
      CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS
      136PART
          IVITEM
          14:
      PRINCIPAL
          ACCOUNTING FEES AND SERVICES
      136ITEM
          15:
      EXHIBITS,
          FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
      137
  
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  Cautionary Statements
         Regarding Forward-Looking Statements
  
  As used herein,
    unless the context otherwise requires, NeighborCare, the Company,
    we, our or us refers to NeighborCare,
    Inc. and our subsidiaries.
  
  Statements
    made in this report, and in our other public filings and releases, which are
    not historical facts contain forward-looking statements (as defined
    in the Private Securities Litigation Reform Act of 1995) that involve risks
    and uncertainties and are subject to change at any time. These forward-looking
    statements may include, but are not limited to:
  
  
      statements
          contained in Risk Factors;
      certain
          statements in Managements Discussion and Analysis of Financial
          Condition and Results of Operations, and our notes to our consolidated
          financial statements, such as our ability to meet our liquidity needs,
          scheduled debt and interest payments, and expected future capital expenditure
          requirements; the expected effects of government regulation on reimbursement
          for services provided, including the Medicare Prescription Drug, Improvement
          and Modernization Act of 2003; and our ability to successfully implement
          our strategic objectives and achieve certain performance improvement
          initiatives; the expected financial impact of severance and related
          costs; the expected spin-off costs in fiscal 2004 and the foreseeable
          future; and estimates in our critical accounting policies, including
          our allowance for doubtful accounts, the anticipated impact of long-lived
          asset impairments and our ability to provide for loss reserves for self-insured
          programs;
      certain
          statements contained in Business concerning strategy, corporate
          integrity programs, insurance coverage, environmental matters, government
          regulations and the Medicare and Medicaid programs, and reimbursement
          for services provided; and
      certain
          statements in Legal Proceedings regarding the effects of
          litigation.
  The forward-looking
    statements involve known and unknown risks, uncertainties and other factors
    that are, in some cases, beyond our control. You are cautioned that these
    statements are not guarantees of future performance, and that actual results
    and trends in the future may differ materially.
  
  Factors that
    could cause actual results to differ materially include, but are not limited
    to the following, which are discussed more fully in Risk Factors:
  
  
      our
          ability, and the ability of our customers, to comply with Medicare or
          Medicaid reimbursement regulations or other applicable laws;
      changes
          in the reimbursement rates or methods of payment from Medicare and Medicaid,
          or the implementation of other legislation or measures to reduce the
          reimbursement for our services;
      the
          expiration or phase out of enactments providing for additional governmental
          funding;
      changes
          in pharmacy legislation and/or payment formulas;
      the
          impact of federal and state regulations;
      the
          impact of investigations and audits relating to alleged violations of
          federal and/or state regulations;
      changes
          in the acuity of our customers patients, payor mix and payment
          methodologies;
      further
          consolidation of managed care organizations and other third-party payors;
      the
          effect of the expiration or termination of certain service and supply
          contracts;
      changes in or our failure
            to satisfy our manufacturers rebate programs;
      competition
          in our business;
      competition
          for qualified management and pharmacy professionals;
      an
          economic downturn or changes in the laws affecting our business in those
          markets in which we operate;
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  
      the
          impact of any acquisitions on our operations;
      availability
          of financial and other resources to us after the spin-off of Genesis
          HealthCare Corporation (GHC);
      operating
          inefficiencies and higher costs after the spin-off of GHC;
      federal
          income tax liabilities and indemnification obligations related to the
          spin-off of GHC;
      conflicts
          of interest as a result of our continuing relationship with GHC after
          the spin-off;
      the
          ability of GHC, as our largest customer, to act as a separate entity;
      our
          ability to control operating costs and generate sufficient cash flow
          to meet operational and financial requirements;
      our
          ability, and the ability of our subsidiary guarantors, to fulfill debt
          obligations;
      the
          enforceability or limitations of the guarantees on our senior subordinated
          notes;
      the
          liquidity of our senior subordinated notes as a new issue of securities;
      our
          ability to repurchase or fulfill our obligations on our senior subordinated
          notes; and
      acts
          of God or public authorities, war, civil unrest, fire, floods, earthquakes,
          terrorism and other matters beyond our control.
  In addition
    to these factors and any risks and uncertainties specifically identified in
    the text surrounding forward-looking statements, any statements in this report
    or the reports and other documents filed by us with the SEC that warn of risks
    or uncertainties associated with future results, events or circumstances also
    identify factors that could cause actual results to differ materially from
    those expressed in or implied by the forward-looking statements.
  
  All subsequent
    written and oral forward-looking statements attributable to us or any person
    acting on our behalf are expressly qualified in their entirety by the cautionary
    statements contained or referred to in this section. We do not undertake any
    obligation to release publicly any revisions to these forward-looking statements
    to reflect events or circumstances after the date of this report or to reflect
    the occurrence of unanticipated events, except as may be required under applicable
    securities law.
  
  RISK FACTORS
  
  If we or our client institutions
    fail to comply with Medicare or Medicaid reimbursement regulations, our revenue
    could be reduced, we could be subject to penalties and we could lose our eligibility
    to participate in these programs.
  
  For the year
    ended September 30, 2003, approximately 44% of our pharmacy services billings
    were directly reimbursed by government-sponsored programs, including Medicaid
    and, to a lesser extent, Medicare.   The Medicare and Medicaid programs
    are highly regulated.  Our failure to comply with applicable reimbursement
    regulations could adversely affect the reimbursement we receive and our ability
    to participate in Medicare and Medicaid.  Our failure to comply with
    these regulations could subject us to other civil and criminal penalties.
    Moreover, the Medicaid program is significantly dependent upon federal rules.
    Any limitation of federal funding to states under their Medicaid program could
    negatively affect our business.
  
  Continuing efforts to contain
    healthcare costs may reduce our future revenue.
  
  Our sales
    and profitability are affected by the efforts of healthcare payors to contain
    or reduce the cost of healthcare by lowering reimbursement rates, limiting
    the scope of covered services, and negotiating reduced or
  
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  capitated pricing arrangements. Any
    changes that lower reimbursement levels under Medicare, Medicaid or private
    pay programs, including managed care contracts, could reduce our future revenue.
    Furthermore, other changes in these reimbursement programs or in related regulations
    could reduce our future revenue. These changes may include modifications in
    the timing or processing of payments and other changes intended to limit or
    decrease the growth of Medicare, Medicaid or third-party expenditures.
  
  Healthcare-related legislation
    has significantly impacted our business, and future legislation and regulations
    may negatively affect our financial condition and results of operations.
  
  In recent
    years, Congress has passed a number of federal laws that have effected major
    changes in the healthcare system, including, without limitation, changes under
    the Medicare and Medicaid programs. Our business is directly affected by changes
    in reimbursement rates and methodologies for pharmaceutical services and indirectly
    affected through the changes that negatively impact our healthcare clients.
    Several of these changes have had a significant impact on us.
  
  It is not
    possible to quantify fully the effect of potential legislative changes, the
    interpretation or administration of such legislation or any other governmental
    initiatives on our business. Accordingly, there can be no assurance that the
    impact of any future healthcare legislation will not further adversely affect
    our business. There can be no assurance that payments under governmental and
    private third-party payor programs will be timely, will remain at levels comparable
    to present levels or will, in the future, be sufficient to cover the costs
    allocable to patients eligible for reimbursement pursuant to such programs.
    Our financial condition and results of operations may be affected by the reimbursement
    process, which is complex and can result in delays between the time that revenue
    is recognized and the time that reimbursement amounts are settled.
  
  The recent
      legislation, titled the Medicare Prescription Drug, Improvement, and Modernization
      Act of 2003, referred to as the Medicare Modernization Act, passed by Congress
      on November 25, 2003 and signed by the President on December 8, 2003, may
      have a significant impact on long-term care pharmacy services with respect
      to Medicare coverage and payment rates to facilities and individual suppliers. 
    The Medicare Modernization Act constitutes a significant overhaul of the
    Medicare  system, including provisions which add a prescription drug benefit
    under Medicare
    starting in 2006, provide subsidies to insurers and managed care organizations
     and establish mechanisms to allow private health care coverage plans to
    compete
    with Medicare initially on a pilot basis.   In addition, the Medicare
     Modernization Act phases out the average wholesale price reimbursement system

    related to certain outpatient pharmaceutical drugs and biologicals. 
    For discussion of the Medicare Modernization Act, see Part I, Item 1, Business
     NeighborCare, Inc.  Medicare and Medicaid, of this Form 10-K.
  
  Because of
    the recent enactment of the Medicare Modernization Act and its broad scope,
    we are not in a position to fully assess its impact on our business. 
    The impact of this legislation depends upon a variety of factors, including
    patient mix.  It is not clear at this time whether this new legislation
    will have an overall negative impact on long-term care pharmacy services. 
    This legislation may reduce revenue and impose additional costs to the industry. 
    Moreover, the United States Department of Health and Human Services, referred
    to as DHHS, has not yet promulgated any regulations under the Act, as the
    Act requires it to do.  The impact of these regulations when promulgated,
    including those regulations relating to the prescription drug discount plan
    discussed above, is unclear.
  
  We have described
    only certain provisions of the Medicare Modernization Act applicable to our
    business.  There may be other provisions of the legislation that may
    impact our business by decreasing revenues or increasing operational expenses. 
    We can make no assurance as to the effect of these provisions on our business.
  
  The phase
    out of the average wholesale price reimbursement system related to certain
    outpatient pharmaceutical drugs and biologicals under the Medicare Modernization
    Act could adversely affect our business.  In addition, a second initiative
    under consideration at the federal level is a program to further reduce reimbursement
    for specific types of drugs.  These initiatives have focused on certain
    therapies that are not extensively utilized in long-term care facilities. 
    However, if this program were to be expanded, such a decision could have an
    adverse impact on our business.
  
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State Medicaid program reimbursement
    is directly affected by the Medicare Modernization Act and may have a material
    adverse effect on our operating results.





The reimbursement
    rates for pharmacy services under Medicaid are determined on a state-by-state
    basis subject to applicable federal law and review by the Centers for Medicare
    and Medicaid Services, the agency within DHHS that is responsible for the
    Medicare and Medicaid programs.  In most states, pharmacy services are
    priced at the lower of usual and customary charges or cost (which
    generally is defined as a function of average wholesale price and may include
    a profit percentage) plus a dispensing fee. Certain states have lowest
    charge legislation or most favored nation provisions which
    require us to charge Medicaid no more than its lowest charge to other consumers
    in the state.  Since 2000, federal Medicaid requirements establishing
    payment caps on certain drugs have been periodically revised.  The Medicare
    Modernization Acts phase out of the use of average wholesale price related
    to certain outpatient pharmaceutical drugs and biologicals might impact these
    current payment methodologies.





State Medicaid
    programs generally have long-established programs for reimbursement which
    have been revised and refined over time and have not had a material adverse
    effect on the pricing policies or receivables collection for long-term care
    facility pharmacy services. Any future changes in such reimbursement programs
    or in regulations relating thereto, such as reductions in the allowable reimbursement
    levels or the timing of processing of payments, could adversely affect our
    business.





In order to
    control healthcare costs, we anticipate that federal and state governments
    will continue to review and assess alternate healthcare delivery systems,
    payment methodologies and operational requirements for healthcare providers,
    including long-term care facilities and pharmacies.  Given the continuous
    debate regarding the cost of healthcare, managed care and other healthcare
    issues, we cannot predict with any degree of certainty what additional healthcare
    initiatives, if any, will be implemented or the effect any future legislation
    or regulation will have on our business.





While Congress
    has expanded Medicare to cover certain costs of outpatient pharmaceutical
    services, the federal and state governments continue to focus on efforts to
    curb spending on healthcare programs such as Medicare and Medicaid. 
    A number of states have enacted or are considering cost containment initiatives.
    Many of these initiatives focus on reducing the amount that the state Medicaid
    program will pay for drug acquisition costs. Some have attempted to impose
    more stringent pricing standards. Institutional pharmacies are often paid
    a dispensing fee over and above the payment for the drug. To the extent that
    changes in the payment for drugs are not accompanied by an increase in the
    dispensing fee, margins could erode. Some states have explored efforts to
    restrict utilization by requiring the use of preferred drug lists, prior-authorization
    and formularies. A few states have attempted to extend the preferred Medicaid
    pricing to all Medicare beneficiaries. We cannot at this time predict the
    extent to which these proposals will be adopted or, if adopted and implemented,
    what effect, if any, such proposals will have on us. Efforts to impose reduced
    allowances, greater discounts and more stringent cost controls by government
    and other payors are expected to continue.





Healthcare reform and legislation
    may reduce payments to our skilled nursing facility customers, which may negatively
    impact our ability to fund our working capital needs.





Healthcare
    reform and legislation has an indirect effect on our business through decreasing
    funds available to our skilled nursing facility customers. Limitations or
    restrictions on Medicare and Medicaid payments to skilled nursing facilities
    could adversely impact the liquidity of our pharmacy and other service related
    business customers, resulting in their inability to pay us, or to pay us timely,
    for our products and services. This factor could require us to borrow in order
    to fund our working capital needs, and, in turn, cause us to become more highly
    leveraged.





We derive a significant portion
    of our revenue from state Medicaid programs and the recent economic downturn
    in the states in which we operate could have a material adverse effect on
    our operating results.





There are
    numerous reports affirming that the recent economic downturn has had a detrimental
    effect on state revenues. Historically, these budget pressures have translated
    into reductions in state spending. Given that Medicaid outlays are a significant
    component of state budgets, we expect continuing cost containment pressures
    on Medicaid outlays for nursing homes and pharmacy services in the states
    in which we operate.





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If we, or our long-term care customers,
    fail to comply with licensure requirements or other applicable laws, we may
    need to curtail operations, and could be subject to significant penalties.





Our pharmacy
    services business is subject to extensive and often changing federal, state
    and local regulations, and our pharmacies are required to be licensed in the
    states in which they are located or do business. We continuously monitor the
    effects of regulatory activity on our operations and we currently have pharmacy
    licenses for each pharmacy we operate. The failure to obtain or renew any
    required regulatory approvals or licenses could adversely affect the continued
    operation of our business. The long-term care facilities that contract for
    our services are also subject to federal, state and local regulations and
    are required to be licensed in the states in which they are located. The failure
    by these long-term care facilities to comply with these or future regulations
    or to obtain or renew any required licenses could result in our inability
    to provide pharmacy services to these facilities and their residents.





We conduct business in a heavily
    regulated industry, and changes in regulations or violations of regulations
    including fraud and abuse laws may result in increased costs or sanctions.





We are also
    subject to federal and state laws that prohibit some types of direct and indirect
    payments between healthcare providers. These laws, commonly known as the fraud
    and abuse laws, prohibit payments intended to induce or encourage the referral
    of patients to, or the recommendation of, a particular provider of items or
    services. Violation of these laws can result in loss of licensure, civil and
    criminal penalties and exclusion from the Medicare, Medicaid and other federal
    healthcare programs.  We are subject to periodic audits under the Medicare
    and Medicaid programs, which have various rights and remedies against us if
    they assert that we have overcharged the programs or failed to comply with
    program requirements. Rights and remedies available to these programs include
    repayment of any amounts alleged to be overpayments or in violation of program
    requirements, or making deductions from future amounts due to us. These programs
    may also impose fines, criminal penalties or program exclusions. Other third-party
    payor sources also reserve the right to conduct audits and make monetary adjustments
    in connection with or exclusive of audit activities.





In the ordinary
    course of our business, the long-term care facilities we service receive notices
    of deficiencies for failure to comply with conditions of participation in
    the Medicare and Medicaid programs.  This non-compliance may have a negative
    effect upon our business.





We are also
    subject to federal and state laws that govern financial and other arrangements
    between healthcare providers. These laws often prohibit certain direct and
    indirect payments or fee-splitting arrangements between healthcare providers
    that are designed to induce the referral of patients to a particular provider
    for medical products and services. Possible sanctions for violation of any
    of these restrictions or prohibitions include loss of eligibility to participate
    in reimbursement programs and/or civil and criminal penalties.





We have established
    policies and procedures that we believe are sufficient to ensure that our
    facilities will operate in substantial compliance with these anti-fraud requirements. 
    While we believe that our business practices are consistent with Medicare
    and Medicaid criteria, those criteria are often complex and subject to change
    and interpretation.  Aggressive anti-fraud actions, however, could have
    an adverse effect on our financial condition, results of operations and cash
    flows.





In addition,
    a number of states have undertaken enforcement actions against pharmaceutical
    manufacturers involving pharmaceutical marketing programs, including programs
    containing incentives to pharmacists to dispense one particular product rather
    than another. These enforcement actions arose under state consumer protection
    laws, which generally prohibit false advertising, deceptive trade practices
    and the like.





New federal medical privacy regulations
    may increase the costs of operations and expose us to civil and criminal sanctions.





We face additional
    federal requirements that mandate major changes in the transmission and retention
    of health information. The Health Insurance Portability and Accountability
    Act of 1996 was enacted first, to ensure that employees can retain and at
    times transfer their health insurance when they change jobs, and second, to
    simplify healthcare administrative processes. This simplification includes
    expanded protection of the privacy and security of personal medical data and
    requires the adoption of standards for the exchange of electronic health information.





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Among the standards that the Secretary
    of Health and Human Services has adopted pursuant to the Health Insurance
    Portability and Accountability Act are standards for electronic transactions
    and code sets, and it may adopt unique identifiers for providers, employers,
    health plans and individuals, security and electronic signatures, privacy
    and enforcement. Although the Health Insurance Portability and Accountability
    Act was intended to ultimately reduce administrative expenses and burdens
    faced within the healthcare industry, we believe that implementation of this
    law will result in additional costs. Failure to comply with the Health Insurance
    Portability and Accountability Act could result in fines and penalties that
    could have a material adverse effect on us.





Possible changes in the acuity
    of patients as well as payor mix and payment methodologies may significantly
    affect our profitability.





The sources
    and amounts of our revenues will be determined by a number of factors, including
    licensed bed capacity and occupancy rates of the centers we supply, the acuity
    of patients and the rates of reimbursement among payors. Changes in the acuity
    of the patients as well as payor mix among private pay, Medicare and Medicaid
    in the centers we supply will significantly affect our profitability. Particularly,
    any significant increase in the Medicaid population in such facilities could
    have a material adverse effect on our financial condition, results of operations
    and cash flows, especially if states operating these programs continue to
    limit, or more aggressively seek limits on, reimbursement rates.





Further consolidation of managed
    care organizations and other third-party payors may adversely affect our profits.





Managed care
    organizations and other third-party payors have continued to consolidate in
    order to enhance their ability to influence the delivery of healthcare services.
    Consequently, the healthcare needs of a large percentage of the U.S. population
    are increasingly served by a small number of managed care organizations. These
    organizations generally enter into service agreements with a limited number
    of providers for needed services. To the extent that such organizations terminate
    us as a preferred provider and/or engage our competitors as a preferred or
    exclusive provider, our business could be materially and adversely affected.
    In addition, private payors, including managed care payors, increasingly are
    demanding discounted fee structures.





We purchase a significant portion
    of our pharmaceutical products from one supplier.





We obtain
    approximately 98% of our pharmaceutical products from one supplier pursuant
    to contracts that are terminable by either party on 90 days notice. If these
    contracts are terminated, there can be no assurance that our operations would
    not be disrupted or that we could obtain the products at similar cost. In
    this event, failure to satisfy our customers requirements could materially
    and adversely affect our business, results of operations and financial condition.





Possible changes in or our failure
    to satisfy our manufacturers rebate programs could adversely affect
    our results of operations.





We currently earn
      rebates from certain manufacturers of pharmaceutical products for meeting
      targeted purchase volumes on a quarterly basis. There can be no assurance
      that our pharmaceutical manufacturers will continue to offer these rebates
      or that we will continue to satisfy the targeted purchase volumes. The termination
      of such programs or our failure to satisfy the targeted volumes may have
      an adverse affect on our cost of sales and inventory costs.





We face intense competition in
    our business.





We compete
    with a variety of other companies in providing pharmacy services, many of
    which have greater financial and other resources than we do and may be more
    established in their respective communities than we are. Competing companies
    may offer newer or different services than we do and may thereby attract customers
    who are presently our customers or are otherwise receiving our services.





The provision
    of pharmacy services in the long-term care industry is highly competitive.
    In the 32 states and in the District of Columbia where we sell pharmacy products
    and services, we compete with multiple national, regional and local institutional
    pharmacies. Institutional pharmacies compete principally on the basis of service,
    integrity, clinical expertise, fair pricing and the ability to form strong
    relationships with key personnel.





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We are dependent on our senior
    management team and our pharmacy professionals.





We are highly
    dependent upon the members of our senior management team, our pharmacists
    and other pharmacy professionals. Our business is managed by a small number
    of key management personnel, including John J. Arlotta, who became our chairman, president
    and chief executive officer after the spin-off. If we were unable to retain
    these persons, we might be adversely affected. Our industry is small and there
    is a limited pool of senior management personnel with significant experience
    in our industry. Accordingly, we believe we could experience significant difficulty
    in replacing key management personnel. Although we have employment contracts
    with our key management personnel, these contracts generally may be terminated
    without cause by either party.





In addition,
    our continued success depends on our ability to attract and retain pharmacists
    and other pharmacy professionals. Competition for qualified pharmacists and
    other pharmacy professionals is intense. The loss of pharmacy personnel or
    the inability to attract, retain or motivate sufficient numbers of qualified
    pharmacy professionals could adversely affect our business. Although we generally
    have been able to meet our staffing requirements for pharmacists and other
    pharmacy professionals in the past, our inability to do so in the future could
    have a material adverse effect on us.





A significant portion of our business
    is concentrated in certain markets, and an economic downturn or changes in
    the laws affecting our business in those markets could have a material adverse
    effect on our operating results.





We receive
    approximately 62% of our revenue from operations in the states of Maryland,
    New Jersey, Pennsylvania, Virginia, Ohio and West Virginia. The economic condition
    of these markets could affect the ability of our patients and third-party
    payors to reimburse us for our services through a reduction of disposable
    household income or the ultimate reduction of the tax base used to generate
    state funding of their respective Medicaid programs. An economic downturn
    in these markets and in surrounding markets or changes in the laws affecting
    our business could have a material adverse effect on our financial condition,
    results of operations and cash flows.





We may make acquisitions that
    could subject us to a number of operating risks.





We anticipate
    that we may make acquisitions of, investments in and strategic alliances with
    complementary businesses to enable us to capitalize on our strong position
    in the geographic markets in which we operate and to expand our businesses
    in new geographic markets. However, implementation of this strategy entails
    a number of risks, including:





| |  |  | inaccurate
          assessment of undisclosed liabilities;                                                                                     
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                 
| |  |  | entry
          into markets in which we may have limited or no experience;                                                                     
| |  |   |                                                                                                                                                 
| |  |  | diversion
          of managements attention from our core business;                                                                           
| |  |   |                                                                                                                                                 
| |  |  | difficulties
          in assimilating the operations of an acquired business or in realizing
          projected efficiencies and cost savings;
| |  |   |                                                                                                                                                 
| |  |  | increase
          in our indebtedness and a limitation on our ability to access additional
          capital when needed; and                  
| |  |   |                                                                                                                                                 
| |  |  | difficulties
          in obtaining anticipated revenue synergies or cost reductions.                                                           




In addition,
    certain changes may be necessary to integrate the acquired businesses into
    our operations, assimilate many new employees and implement reporting, monitoring,
    compliance and forecasting procedures.





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We have no history operating as
    an entity without our eldercare businesses.





Historically,
    our operations were conducted as part of a consolidated entity with GHC and
    not as a separate entity. As a result of the spin-off, we own and operate
    the pharmacy services business and GHC owns and operates the inpatient services
    business and other ancillary businesses. Neither of these businesses has an
    operating history as a separate company. The spin-off may result in some temporary
    dislocation and inefficiencies to our business operations, as well as impact
    the overall management of our company. In addition, operating these businesses
    independently may be more expensive, more complicated or more difficult than
    operating them together.





Since we and our subsidiaries
    emerged from bankruptcy on October 2, 2001, there is limited operating and
    financial data available from which to analyze our operating results and cash
    flows.





Financial
    information related to our and our subsidiaries operations after our
    emergence from bankruptcy is limited and therefore, it is difficult to compare
    such post-bankruptcy financial information with that of prior periods. Additionally,
    this information reflects the results of fresh-start reporting which also
    makes comparison of results of operations and financial condition after our
    emergence from bankruptcy to the results of prior periods difficult. For additional
    information, see Part II, Item 7, Managements Discussion and Analysis
    of Financial Condition and Results of Operations, of this Form 10-K.





Our historical financial information
    and our pro forma financial information may not be representative of our results
    as a separate company.





Historically,
    our operations were conducted as part of a consolidated entity with GHC and
    not as a separate entity. Accordingly, the pro forma financial information
    included in the notes to our consolidated financial statements may not reflect
    the results of operations and financial condition that would have been achieved
    had our company been operated independently during the period and as of the
    dates presented.  In addition, the historical pharmacy services segment
    information contained herein may not be indicative of how our business would
    have performed had the spin-off occurred during the periods presented. 
    Such segment information does not, for example, reflect general and administrative
    and other corporate overhead expenses.





Costs related
    to our corporate functions, including legal support, treasury administration,
    insurance administration, human resource management, information systems,
    internal audit and corporate accounting and income tax administration, which
    are not directly and solely related to our operations, have been allocated
    for purposes of preparing pro forma financial information based upon various
    methodologies deemed reasonable by management.  Although our management
    believes that the methods used to allocate and estimate such expenses are
    reasonable, there can be no assurance that our actual costs will not be higher,
    perhaps substantially.





Furthermore,
    our historical consolidated financial statements do not reflect the costs
    to us of borrowing funds as a separate entity.





We may be responsible for federal
    income tax liabilities that relate to our distribution of GHC common stock.





We have received
    a private letter ruling from the Internal Revenue Service to the effect that
    the spin-off and certain related transactions will qualify as a tax-free distribution
    to us and our shareholders under Section 355 of the Internal Revenue Code
    of 1986, as amended. We and GHC have made certain representations in connection
    with the private letter ruling, and we will agree to restrictions on certain
    future actions designed to preserve the tax-free status of the spin-off.





If the spin-off
    were found to be taxable by reason of any act (or failure to act) by GHC described
    in certain covenants contained in the spin-off documents, any acquisition
    of our equity securities or assets, or any breach of any of our representations
    in the spin-off documents or in the private letter ruling request, the spin-off
    would be taxable to us and may be taxable to holders of our common stock who
    received shares of GHC common stock in the spin-off. In such case, under the
    spin-off documents between us and GHC, GHC will be required to indemnify us
    against any taxes and related losses. The amount of any such indemnification
    payment could be substantial and we cannot assure you that GHC will have the
    ability to satisfy those obligations.





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We may be required to satisfy
    certain indemnification obligations to GHC or may not be able to collect on
    indemnification rights from GHC.





Under the
    terms of the separation and distribution agreement, we and GHC have agreed
    to indemnify each other from and after the distribution with respect to the
    indebtedness, liabilities and obligations that will be retained by our respective
    companies. These indemnification obligations could be significant, and we
    cannot presently determine the amount of indemnification obligations for which
    we will be liable or for which we will seek payment from GHC. Our ability
    to satisfy these indemnities, if we are called upon to do so, will depend
    upon our future financial performance. Similarly, GHCs ability to satisfy
    any such obligations to us will depend on GHCs future financial performance.
    We cannot assure you that we will have the ability to satisfy any substantial
    indemnification obligations to GHC. We also cannot assure you that if GHC
    is required to indemnify us for any substantial obligations, GHC will have
    the ability to satisfy those obligations.





Our management owns stock in GHC
    and there continue to be agreements between us and GHC.





As a result
    of their ownership of our common stock, most of our officers and certain members
    of our board of directors own GHC stock received in the spin-off distribution
    to our shareholders. In addition, certain of our subsidiaries entered into
    a tax sharing agreement, transition services agreement, a group purchasing
    agreement, an employee benefits agreement, a pharmacy services agreement,
    a pharmacy benefit management agreement and a durable medical equipment agreement
    with GHC. Although we believe the charges for services under the group purchasing
    agreement, the pharmacy services agreement, the pharmacy benefit management
    agreement and the durable medical equipment services agreement represent fair
    market value, there can be no assurance that we could not have obtained more
    favorable terms from an independent third-party. In some cases, the terms
    of the new agreements are not as favorable to us as the terms in effect prior
    to the spin-off. Robert H. Fish, the former chairman of our board of directors
    and chief executive officer, continues to serve as a director of both GHC
    and NeighborCare. Ownership of GHC common stock by our officers and directors
    could create, or appear to create, potential conflicts of interest for these
    officers and directors when faced with decisions that could have implications
    for both GHC and us.





GHC, our largest customer, will
    be subject to its own risks as a result of the spin-off and its operation
    as a separate entity.





Sales to facilities
    of GHC, our largest customer, represented 14% of our total revenues for the
    year ended September 30, 2003 after giving effect to the spin-off. As a result
    of the spin-off, it is operating for the first time as an independent public
    entity. GHC is also exposed to risks similar to those outlined herein, including
    initial operation without the support of the former consolidated corporate
    infrastructure. In addition, GHC will be highly leveraged. The degree to which
    GHC is leveraged could materially and adversely affect GHCs ability
    to obtain financing for working capital, acquisitions or other purposes and
    could make GHC more vulnerable to industry downturns and competitive pressures.
    GHCs ability to meet its obligations will be dependent upon its future
    performance, which will be subject to financial, business and other factors
    affecting GHCs operations. We are bound by a multi-year contractual
    arrangement with GHC. If GHC is not able to meet its obligations under this
    arrangement, our financial condition and results of operations could suffer
    materially.





Our ability to generate cash to
    service our indebtedness depends on many factors beyond our control.





Our ability
    to make payments on our existing and future debt and to fund working capital
    needs and planned capital expenditures will depend on our ability to generate
    cash in the future. Risks of future cash generation include the ability to
    sustain an audfit, and utilized, net operating losses for tax purposes. Our
    ability to generate cash, to a certain extent, is subject to general economic,
    financial, competitive, regulatory, legislative and other factors that are
    beyond our control.





Cost containment
    and lower reimbursement levels relative to inflationary increases in cost
    by third-party payors, including federal and state governments, have had a
    significant impact on the healthcare industry and on our





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cash flows. Our operating margins
    continue to be under pressure because of continuing regulatory scrutiny and
    growth in operating expenses, such as labor costs and insurance premiums.





We cannot
    assure you that our business will generate sufficient cash flow from operations
    or that future borrowings will be available to us in amounts sufficient to
    enable us to pay our indebtedness or to fund our other liquidity needs. If
    we do not generate or are unable to borrow sufficient amounts of cash to meet
    these needs, we may need to refinance all or a portion of our indebtedness
    on or before maturity, sell assets, curtail discretionary capital expenditures
    or file for bankruptcy protection. We cannot assure you that we will be able
    to refinance any of our indebtedness on commercially reasonable terms or at
    all.





The agreements
    governing our existing debt permit us, subject to specified conditions, to
    incur a significant amount of additional indebtedness. If we incur additional
    debt above current levels, the risks associated with our leverage, including
    our ability to service our debt, would increase.





The agreements governing our existing
    debt and preferred stock impose, and future debt may impose, significant operating
    and financial restrictions on us, which may prevent us from capitalizing on
    business opportunities and taking some corporate actions.





The agreements
    and instruments governing our existing debt impose, and the agreements and
    instruments governing our future debt may impose, significant operating and
    financial restrictions on us. These restrictions, among other things, limit
    our ability to:





| |  |  | incur
          additional indebtedness;                                
| |  | - | ------------------------------------------------------------------------
| |  |   |                                                                         
| |  |  | issue
          redeemable preferred stock;                             
| |  |   |                                                                         
| |  |  | pay
          dividends or make other distributions to our shareholders;
| |  |   |                                                                         
| |  |  | repurchase
          our stock;                                         
| |  |   |                                                                         
| |  |  | make
          certain investments;                                     
| |  |   |                                                                         
| |  |  | create
          liens;                                                 
| |  |   |                                                                         
| |  |  | sell
          or otherwise dispose of certain assets;                  
| |  |   |                                                                         
| |  |  | consolidate,
          merge or sell all of our assets;                 
| |  |   |                                                                         
| |  |  | prepay,
          redeem or repurchase debt;                            
| |  |   |                                                                         
| |  |  | enter
          into transactions with affiliates; and                  
| |  |   |                                                                         
| |  |  | engage
          in certain business activities.                        




In addition,
    the agreements and instruments governing our existing debt require us to maintain
    specified financial ratios and satisfy other financial condition tests. We
    cannot assure you that these covenants will not adversely affect our ability
    to finance our future operations or capital needs or to pursue available business
    opportunities or limit our ability to plan for or react to market conditions
    or meet capital needs or otherwise restrict our activities or business plans.
    A breach of any of those covenants or our inability to maintain the required
    financial ratios could result in a default in respect of the related indebtedness.
    If a default occurs, the relevant lenders could elect to declare the indebtedness,
    together with accrued interest and other fees, to be immediately due and payable
    and proceed against any collateral securing that indebtedness.





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The terms
    of our outstanding preferred stock also contain restrictions on our ability
    to complete certain types of transactions without the consent of the holders
    of our preferred stock.





Provisions in Pennsylvania law
    and our corporate charter documents could delay or prevent a change in control.





As a Pennsylvania
    corporation, we are governed by the Pennsylvania Business Corporation Law
    of 1988, as amended, referred to as Pennsylvania corporation law.  Pennsylvania
    corporation law provides that the board of directors of a corporation in discharging
    its duties, including its response to a potential merger or takeover, may
    consider the effect of any action upon employees, shareholders, suppliers,
    customers and creditors of the corporation, as well as upon communities in
    which offices or other establishments of the corporation are located, and
    all other pertinent factors.  In addition, under Pennsylvania corporation
    law, subject to certain exceptions, a business combination between us and
    a beneficial owner of more than 20% of our stock may be accomplished only
    if certain conditions are met.





Our articles
    of incorporation contain certain provisions that may affect a persons
    decision to implement a takeover of us, including the following provisions:





| |  | a
          classified board of directors, with each director having a three-year
          term;                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | a
          provision providing that certain business combinations involving us,
          unless approved by at least 75% of the board of directors, will require
          the affirmative vote of at least 80% of our voting stock;                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | a
          provision permitting the board of directors to oppose a tender or other
          offer for our securities in light of the fairness of the price, the
          impact on our constituents, the reputation of the offeror, the value
          of the offered securities and any applicable legal or regulatory issues
          raised by the offer, as well as all other pertinent factors;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | a
          provision requiring the affirmative vote of at least 80% of our voting
          stock to amend provisions relating to anti-takeover measures, unless
          the amendment is approved by at least 75% of the board of directors;
          and                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | the
          authority to issue preferred stock with rights to be designated by the
          board of directors.                                                                                                                                                                                                                                                                                       




Additionally,
    we have entered into a shareholder rights plan which will make it extremely
    difficult for any person or group to acquire a significant interest in our
    common stock without advance approval of our board of directors.





The overall
    effect of the foregoing provisions may be to deter a future tender offer or
    other offer to acquire us or our shares.  Shareholders might view such
    an offer to be in their best interest if the offer includes a substantial
    premium over the market price of the common stock at that time.  In addition,
    these provisions may assist our management in retaining their position and
    place us in a better position to resist changes that the shareholders may
    want to make if dissatisfied with the conduct of our business.





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PART I





|ITEM 1: | BUSINESS
|------- | --------




General





NeighborCare,
    Inc. was incorporated in May 1985 as a Pennsylvania corporation and was formerly
    named Genesis Health Ventures, Inc.





Prior to
      December  1, 2003, our operations were comprised of two primary business
      segments: 
    pharmacy services and inpatient services. On December 1, 2003, we completed
     the distribution (the spin-off) of the common stock of Genesis
      HealthCare Corporation (GHC) and on December 2, 2003, we changed
       our name to NeighborCare, Inc. and changed our trading symbol to NCRX.
    The spin-off was effected by way of a pro-rata tax free distribution of the
     common stock of GHC to holders of NeighborCares common stock on December
      1, 2003 at a rate of 0.5 shares of GHC stock for each share of NeighborCare

    stock owned as of October 15, 2003. We received a private letter ruling from
      the Internal Revenue Service to the effect that, for United States federal

    income tax purposes, the distribution of GHC stock qualified as tax free
     for  GHC and our shareholders, with the exception of cash received for fractional

    shares.  The common stock of GHC began trading publicly on the Nasdaq
     National Market System on December 2, 2003 under the symbol GHCI. 
    As a result of the spin-off, we continue to own and operate our pharmacy
    services  business and our group purchasing business and GHC owns and operates
    what
    was formerly our inpatient services business (as well as our former rehabilitation
     therapy, diagnostic, respiratory and management services businesses). See

    Part II, Item 7, Managements Discussion and Analysis of Financial
     Condition and Results of Operations  Certain Transactions and Events,
    of this Form 10-K. As used herein, unless the context otherwise requires,
    NeighborCare, the Company, we, our
    or us refers to NeighborCare, Inc. and its subsidiaries.





Because the
    spin-off occurred subsequent to our fiscal year ended September 30, 2003 but
    before the filing of this report on Form 10-K, we have included the required
    business and financial disclosures of the consolidated organization herein.
    We will treat the operations of GHC as discontinued in our consolidated financial
    statements beginning in fiscal 2004.





We provide
    pharmacy services nationwide through our NeighborCare® integrated pharmacy
    operation that serves approximately 246,000 institutional beds in longterm
    care settings. We also operate 32 communitybased retail pharmacies and
    a group purchasing organization.





GHC provides
       inpatient services through skilled nursing and assisted living centers
      primarily
    located in the eastern United States. GHC currently owns, leases, manages
       or jointlyowns 217 eldercare centers with 26,470 beds, of which
       two  centers with 404 beds have been identified as either held for sale
       or discontinued
    operations. See Part II, Item 7, Managements Discussion and Analysis
     of Financial Condition and Results of Operations  Certain Transactions
      and Events  Assets Held for Sale and Discontinued Operations,
    of this Form 10-K. GHC also provides rehabilitation therapy, diagnostic,
    respiratory, and management services.





Financial
    information regarding our business segments prior to the spin-off (i.e., pharmacy
    services and inpatient services) is presented at note 21  Segment
    Information of Part II, Item 8, Financial Statements and Supplementary
    Data, of this Form 10-K.





The business
    descriptions below of NeighborCare, Inc. and GHC are as they existed after
    the spin-off.





NeighborCare,
    Inc.





Description of Business





We are the
    third largest provider of institutional pharmacy services in the United States.
    In five of the seven regions in which we do business, we believe we are the
    number one or number two institutional pharmacy service provider based upon
    the number of beds served. As of September 30, 2003, we provided pharmacy
    services for approximately 246,000 beds in long-term care facilities in 32
    states and the District of Columbia. Our pharmacy operations consist of 62
    institutional pharmacies (five are jointly-owned), 32 community-based professional
    retail





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pharmacies (two are jointly-owned)
    and 20 on-site pharmacies which are located in customers facilities
    and serve only customers of that facility. In addition, we operate 16 home
    infusion, respiratory and medical equipment distribution centers (four are
    jointly-owned). Jointly-owned facilities and the operations conducted therein
    are part of joint ventures which are owned by NeighborCare and at least one
    other unaffiliated party.





Institutional
    pharmacy





Our institutional
    pharmacy business purchases, repackages, labels and dispenses prescription
    and non-prescription medication in accordance with physician orders and delivers
    such medications to long-term care facilities for administration to individual
    residents. We typically service long-term care facilities within a 100-mile
    radius of our pharmacy locations. We maintain 24-hour, seven-day per week,
    on-call service for emergency dispensing and delivery or for consultation
    with the facilitys staff or the residents attending physician.





Upon receipt
    of a prescription, the relevant resident information is entered into our computerized
    dispensing and billing systems. At that time, the dispensing system checks
    the prescription for any potentially adverse drug interactions or resident
    sensitivity. When required and/or specifically requested by the physician
    or patient, branded drugs are dispensed; otherwise generic drugs are substituted
    in accordance with applicable federal and state laws. We also provide therapeutic
    interchange, with physician approval, in accordance with our pharmaceutical
    care guidelines, which are in compliance with applicable state laws. Therapeutic
    interchange is a process that allows the pharmacist to dispense a pre-approved
    therapeutically equivalent and cost-effective product within a designated
    therapeutic category whenever a non-formulary product is ordered.





We offer prescription
    and non-prescription pharmaceuticals to our customers through a unit dose
    or modified unit dose packaging, dispensing and delivery system, typically
    in 30-day supplies. Unit doses are packaged for dispensing in individual doses
    compared to bulk packaging used by most retail pharmacies. We believe a unit
    dose delivery system is preferred over the bulk delivery systems employed
    by retail pharmacies because it does not require the measurement of each individual
    dose, improves control over the provision of drugs and reduces errors in drug
    administration in long-term care facilities. Dispensing in unit dose also
    makes it possible to accept returns and issue credits where permitted by law,
    reducing waste and, therefore, resident care costs.





Integral to
    our drug distribution system is our computerized medical records and documentation
    system. We provide to each client facility patient specific computerized medication
    administration records, physicians order sheets and treatment records.
    Data extracted from these computerized records is also formulated into monthly
    management reports which each client facility utilizes in resident care and
    quality assurance. We believe our computerized documentation system, in combination
    with our unit dose drug delivery system, results in greater efficiency in
    nursing time, improved control, reduced drug waste in the facility and lower
    error rates in both dispensing and administration. In addition, our consulting
    practice is fully integrated with our dispensing system through proprietary
    software, enabling us to offer unique, real time consultations to our customers.





Approximately
       91% of our institutional pharmacy revenues for the year ended September
      30,
    2003 consisted of the sale of prescription and non-prescription pharmaceuticals.
       Approximately 84% of the institutional pharmacy sales in the year ended
      September
    30, 2003 was generated through external contracts with independent healthcare
       providers, with the balance attributable to centers owned or leased as
      of
    December 1, 2003 by GHC. At September 30, 2003, we had contracts to provide
       services to more than 246,000 residents in long-term care facilities in
      32
    states and the District of Columbia. These contracts, as is typical in the
       industry, are generally for a period of one year but can be terminated
      by
    either party for any reason upon thirty days written notice. For the year
       ended September 30, 2003, other than sales to facilities owned or leased
      as
    of December 1, 2003 by GHC (16% of institutional pharmacy revenue and 11%
       of beds served) and Manor Care (14% of institutional pharmacy revenue
      and
    11% of beds served), no individual customer or market group represented more
       than 5% of the total sales of our institutional pharmacy business. In
      connection
    with the spin-off, we entered into a pharmacy services agreement, a pharmacy
      benefit management agreement and a durable medical equipment agreement
      with GHC. These new agreements represent an approximately
      0.5% annual
      reduction
      in
      revenue
      for NeighborCare.
      In
      addition,
      we have
      a pharmacy services agreement with Manor Care which expires in 2006.





We obtain
    approximately 98% of our institutional pharmaceutical products from one supplier
    pursuant to contracts that are terminable by either party on 90 days notice.
    We have not experienced any difficulty in obtaining pharmaceutical products
    or supplies used in the conduct of our business.





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We also provide
    pharmacy consulting services that assist clients in complying with federal
    and state regulations applicable to long-term care facilities. Federal and
    state regulations mandate that long-term care facilities, in addition to providing
    a source of pharmaceuticals, retain consultant pharmacist services to monitor
    and report on prescription drug therapy in order to maintain and improve the
    quality of resident care. Our consulting services include:





| |  | monthly
          reviews of each residents drug regimen to assess the appropriateness
          and efficacy of drug therapies, including a review of medical records,
          monitoring drug interactions with other drugs or food, monitoring laboratory
          test results and recommending alternate therapies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | participation
          on quality assurance and other committees of our customers;                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | monitoring
          and reporting on facility-wide drug utilization;                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | development
          and maintenance of pharmaceutical policy and procedure manuals; and                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | assistance
          with federal and state regulatory compliance pertaining to resident
          care.                                                                                                                                                                                                                    




Community-Based
    Professional Retail Pharmacies





We also operate
    32 community-based professional retail pharmacies, two of which are jointly
    owned. Our community-based professional pharmacies are retail operations located
    in or near medical centers, hospitals and physician office complexes which
    provide prescription and non-prescription medications and certain medical
    supplies as well as personal service and consultation by licensed registered
    pharmacists.





Home Infusion,
    Respiratory and Medical Equipment





Our home infusion,
    respiratory and medical equipment distribution centers provide a wide array
    of products and services to support the home care needs of a range of individuals
    of all ages. We work with physicians, hospital discharge planners, case managers
    and managed care organizations that refer these individuals to us. Services
    include respiratory and medical equipment (such as oxygen, hospital beds,
    wheelchairs and respiratory medications), as well as home infusion (such as
    antibiotics, TPN, chemotherapy and pain management).





Other Services





We also own
    and operate The Tidewater Healthcare Shared Services Group, Inc., one of the
    largest long-term care group purchasing companies in the country. Tidewater
    provides purchasing and shared service programs specially designed to meet
    the needs of eldercare centers and other long-term care facilities.





Revenue Sources





We receive
    revenues from Medicare, Medicaid, private insurance, self-pay patients, other
    third-party payors and long-term care facilities that utilize our pharmacy
    and other services. The healthcare industry is experiencing the effects of
    the trend toward cost containment as federal and state governments and other
    third-party payors seek to control utilization and negotiate reduced payment
    schedules with providers. These cost containment measures, combined with the
    increasing influence of managed care payors and competition for customers,
    generally have resulted in reduced rates of reimbursement for the products
    and services provided by us.





The sources
    and amounts of our revenues will be determined by a number of factors, including
    the mix of our customers patients and the rates of reimbursement among
    payors. Changes in the case mix of the patients as well as payor mix among
    private pay, Medicare and Medicaid will affect our profitability.





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The following
    table reflects the payor mix of pharmacy service revenues for the respective
    years ended September 30:





|                                    |  | 2003 |     | 2002 |  | 2001 |  
|----------------------------------- |  | ---- | --- | ---- |  | ---- | -
|                                    |  |      |     |      |  |      |  
|Medicaid                            |  |      | 42  | %    |  | 40   | %
|Long-term
          care facilities |  |      | 30  | %    |  | 34   | %
|Third-party
          payor         |  |      | 16  | %    |  | 14   | %
|Private                             |  |      | 10  | %    |  | 10   | %
|Medicare
          Part B           |  |      | 2   | %    |  | 2    | %
|                                    |  |      |     |      |  |      |  
|Totals:                             |  |      | 100 | %    |  | 100  | %
|                                    |  |      |     |      |  |      |  




Medicare
    and Medicaid





The Health
    Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act),
    or Medicare, is a federally funded and administered health insurance
    program for individuals aged 65 and over or for certain individuals who are
    disabled. The Medicare program consists of three parts: (i) Medicare Part
    A, which covers, among other things, inpatient hospital, skilled long-term
    care, home healthcare and certain other types of healthcare services; (ii)
    Medicare Part B, which covers physicians services, outpatient services
    and certain items and services provided by medical suppliers; and (iii) a
    managed care option for beneficiaries who are entitled to Medicare Part A
    and enrolled in Medicare Part B, known as Medicare+Choice or Medicare Part
    C. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization
    Act of 2003, or the Medicare Modernization Act, passed by Congress on November
    25, 2003 and signed into law by the President on December 8, 2003, the Medicare+Choice
    program will be subsumed into a new Medicare supplemental product called Medicare
    Advantage by 2006.  Under Medicare Part B, we are entitled to payment
    for products that replace a bodily function (i.e., ostomy supplies), home
    medical equipment and supplies and a limited number of specifically designated
    prescription drugs.  The Medicare program is currently administered by
    fiscal intermediaries (for Medicare Part A and some Medicare Part B services)
    and carriers (for Medicare Part B) under the direction of the Centers for
    Medicare and Medicaid Services, or CMS, the Medicare and Medicaid oversight
    division of the United States Department of Health and Human Services, or
    DHHS.





Medicaid
      (Title  XIX of the Social Security Act) is a federal-state matching fund
      program,
    whereby the federal government, under a needs-based formula, matches funds
       provided by the participating states for medical assistance to medically
        indigent persons. The programs are administered by the applicable
        state  welfare or social service agencies under federal rules. Although
        Medicaid
    programs vary from state to state, traditionally they have provided for the
         payments, up to established limits, at rates determined in accordance
        with
    each states regulations. The federal Medicaid statute specifies a variety
     of requirements that the state plan must meet, including requirements relating

    to eligibility, coverage of services, payment and administration. For patients
     eligible for Medicaid, we bill the individual state Medicaid program or,
    in
    certain circumstances, the state designated managed care or other similar
     organizations. The reimbursement rates for pharmacy services under Medicaid

    are determined on a state-by-state basis subject to review by the Centers
     for Medicare and Medicaid Services and applicable federal law. Federal regulations

    and the regulations of certain states establish upper limits for
     reimbursement for certain prescription drugs under Medicaid. In most states,

    pharmacy services are priced at the lower of usual and customary
    charges or cost (which generally is defined as a function of average wholesale
     price and may include a profit percentage) plus a dispensing fee. Most states

    establish a fixed dispensing fee that is adjusted to reflect associated costs
     on an annual or less frequent basis.  The payment methodology for certain
      forms of prescription drugs and biologicals reimbursed under the Medicaid

    program may be subject to changes under the Medicare Modernization Act. 
    See  NeighborCare, Inc.  Laws Affecting Revenues.





Any future
    changes in Medicaid reimbursement programs or in regulations relating thereto,
    such as reductions in the allowable reimbursement levels or the timing of
    processing of payments, could adversely affect our business. The annual increase
    in the federal share could vary from state to state based on a variety of
    factors. Such provisions, if ultimately signed into law, could adversely affect
    our business. Additionally, any shift from Medicaid to state designated managed
    care could adversely affect our business due to historically lower reimbursement
    rates for managed care.





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Moreover,
    Medicare and Medicaid are subject to statutory and regulatory changes, retroactive
    rate adjustments, administrative rulings and government funding restrictions,
    all of which may materially affect the timing and/or levels of payments to
    us for our services.





We are subject
    to periodic audits by the Medicare and Medicaid programs, which have various
    rights and remedies against us if they assert that we have overcharged the
    programs or failed to comply with program requirements. These rights and remedies
    may include requiring the repayment of any amounts alleged to be overpayments
    or in violation of program requirements, or making deductions from future
    amounts due to us. Such programs may also impose fines, criminal penalties
    or program exclusions. Other third-party payor sources also reserve rights
    to conduct audits and make monetary adjustments.





Laws Affecting
    Revenues





Congress has
    enacted laws directly affecting our business and the skilled nursing facilities
    served by us. Three major laws during the past six years have significantly
    altered payment for nursing home and medical ancillary services. Healthcare
    related legislation has significantly impacted our business, and future legislation
    and regulations are likely to affect us. For a discussion of the effect of
    laws upon our business, see Risk Factors.





The recently
      enacted Medicare Prescription Drug, Improvement and Modernization Act of
      2003,
    referred to as the Medicare Modernization Act, may have a significant impact
      on our  business or the business of our primary customers, nursing facilities. 
    Specifically, the Medicare Modernization Act increases payments to nursing
     facilities to cover the high costs of care associated with treatment for
    AIDS
    patients, subject to applicable sunsets, while potentially reducing payments
     for certain outpatient pharmaceutical drugs and biologicals currently reimbursed

    under the average wholesale price methodology.  The legislation
     shifts the payment methodology from average wholesale price to average
      sales price.  DHHS will have the authority to adjust payment
      rates  where the average sales price does not reflect widely available
      market prices. 
    In addition, the legislation will have a significant impact on reimbursement
     rates for durable medical equipment by freezing durable medical equipment

    rates from 2004 through 2006.  DHHS will have the authority to adjust
     rates for the top five most widely used durable medical equipment codes
    to
    reflect reimbursement rates paid under the Federal Employee Health Benefit
     Plan.  The Medicare Modernization Act also provides for increased federal
      resources being available for prescription drug benefits coverage in 2006. 
    Finally, the Medicare Modernization Act authorizes an interim federally sponsored
     prescription drug discount plan to provide group discounts for Medicare
    beneficiaries
    between 2004 and 2006.





Because of
    the recent enactment of the Medicare Modernization Act and its broad scope,
    we are not in a position to fully assess its impact on our business. 
    The impact of the legislation depends upon a variety of factors, including
    patient mix.  It is not clear at this time whether this new legislation
    will have an overall negative impact on institutional and long-term care pharmacy
    services.  This legislation may reduce revenue and impose additional
    costs to the industry.  DHHS has not yet promulgated any final regulations
    under the Act, as the Act requires it to do.  The impact of these regulations
    when promulgated, including those regulations relating to the prescription
    drug discount plan discussed above, is unclear. NeighborCare will continue
    to work closely with the Center for Medicare and Medicaid Services directly,
    as well
	as through the Long Term Care Pharmacy Alliance, to offer its expertise in
    pharmaceutical care for the elderly.





Prior to
      the  Medicare Modernization Act, reimbursement for certain products covered
      under
    Medicare Part B was limited to 95% of the average wholesale price. 
    The move to a prospective payment system under the Balanced Budget Act of
    1997  made pricing a more important consideration in the selection of pharmacy
    providers. 
    Also, Congress included provisions in the Balanced Budget Act of 1997 that
     would require nursing facilities to submit all claims for Medicarecovered
      services that their residents receive, both Medicare Part A and Medicare
     Part
    B, even if such services are provided by outside suppliers, including but
      not limited to pharmacy and rehabilitation therapy providers, except for
     certain
    excluded services. The Benefits Improvement and Protection Act, enacted in
      December 2000, repealed this provision, except for therapy services as
     discussed
    below.





The reimbursement
    rates for pharmacy services under Medicaid are determined on a state by state
    basis subject to review by the Centers for Medicare and Medicaid Services
    and applicable federal law.  In most states, pharmacy services are priced
    at the lower of usual and customary charges or cost (which generally
    is defined as a function of average wholesale price and may include a profit
    percentage) plus a dispensing fee.  Certain states have lowest
    charge legislation or most favored nation provisions which
    require our institutional pharmacy and medical supply operation to charge
    Medicaid no more than its lowest charge to other consumers in the state. Since
    2000, federal Medicaid requirements establishing payment caps on certain drugs
    have been periodically revised.  We have





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participated in the efforts to review
    and interact with the Centers for Medicare and Medicaid Services on the revisions. 
    This proactive involvement has helped in modifying the rate structures and
    thereby minimizing the impact of the new rules on our operations.





Revisions
    made by the Medicare Modernization Act are expected to provide significant
    relief to states as Medicare coverage becomes primary to Medicaid assistance
    for dually eligible individuals.  While those provisions making Medicare
    primary to Medicaid do not become effective until January 1, 2006, the competitive
    design of the interim Drug Rx Discount Card program is expected to influence
    cost reductions for all pharmacy services, thus impacting Medicaid outlays
    for prescription drugs.





It is not
    possible to quantify fully the effect of legislative changes, the interpretation
    or administration of such legislation or any other governmental initiatives
    on our business and the business of our principal customers. Accordingly,
    there can be no assurance that the impact of any future healthcare legislation
    will not further adversely affect our business. There can be no assurance
    that payments under governmental and private third-party payor programs will
    be timely, will remain at levels comparable to present levels or will, in
    the future, be sufficient to cover the costs allocable to patients eligible
    for reimbursement pursuant to such programs. Our financial condition and results
    of operations may be affected by the reimbursement process, which in the healthcare
    industry is complex and can involve lengthy delays between the time that revenue
    is recognized and the time that reimbursement amounts are settled.





We belong, with
  other leading multi-state institutional pharmacy companies, to the Alliance
  for Long Term Care Pharmacy (LTCPA),an industry trade group established
  to influence the outcomes of both federal and state-specific legislative and
  regulatory activities. In this collaboration, LTCPA provides leadership to responding
  to specific issues. Presently, LTCPA has engaged representation in 23 states
  and the District of Columbia. Such efforts are augmented by the government relations
  specialists of the various companies and by active grassroots efforts of pharmacy
  professionals. These proactive steps have been successful in a number of instances,
  but given the budgetary concerns of both federal and state governments, there
  can be no assurance that changes in payment formulas and delivery requirements
  will not have a negative impact going forward.





While Congress
    has, through the Medicare Modernization Act, expanded Medicare coverage of
    certain costs of outpatient pharmaceutical services, the federal government
    and state governments continue to focus on efforts to curb spending on healthcare
    programs such as Medicare and Medicaid. We cannot at this time predict the
    extent to which these proposals will be adopted or, if adopted and implemented,
    what effect, if any, such proposals and existing new legislation will have
    on us. Efforts to impose reduced allowances, greater discounts and more stringent
    cost controls by government and other payors are expected to continue.





See 
     Genesis HealthCare Corporation  Laws Affecting Revenues.





Government Regulation





General





Our business
    is subject to extensive federal, state and, in some cases, local regulation
    with respect to, among other things, licensure, certification and health planning.
    For pharmacy and medical supply products and services, this regulation relates,
    among other things, to operational requirements, reimbursement, documentation,
    licensure, certification and regulation of controlled substances. Compliance
    with such regulatory requirements, as interpreted and amended from time to
    time, can increase operating costs and thereby adversely affect the financial
    viability of our business. Failure to comply with current or future regulatory
    requirements could also result in the imposition of various remedies including
    fines, restrictions on admission, the revocation of licensure, decertification,
    imposition of temporary management or the closure of the facility.





Institutional
    pharmacies, as well as the long-term care facilities that they service, are
    subject to extensive federal, state and local laws and regulations. These
    laws and regulations cover required qualifications, day-to-day operations,
    reimbursement and the documentation of activities. We continuously monitor
    the effects of regulatory activity on our operations.





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Licensure,
    Certification and Regulation





States require
    that companies operating a pharmacy within that state be licensed by its
    board of pharmacy. We currently hold a license for each of the pharmacies
    we operate. Our pharmacies are also registered with the appropriate federal
    and state authorities pursuant to statutes governing the regulation of controlled
    substances.





For an extensive
    period of time, the long-term care pharmacy business has operated under regulatory
    and cost containment pressures from federal and state legislation primarily
    affecting the Medicare and Medicaid programs.





The Medicare
    program establishes certain requirements for participation of providers and
    suppliers in the Medicare program.  Failure to comply with these requirements
    and standards may adversely affect the ability of providers and/or suppliers
    to participate in the Medicare program and receive reimbursement for services
    provided to Medicare beneficiaries.





Federal law
    and regulations contain a variety of requirements relating to the furnishing
    of prescription drugs under Medicaid. First, states are given broad authority,
    subject to certain standards, to limit or to specify conditions as to the
    coverage of particular drugs. Second, federal Medicaid law establishes standards
    affecting pharmacy practice. These standards include general requirements
    relating to patient counseling and drug utilization review and more specific
    requirements for long-term care facilities relating to drug regimen reviews
    for Medicaid patients in such facilities. States may require pharmacies to
    comply with the general standards, regardless of whether the long-term care
    facility satisfies the drug regimen review requirement, and the states in
    which we operate currently require their pharmacies to comply therewith. Third,
    federal regulations impose certain requirements relating to reimbursement
    for prescription drugs furnished to Medicaid residents.





In addition
    to requirements imposed by federal law, states have substantial discretion
    to determine administrative, coverage, eligibility and payment policies under
    their state Medicaid programs which may affect our operations. For example,
    some states have enacted freedom of choice requirements which
    prohibit a long-term care facility from requiring its residents to purchase
    pharmacy or other ancillary medical services or supplies from particular providers
    that deal with the long-term care facility. Such limitations may increase
    the competition that we face in providing services to long-term care facility
    patients.





Providers
    and suppliers who participate in the Medicare and Medicaid programs are subject
    to inquiries or audits to evaluate their compliance with requirements and
    standards set forth under these programs. We believe that our billing procedures
    materially comply with applicable federal and state requirements. However,
    there can be no assurance that in the future such requirements will be interpreted
    in a manner consistent with the current interpretation and application.





Laws Affecting
    Billing and Business Practices





We are also
    subject to federal and state laws that govern financial and other arrangements
    between healthcare providers. These laws often prohibit certain direct and
    indirect payments or fee-splitting arrangements between healthcare providers
    that are designed to induce or encourage the referral of patients to, or the
    recommendation of, a particular provider for medical products and services.
    These laws include:





| |  | the
          anti-kickback provisions of the federal Medicare and Medicaid
           programs, which prohibit, among other things, knowingly and willfully

          soliciting, receiving, offering or paying any remuneration (including
           any kickback, bribe or rebate) directly or indirectly in return for

          or to induce the referral of an individual to a person for the furnishing
           or arranging for the furnishing of any item or service for which payment

          may be made in whole or in part under Medicare or Medicaid. Penalties
          may include imprisonment, fines, exclusion from participation in the
          Medicare and Medicaid programs and loss of license; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | the
          Stark laws which prohibit, with limited exceptions, the
           referral of patients by physicians for certain services, to an entity

          in which the physician has a financial interest. Penalties may include
          denial of payment, mandatory refund of prior payment, civil monetary
          penalties and exclusion from participation in the Medicare and Medicaid
          programs.                                                                                                                                                                                                                                                                                                          




In addition,
  some states restrict certain business relationships between physicians and other
  providers of healthcare services. Possible sanctions for violation of any of
  these restrictions or prohibitions include loss of licensure or eligibility
  to participate in reimbursement programs and civil and criminal penalties. These
  laws vary from state to state, are often complex and have seldom been interpreted
  by the courts or regulatory agencies. From time to time, we have sought guidance
  as to the interpretation of these laws, however, there can be no assurance that
  such laws will ultimately be interpreted in a manner consistent with our practices.





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There have
       also been a number of recent federal and state legislative and regulatory

    initiatives concerning reimbursement under the Medicare and Medicaid programs.
       During the past few years, the Department of Health and Human Services
      has
    issued a series of voluntary compliance guidelines. These compliance guidelines
       provide guidance on acceptable practices. Skilled nursing facility services

    and durable medical equipment, prosthetics, orthotics and supplies and supplier
       performance practices have been among the services addressed in these
      publications.
    Our Corporate Integrity Program is working to assure that our practices conform
       to those requirements applicable to us. The Department of Health and Human

    Services also issues fraud alerts and advisory opinions. Directives concerning
       double billing, home health services and the provision of medical supplies

    to nursing facilities have been released. It is anticipated that areas addressed
       by these advisories may come under closer scrutiny by the government.
      While
    we have focused our internal compliance reviews to assure our practices conform
       with government instructions, we cannot accurately predict the impact
      of any
    such initiatives. See Cautionary Statements Regarding Forward-Looking
     Statements and  NeighborCare, Inc.  Revenue Sources.





Laws Governing
    Health Information





We face additional
    federal requirements that mandate major changes in the transmission and retention
    of health information. The Health Insurance Portability and Accountability
    Act of 1996, or HIPAA, was enacted to ensure, first, that employees
    can retain and at times transfer their health insurance when they change jobs,
    and second, to simplify healthcare administrative processes. This simplification
    includes expanded protection of the privacy and security of personal medical
    data and requires the adoption of standards for the exchange of electronic
    health information. Among the standards that the DHHS may adopt pursuant to
    HIPAA are standards for the following: electronic transactions and code sets;
    unique identifiers for providers, employers, health plans and individuals;
    security and electronic signatures; privacy; and enforcement.





Although HIPAA
    was intended to ultimately reduce administrative expenses and burdens faced
    within the healthcare industry, we believe that implementation of this law
    will result in additional costs. We have established a HIPAA task force consisting
    of clinical, financial and information services professionals focused on HIPAA
    compliance.





The Department
    of Health and Human Services has released three rules to date mandating the
    use of new standards with respect to certain healthcare transactions and health
    information. The first rule establishes uniform standards for common healthcare
    transactions, including:





| |  | healthcare
          claims information;                             
| | - | ---------------------------------------------------------------------
| |   |                                                                      
| |  | plan
          eligibility, referral certification and authorization;
| |   |                                                                      
| |  | claims
          status;                                             
| |   |                                                                      
| |  | plan
          enrollment and disenrollment;                         
| |   |                                                                      
| |  | payment
          and remittance advice;                             
| |   |                                                                      
| |  | plan
          premium payments; and                                 
| |   |                                                                      
| |  | coordination
          of benefits.                                  




Second, DHHS
       has released standards relating to the privacy of individually identifiable

    health information. These standards not only require our compliance with
      rules  governing the use and disclosure of protected health information,
      but they
    also require us to impose those rules, by contract, on any business associate
       to whom we disclose information. Third, DHHS has released rules governing
      the
    security of health information maintained or transmitted in electronic form.




DHHS finalized
        the transaction standards on August 17, 2000. DHHS issued the privacy standards
      on December 28, 2000, and, after certain delays, they became effective on
        April 14, 2001, with a compliance date of April 14, 2003. On February 20,
        2003, DHHS issued final rules governing
        the security of health information. This rule specifies a series of administrative,
        technical and physical security procedures to assure the confidentiality
        of
      electronic protected health information. Affected parties will have approximately
        two years to be fully compliant. Sanctions for failing to comply with HIPAA
        health information practices
      provisions include criminal penalties and civil sanctions.


At this time,
        our management anticipates that NeighborCare will be able to fully comply with those HIPAA requirements that have been
        adopted.  As part of our Corporate Integrity Program, we will monitor our compliance with HIPAA. Our compliance and privacy
		officer will be responsible for administering the Corporate Integrity
      Program which includes HIPAA related compliance. However, management cannot
      at this time estimate the
      cost of compliance, nor can management estimate the cost of compliance
      with standards that have not yet been finalized by DHHS. It is not possible to fully quantify
      the effect of recent legislation, potential legislative or regulatory changes,
      the interpretation or administration of such legislation or any other governmental
      initiatives on our business. Accordingly, there can be no assurance
      that the impact of these changes or any future healthcare legislation will
  not





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adversely
          affect our business. There can be no assurance that payments
          under governmental and private third-party payor programs will be timely,
          will remain at levels comparable to present levels or will, in the
          future, be sufficient to cover the costs allocable to patients eligible
          for reimbursement pursuant to such programs. Our financial
          condition and results of operations may be affected by the reimbursement
          process, which in our industry is complex and can involve lengthy delays
          between the time that revenue is recognized and the time that reimbursement
      amounts are settled.


Corporate Integrity Program





Our Corporate
    Integrity Program was developed to assure that we continue to achieve our
    goal of providing a high level of care and service in a manner consistent
    with all applicable federal and state laws and regulations and our internal
    standard of conduct. This program is intended to allow personnel to prevent,
    detect and resolve any conduct or action that fails to satisfy all applicable
    laws and our standard of conduct.





We have a
    corporate compliance officer responsible for administering the Corporate Integrity
    Program. The corporate compliance officer, with the approval of our chief
    executive officer or our board of directors, may use any of our resources
    to evaluate and resolve compliance issues. The corporate compliance officer
    reports significant compliance issues to our board of directors.





We established
    the Corporate Integrity Program hotline, which offers a toll-free number available
    to all of our employees to report non-compliance issues, including any alleged
    privacy violations under the Health Insurance Portability and Accountability
    Act of 1996. Employee calls to the hotline will be kept anonymous unless the
    employee waives his/her right to anonymity. All calls reporting alleged non-compliance
    are logged, investigated, addressed and remedied by appropriate company officials.





The corporate
    integrity subcommittee was established to ensure a mechanism exists for us
    to monitor compliance issues. The corporate integrity subcommittee members
    are senior members of the human resources, legal, internal audit and operations
    departments.





Periodically,
    we receive information from the Department of Health and Human Services regarding
    individuals and providers that are excluded from participation in Medicare,
    Medicaid and other federal healthcare programs. Providers may include pharmacists
    and pharmacy technicians. On a monthly basis, management compares the information
    provided by the Department of Health and Human Services to our employee databases.
    Any potential matches are investigated and any necessary corrective action
    is taken to ensure we cease employing that individual.





Personnel





At September
    30, 2003, we employed approximately 5,900 people, including approximately
    4,800 full-time and 1,100 part-time employees. Approximately 16% of these
    employees are pharmacists or nurses.





We currently
    have two facilities that are covered by collective bargaining agreements.
    The agreements expire at various dates through 2007 and cover approximately
    100 employees. We believe that our relationship with our employees is generally
    good.





Competition
    for qualified pharmacists and other pharmacy professionals is intense. See
    Risk Factors  We are dependent on our senior management team and
    our pharmacy professionals.





We believe
    that clinical staff retention and development, both pharmacists and nurses,
    continues to be a critical factor in our successful operation. In order to
    reduce turnover and increase our staff retention rates, we have implemented
    a compensation program which provides for annual merit reviews as well as
    continued market wage assessments. Our management team is also eligible for
    both financial and clinically based incentives that ultimately promote staff
    motivation and productivity. All sites participate in performance improvement
    initiatives that make an impact on the quality of patient care.





In 2002, in
    response to the pharmacist shortage, we implemented a pharmacist scholarship
    program to provide financial assistance to 3rd and 4th year pharmacy school
    students. In addition, we offer tuition assistance programs to our internal
    associates that enroll in an accredited educational program.





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In 2000, we
    began a junior level management and leadership training program, Mastering
    Management. This program includes various topics such as leadership style,
    setting goals, problem solving, interviewing and performance management. To
    date, we have trained over 1,000 participants.





Marketing





We market
    our institutional pharmacy services, homecare and group purchasing services
    through a direct sales force which primarily calls on long-term care facilities
    and their owners, hospitals, clinics and home health agencies. In addition,
    we have formed a national accounts team that is responsible for identifying
    opportunities within significant long-term care chains.





In addition,
    we have a corporate marketing department that helps develop promotional materials
    and literature focusing on our operational philosophy, the programs and services
    provided, and clinical expertise as well as providing market research.





Our logos,
    trademarks and service marks are featured in print advertisements in publications
    serving the markets in which we operate. Our marketing is aimed at supporting
    the efforts of our field sales staff and increasing awareness among decision
    makers in key professional and business audiences. We use advertising to promote
    our brand names in trade, professional and business publications and to promote
    services directly to consumers. In addition, to support our professional pharmacy
    business we advertise in regional markets through both radio and television
    outlets.





Inventories





We seek to
    maintain adequate on-site inventories of pharmaceuticals and supplies to ensure
    prompt delivery service to our customers. Our primary supplier also maintains
    local warehousing in most major geographic markets in which we operate.





Competition





The institutional
    pharmacy business is highly fragmented. We are the third largest provider
    of institutional pharmacy services in the United States. In the 32 states
    and the District of Columbia where we sell pharmacy products and services,
    we compete with multiple national, regional and local institutional pharmacies,
    pharmacies owned by long-term care facilities and numerous local retail pharmacies.
    Some of our competitors may have greater financial and other resources and
    may be more established than us in the markets in which we compete. Competing
    companies also may offer newer or different services than us and may thereby
    attract our clients. We believe that the primary competitive factors in obtaining
    and retaining clients are service, integrity, clinical expertise, fair pricing
    and the ability to form strong relationships with key personnel.





We also compete
    with a variety of companies in the retail pharmacy market as well as companies
    providing home infusion, respiratory and medical equipment in providing other
    specialty medical services with a variety of different companies. Generally,
    this competition is national, regional and local in nature. The primary competitive
    factors in these businesses are similar to those in the pharmacy business
    and include service, the cost of services, the quality of clinical services,
    responsiveness to customer needs, information management and patient record-keeping.
    See Risk Factors We face intense competition in our business.





Insurance





Our workers
    compensation, automobile, general and professional liability insurance is
    maintained as statutorily required through third-party commercial insurers.
    The commercial insurance purchased is loss sensitive in nature. As a result,
    we are responsible for adverse loss development beyond an aggregate level.





We provide
    several health insurance options to our employees, including a self-insured
    health plan and several fully-insured health maintenance organizations.





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Genesis HealthCare
    Corporation





Description of Business





GHC is one
    of the largest providers of healthcare and support services to the elderly
    in the United States. Within its network of geographically concentrated facilities,
    GHC offers services focusing on the primary medical, physical and behavioral
    issues facing the medically complex elderly population. Through its physicians,
    nurses, therapists and other members of our interdisciplinary medical care
    team, GHC applies a comprehensive approach to the complex needs facing the
    elderly, which it believes has resulted in its above industry average occupancy
    levels and an enhanced quality payor mix. For the twelve months ended September
    30, 2003, the average occupancy level in GHCs inpatient facilities was
    approximately 91%, and approximately 28% of its net revenues were from Medicare
    patients.





GHCs
    business is comprised of two primary businesses: inpatient services and rehabilitation
    therapy services. These segments are supported by complementary service capabilities.





Approximately
    90% of GHCs net revenues are generated through inpatient services. GHCs
    inpatient services business is offered through a network of skilled nursing
    and assisted living centers primarily located in the eastern United States.
    Its eldercare centers are concentrated in the states of Pennsylvania, New
    Jersey, Maryland and Massachusetts. GHC currently owns 123 eldercare facilities,
    jointly-owns 22 eldercare facilities, leases 37 eldercare facilities and manages
    35 eldercare facilities. These eldercare facilities consist of 194 skilled
    nursing facilities and 23 assisted living facilities with 26,470 beds, including
    two skilled nursing facilities with 404 beds located in the state of Wisconsin
    that have been identified as held for sale.





GHCs
    rehabilitation therapy business provides an extensive range of rehabilitation
    therapy services to the elderly, including speech pathology, physical therapy
    and occupational therapy in its eldercare regional market concentrations.
    These services are provided by approximately 4,200 licensed rehabilitation
    therapists and assistants employed or contracted by GHC at substantially all
    of the eldercare facilities it operates, as well as by contract to third-party
    healthcare facilities and through its 13 outpatient rehabilitation sites.





Inpatient
    Services





GHCs
    eldercare centers are located in 13 states, and concentrated in three geographic
    regions: New England Region (Massachusetts/Connecticut/New Hampshire/Vermont/Rhode
    Island); Midatlantic Region (Greater Philadelphia/Delaware Valley/New Jersey);
    and Chesapeake/Allegheny Region (Southern Delaware/Eastern Shore of Maryland/Baltimore,
    Maryland/Washington D.C./Virginia/West Virginia/Western Pennsylvania/North
    Carolina).





GHCs
    services focus on the primary medical, physical and behavioral issues facing
    the more medically complex elderly. Through the talents of its nurses, physicians,
    therapists and other members of the interdisciplinary team, GHC believes that
    its holistic approach to meeting the complex needs facing the elderly has
    resulted in a high occupancy of available beds and enhanced quality payor
    mix.





GHC employs
    physicians, physician assistants and nurse practitioners who are primarily
    involved in providing medical direction and/or direct patient care. The emphasis
    on physician leadership is a strength that differentiates GHC from other long-term
    care companies. Its physician executives are administratively and clinically
    accountable for clinical care and quality improvement. The nursing center
    medical directors are dually accountable to the administrator and the physician
    executive. This medical staff structure allows for significant involvement
    of physicians at all levels of the organization thus ensuring that an emphasis
    on quality care is maintained. GHC maintains a corporate quality improvement
    program to enhance and continuously improve care provided in each center.





GHC has established
    and actively markets programs for the elderly and other patients who require
    more complex levels of medical care. It focuses on clinically complex elderly
    patients who need extensive therapies and treatments to stabilize health problems
    before returning home or transitioning into a permanent long-term care setting.
    Over 90% of patients come to GHCs centers directly from an acute hospital
    stay and have four or more health problems that affect their ability to carry
    out everyday activities. Half of the elders who enter GHCs centers for
    post-acute care are discharged within 27 days while the average stay for a
    long-term care patient is 174 days.





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Private insurance companies and other
    third-party payors, including certain state Medicaid programs, have recognized
    that treating patients requiring complex medical care in centers such as those
    GHC operates is a cost-effective alternative to treatment in an acute care
    hospital. GHC provides high acuity care at rates that it believes are substantially
    below the rates typically charged by acute care hospitals for comparable services.





The following
    table reflects GHCs average number of beds in service and its average
    occupancy levels for the periods presented. The average beds in service have
    not been adjusted to exclude discontinued operations, however, the owned and
    leased facility occupancy data does exclude discontinued operations:





|                                                      |  | Years
          Ended September 30, |       
|----------------------------------------------------- |  | ----------------------------------- | ------
|                                                      |  |                                     |       
|                                                      |  | 2003                                |       
|                                                      |  |                                     |       
|Average
          Beds in Service                     |  |                                     |       
|Owned
          and Leased Facilities                 |  |                                     | 22,758
|Managed
          and Jointly-Owned Facilities        |  |                                     | 6,320 
|Occupancy
          Based on Average Beds in Service: |  |                                     |       
|Owned
          and Leased Facilities                 |  |                                     | 91    
|Managed
          and Jointly-Owned Facilities        |  |                                     | 92    




The following
    table reflects the payor mix of inpatient services revenues for the periods
    presented, and has not been adjusted to exclude discontinued operations:





|                                |  | Years
          Ended September 30, |    
|------------------------------- |  | ----------------------------------- | ---
|                                |  |                                     |    
|                                |  | 2003                                |    
|                                |  |                                     |    
|Medicaid                        |  |                                     | 50 
|Medicare                        |  |                                     | 28 
|Private
          pay and other |  |                                     | 22 
|                                |  |                                     |    
|                                |  |                                     | 100
|                                |  |                                     |    




See   Genesis HealthCare
    Corporation  Revenue Sources and   Genesis HealthCare
    Corporation  Government Regulation.





Rehabilitation
    Therapy





GHC provides
    an extensive range of rehabilitation therapy services, including speech pathology,
    physical therapy and occupational therapy in all of its eldercare regional
    market concentrations. These services are provided by approximately 4,200
    licensed rehabilitation therapists and assistants employed or contracted by
    GHC at substantially all of the eldercare centers it operates, as well as
    by contract to healthcare facilities operated by others and through any one
    of GHCs 13 certified outpatient rehabilitation agencies.





Other Services





GHC provides
    management services to 57 eldercare centers and transitional care units, which
    are the eldercare centers jointly-owned and/or managed referred to in 
     Genesis HealthCare Corporation  Inpatient Services above,
    pursuant to management agreements that provide generally for the day-to-day
    responsibility for the operation and management of the centers. In turn, GHC
    receives management fees, depending on the agreement, computed as an overall
    fixed fee, a fixed fee per customer, a percentage of net revenues of the center
    plus an incentive fee, or a percentage of gross revenues of the center with
    some incentive clauses. The management agreements, including renewal option
    periods, are scheduled to terminate between 2003 and 2018, 34 of which are
    scheduled to terminate within the next twelve months. GHC expects to renew
    a majority of the terminating contracts.





GHC also provides
    an array of other specialty medical services in certain parts of its eldercare
    network, including portable x-ray and other diagnostic and respiratory health
    services.





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Revenue Sources





GHC receives
    revenues from Medicare, Medicaid, private insurance, self-pay residents, other
    third-party payors and long-term care facilities that utilize its rehabilitation
    therapy services and other service related businesses.





The sources
    and amounts of GHCs revenues are determined by a number of factors,
    including licensed bed capacity and occupancy rates of its eldercare centers,
    the mix of patients and the rates of reimbursement among payors. Likewise,
    payment for ancillary medical services, including services provided by GHCs
    rehabilitation therapy services business, vary based upon the type of payor
    and payment methodologies. Changes in the case mix of the patients as well
    as payor mix among Medicare, Medicaid and private pay can significantly affect
    GHCs profitability.





Medicare
    and Medicaid





The Health
    Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act),
    or Medicare, is a federally funded and administered health insurance
    program for individuals aged 65 and over or for certain individuals who are
    disabled. The Medicare program consists of three parts: (i) Medicare Part
    A, which covers, among other things, inpatient hospital, skilled long-term
    care, home healthcare and certain other types of healthcare services; (ii)
    Medicare Part B, which covers physicians services, outpatient services
    and certain items and services provided by medical suppliers; and (iii) a
    managed care option for beneficiaries who are entitled to Medicare Part A
    and enrolled in Medicare Part B, known as Medicare+Choice or Medicare Part
    C. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization
    Act of 2003, or the Medicare Modernization Act, passed by Congress on November
    25, 2003 and signed into law by the President on December 8, 2003, the Medicare+Choice
    program will be subsumed into a new Medicare supplemental product called Medicare
    Advantage by 2006.  Under Medicare Part B, we are entitled to payment
    for products that replace a bodily function (i.e., ostomy supplies), home
    medical equipment and supplies and a limited number of specifically designated
    prescription drugs.  The Medicare program is currently administered by
    fiscal intermediaries (for Medicare Part A and some Medicare Part B services)
    and carriers (for Medicare Part B) under the direction of the Centers for
    Medicare and Medicaid Services, or CMS, the Medicare and Medicaid oversight
    division of the United States Department of Health and Human Services, or
    DHHS.





Medicaid (Title
    XIX of the Social Security Act) is a federal-state matching fund program,
    whereby the federal government, under a needs-based formula, matches funds
    provided by the participating states for medical assistance to medically
    indigent persons. The programs are administered by the applicable state
    welfare or social service agencies under federal rules. Although Medicaid
    programs vary from state to state, traditionally they have provided for the
    payments, up to established limits, at rates determined in accordance with
    each states regulations. The federal Medicaid statute specifies a variety
    of requirements that the state plan must meet, including requirements relating
    to eligibility, coverage of services, payment and administration. For patients
    eligible for Medicaid, we bill the individual state Medicaid program or, in
    certain circumstances, the state designated managed care or other similar
    organizations. The reimbursement rates for pharmacy services under Medicaid
    are determined on a state-by-state basis subject to review by the Centers
    for Medicare and Medicaid Services and applicable federal law. Federal regulations
    and the regulations of certain states establish upper limits for
    reimbursement for certain prescription drugs under Medicaid. In most states,
    pharmacy services are priced at the lower of usual and customary
    charges or cost (which generally is defined as a function of average wholesale
    price and may include a profit percentage) plus a dispensing fee. Most states
    establish a fixed dispensing fee that is adjusted to reflect associated costs
    on an annual or less frequent basis.  The payment methodology for certain
    forms of prescription drugs and biologicals reimbursed under the Medicaid
    program may be subject to changes under the Medicare Modernization Act. 
    See   Genesis HealthCare Corporation  Laws
    Affecting Revenues.





State Medicaid
    programs generally have long-established programs for reimbursement which
    have been revised and refined over time and have not had a material adverse
    effect on the pricing policies or receivables collection for long-term care
    facility pharmacy services. Any future changes in such reimbursement programs
    or in regulations relating thereto, such as reductions in the allowable reimbursement
    levels or the timing of processing of payments, could adversely affect our
    business. The annual increase in the federal share could vary from state to
    state based on a variety of factors. Such provisions, if ultimately signed
    into law, could adversely affect our business. Additionally, any shift from
    Medicaid to state designated managed care could adversely affect our business
    due to historically lower reimbursement rates for managed care.





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Moreover,
    Medicare and Medicaid are subject to statutory and regulatory changes, retroactive
    rate adjustments, administrative rulings and government funding restrictions,
    all of which may materially affect the timing and/or levels of payments to
    us for our services.





We are subject
    to periodic audits by the Medicare and Medicaid programs, which have various
    rights and remedies against us if they assert that we have overcharged the
    programs or failed to comply with program requirements. These rights and remedies
    may include requiring the repayment of any amounts alleged to be overpayments
    or in violation of program requirements, or making deductions from future
    amounts due to us. Such programs may also impose fines, criminal penalties
    or program exclusions. Other third-party payor sources also reserve rights
    to conduct audits and make monetary adjustments.





Laws Affecting
    Revenues





Congress has
    enacted three major laws during the past six years that have significantly
    altered payment for skilled nursing facilities and medical ancillary services.
    The Balanced Budget Act, signed into law on August 5, 1997, reduced federal
    spending on Medicare and Medicaid programs. The Medicare Balanced Budget Refinement
    Act, enacted in November 1999, addressed a number of the funding difficulties
    caused by the Balanced Budget Act. The Benefits Improvement and Protection
    Act, enacted on December 15, 2000, further modified the law and restored additional
    funding. The following is a brief summary of these laws and an overview of
    the impact of these enactments on us. For a discussion of the effect of laws
    upon our business, see Risk Factors.





Under the
    Balanced Budget Act, participating skilled nursing facilities are reimbursed
    under a prospective payment system for inpatient Medicare covered services.
    The prospective payment system commenced with a facilitys first cost
    reporting period beginning on or after July 1, 1998. Under the prospective
    payment system, skilled nursing facilities are paid a predetermined amount
    per patient, per day or per diem based on the anticipated costs
    of treating patients. The per diem rate is determined by classifying each
    patient into one of 44 resource utilization groups using the information gathered
    as a result of each patients minimum data set assessment. There is a
    separate per diem rate for each of the resource utilization group classifications.
    The per diem rate also covers rehabilitation and non-rehabilitation ancillary
    services. The law phased in the prospective payment system over a three-year
    period.





As implemented
    by the Centers for Medicare and Medicaid Services, the prospective payment
    system has had an adverse impact on the Medicare revenues of many skilled
    nursing facilities. There have been three primary problems. First, the base
    year calculations understate costs. Second, the market basket index used to
    trend payments forward does not adequately reflect market experience. Third,
    the resource utilization group case mix allocation is not adequately predictive
    of the costs of care for patients, and does not equitably allocate funding,
    especially for non-therapy ancillary services.





In November
    1999, the Balanced Budget Refinement Act was passed in Congress. This enactment
    provided relief for certain reductions in Medicare reimbursement caused by
    the Balanced Budget Act. For covered skilled nursing facility services furnished
    on or after April 1, 2000, the Medicare per diem rate was increased by 20%
    for 15 resource utilization group payment categories, which we refer to as
    payment add-ons. While this provision was initially expected to
    adjust payment rates for only six months, the Centers for Medicare and Medicaid
    Services withdrew proposed resource utilization group refinement rules. These
    payment add-ons will continue until the Centers for Medicare and Medicaid
    Services completes certain mandated recalculations of current resource utilization
    group weightings.





A number of
    provisions of the Balanced Budget Refinement Act and the Benefits Improvement
    and Protection Act, providing additional funding for Medicare participating
    skilled nursing facilities, expired on September 30, 2002 resulting in an
    approximate 10% reduction in the rates paid to us for providing services to
    Medicare patients. We refer to the expiration of the additional funding as
    the skilled nursing facility Medicare cliff. Effective October
    1, 2002, Medicare rates adjusted for the skilled nursing facility Medicare
    cliff were increased by a 2.6% annual market basket adjustment. For us, the
    net impact of these provisions adversely impacted annual revenue and EBITDA
    in fiscal 2003 by approximately $24.8 million.





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The final
    fiscal year 2004 prospective payment system rules for skilled nursing facilities
    became effective on October 1, 2003. The final rules enhance the reimbursement
    rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase
    in the annual update factor and a 3.26% upward adjustment correcting previous
    forecast errors). These changes are estimated to increase Medicare payment
    rates per patient day by $19. The final rules also provide for the continuation
    through fiscal year 2004 of certain payment add-ons that were authorized in
    the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.





The recently
    enacted Medicare Modernization Act suspended application of the therapy caps,
    as of December 8, 2003 through calendar year 2005.  The therapy caps
    in place effective September 1, 2003, imposed payment limits to services provided
    by independent therapists as well as to those provided by outpatient rehabilitation
    facilities and other forms of rehabilitation agencies. The suspension does
    not have retroactive impact upon Medicare beneficiaries who exceeded their
    caps between September 1, 2003 and December 8, 2003.  The imposition
    of the therapy caps between September 1, 2003 and December 8, 2003 may have
    the effect of reducing annual net revenue and EBITDA in GHCs fiscal
    year 2004.  Extension of the moratorium removes a significant financial
    threat to our therapy business for the short term.  Previously, GHC estimated
    that the therapy caps would reduce its annual net revenues by approximately
    $18.9 million and EBITDA by approximately $4.9 million.  The new law
    also assures at least a positive 1.5% increase in the therapy fee schedule
    for each of the next two years through calendar year 2005.  No assurances
    can be made or given that Congress will extend the moratorium on application
    of the therapy caps beyond 2005.





The Balanced
    Budget Act of 1997 repealed the Boren Amendment federal payment
    standard for payments to Medicaid nursing facilities, effective October 1,
    1997. This repeal gave the states greater latitude in setting payment rates
    for nursing facilities. Budget constraints and other factors have caused some
    states to reduce Medicaid reimbursement to nursing facilities and states may
    continue to reduce or delay payments to nursing facilities in the future.
    The law also granted the states greater flexibility in establishing Medicaid
    managed care programs without the need to obtain a federal waiver. Although
    these waiver programs generally exempted institutional care, including nursing
    facility and institutional pharmacy services, these programs could ultimately
    change the Medicaid reimbursement system for long-term care. These changes
    could include changing reimbursement for pharmacy services from fee-for-service,
    or payment per procedure or service rendered, to a fixed amount per person
    utilizing managed care negotiated or capitated rates.





The Benefits
    Improvement and Protection Act of 2000 enacted a phase out of intergovernmental
    transfer transactions by states whereby states would artificially inflate
    the payments to certain public facilities to increase federal matching funds. 
    This action may have had the effect of reducing federal support for a number
    of state Medicaid programs. The reduced federal payments may impact aggregate
    available funds requiring states to further contain payments to providers.
    We operate in several of the states that have experienced or will experience
    a contraction of federal matching funds.





The recent
      economic downturn is having a detrimental affect on state revenues in most
      jurisdictions. Budget shortfalls range from 4% to 5% of outlays upwards
      to
    20% of outlays in a handful of states. Historically these budget pressures
      have translated into reductions in state spending. Given that Medicaid
      outlays
    are a significant component of state budgets, we expect continuing cost containment
      pressures on Medicaid outlays for skilled nursing facilities in the states
      in which we operate. In each of the major states where we provide services,
      we are working with trade groups, consultants and government officials
      to
    responsively address the particular funding issues.





The plight
    of state governments has helped to elevate issues related to Medicaid onto
    the national agenda. Earlier this year, Congress passed temporary relief to
    states providing a 2.9% temporary increase in the Federal Medicaid Assistance
    Percentage for five quarters. This assistance is estimated to provide states
    $10 billion in Medicaid relief.





Late in November
    2003, the General Accounting Office released a study examining how nursing
    home reimbursement has been affected by the fiscal crisis being experienced
    by a number of states. The report documents that most states have sustained
    their reimbursement commitments. States have tapped reserves, tobacco settlement
    monies and other funding strategies including provider assessments to meet
    their obligations. While the data does not evaluate the adequacy of state
    Medicaid payments for nursing facility services, the analysis does suggest
    that under current difficult conditions states are honoring their commitments.





It is not
    possible to quantify fully the effect of legislative changes, the interpretation
    or administration of such legislation or any other governmental initiatives
    on our business and the business of our principal customers.





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Accordingly, there can be no assurance
    that the impact of any future healthcare legislation will not further adversely
    affect our business. There can be no assurance that payments under governmental
    and private third-party payor programs will be timely, will remain at levels
    comparable to present levels or will, in the future, be sufficient to cover
    the costs allocable to patients eligible for reimbursement pursuant to such
    programs. Our financial condition and results of operations may be affected
    by the reimbursement process, which in the healthcare industry is complex
    and can involve lengthy delays between the time that revenue is recognized
    and the time that reimbursement amounts are settled.





While Congress
    has, through the Medicare Modernization Act, extended the moratorium on payment
    caps on Medicare Part B rehabilitation therapy services, the federal government
    and state governments continue to focus on efforts to curb spending on healthcare
    programs such as Medicare and Medicaid. We cannot at this time predict the
    extent to which these proposals will be adopted or, if adopted and implemented,
    what effect, if any, such proposals and existing new legislation will have
    on us. Efforts to impose reduced allowances, greater discounts and more stringent
    cost controls by government and other payors are expected to continue.





See 
     NeighborCare, Inc.  Laws Affecting Revenues.





Government Regulation





General





GHCs
    business is subject to extensive federal, state and, in some cases, local
    regulation with respect to, among other things, participation in the Medicare
    and Medicaid programs, licensure, certification and government reimbursement.
    For GHCs eldercare centers, these regulations relate, among other things,
    to the adequacy of physical plant and equipment, qualifications of personnel,
    standards of care, government reimbursement and operational requirements.
    Compliance with such regulatory requirements, as interpreted and amended from
    time to time, can increase operating costs and thereby adversely affect the
    financial viability of GHCs business. Failure to comply with current
    or future regulatory requirements could also result in the imposition of various
    remedies including fines, restrictions on admission, denial of payment for
    all or new admissions, the revocation of licensure, decertification, imposition
    of temporary management or the closure of the facility.





Licensure,
    Certification and Regulation





All of GHCs
    eldercare centers and healthcare services, to the extent required, are currently
    licensed under applicable law. All skilled nursing centers and healthcare
    services, or practitioners providing the services therein, are certified or
    approved as providers under one or more of the Medicaid and Medicare programs.
    Generally, assisted living centers are not eligible to be certified under
    Medicare or Medicaid. Licensing, certification and other applicable standards
    vary from jurisdiction to jurisdiction and are revised periodically. State
    and local agencies survey all skilled nursing centers on a regular basis to
    determine whether such centers are in compliance with governmental operating
    and health standards and conditions for participation in government sponsored
    third-party payor programs. GHC believes that its eldercare centers and other
    sites of service are in substantial compliance with the various Medicare,
    Medicaid and state regulatory requirements applicable to them. However, in
    the ordinary course of its business, GHC receives notices of deficiencies
    for failure to comply with condition of participation in the Medicare and
    Medicaid programs. GHC reviews such notices and takes appropriate corrective
    action. In these cases, GHC submits its plan to bring the center into compliance
    with regulations which must be accepted by the reviewing agency. In some cases,
    the reviewing federal or state agency may take various adverse actions against
    a provider, including but not limited to:





| |  | the
          imposition of fines;                                                                                                                                                     
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | suspension
          of payments for new or all admissions to the center; and                                                                                                          
| |  | in
          extreme circumstances, decertification from participation in the Medicare
          or Medicaid programs and revocation of a centers or service sites
          license.




These actions
    may adversely affect a centers ability to continue to operate, ability
    to provide certain services, and/or eligibility to participate in the Medicare
    or Medicaid programs or to receive payments from other payors. Certain of
    GHCs centers have received notices that, as a result of certain alleged
    deficiencies, the federal and/or





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state agency was taking steps to
    impose remedies. Additionally, actions taken by one center or service site
    may subject other centers or service sites under common control or ownership
    to adverse remedies.





All of GHCs
    skilled nursing centers participate in the Medicare and Medicaid programs.
    Both initial and continuing qualifications of a skilled nursing center to
    participate in such programs depend upon many factors including accommodations,
    equipment, services, patient care, safety, personnel, physical environment,
    and adequate policies, procedures and controls.





During 2002,
    the Centers for Medicare and Medicaid Services piloted a new nursing home
    quality initiative in six states. GHCs facilities cooperated in these
    initiatives to generate improved reporting and public awareness. Based on
    the success of the pilot program, the Centers for Medicare and Medicaid Services
    has rolled out the program nationwide. In addition to the changes being driven
    by public agencies, a number of nursing home companies in conjunction with
    several national trade associations have signed a quality covenant. This covenant
    establishes quality benchmarks the signing companies are striving to obtain.





Several states
    in which GHC operates have adopted certificate of need or similar laws which
    generally require that a state agency approve certain acquisitions and determine
    that the need for certain bed additions, new services, and capital expenditures.
    State approvals are generally issued for a specified maximum expenditure and
    require implementation of the proposal within a specified period of time.
    Failure to obtain the necessary state approval can result in:





| |  | the
          inability to provide the service;                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                            
| |  | the
          inability to operate the centers;                                                                            
| |   |                                                                                                                            
| |  | the
          inability to complete the acquisition, addition or other change; and                                         
| |   |                                                                                                                            
| |  | the
          imposition of sanctions or adverse action on the centers license
          and adverse reimbursement action.




During recent
    years several states have passed legislation altering their certificate of
    need requirements. Virginia is expected to phase out its certificate of need
    requirement and Maryland is studying a similar action. These changes are not
    expected to materially alter our business opportunities.





Laws Affecting
    Billing and Business Practices





GHC is also
    subject to federal and state laws that govern financial and other arrangements
    between healthcare providers. These laws often prohibit certain direct and
    indirect payments or fee-splitting arrangements between healthcare providers
    that are designed to induce the referral of patients to, or the recommendation
    of, a particular provider for medical products and services. These laws include:





| |  | the
          anti-kickback provisions of the federal Medicare and Medicaid
          programs, which prohibit, among other things, knowingly and willfully
          soliciting, receiving, offering or paying any remuneration (including
          any kickback, bribe or rebate) directly or indirectly in return for
          or to induce the referral of an individual to a person for the furnishing
          or arranging for the furnishing of any item or service for which payment
          may be made in whole or in part under Medicare or Medicaid. Penalties
          may include imprisonment, fines, exclusion
          from participation in the Medicare and Medicaid programs and loss of
          license; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | the
          Stark laws which prohibit, with limited exceptions, the
          referral of patients by physicians for certain services, including home
          health services, physical therapy and occupational therapy, to an entity
          in which the physician has a financial interest. Penalties may include
          denial of payment, mandatory refund of prior payment, civil monetary
          penalties and exclusion from participation in the Medicare and Medicaid
          programs.                                                                                                                                                                                                                           




In addition,
  some states restrict certain business relationships between physicians and other
  providers of healthcare services. Possible sanctions for violation of any of
  these restrictions or prohibitions include loss of licensure or eligibility
  to participate in reimbursement programs and civil and criminal penalties. These
  laws vary from state to state, are often complex and have seldom been interpreted
  by the courts or regulatory agencies. From time to time, GHC has sought guidance
  as to the interpretation of these laws, however, there can be no assurance that
  such laws will ultimately be interpreted in a manner consistent with GHCs practices.





There have
    also been a number of recent federal and state legislative and regulatory
    initiatives concerning reimbursement under the Medicare and Medicaid programs.
    During the past few years, the Department of Health and Human Services has
    issued a series of voluntary compliance guidelines. These compliance guidelines
    provide guidance on acceptable practices. Skilled nursing facility services
    and durable medical equipment, prosthetics, orthotics, supplies, and supplier
    performance practices have been among the services addressed in these





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publications. GHCs Corporate
    Integrity Program is working to assure that its practices conform to regulatory
    requirements. The Department of Health and Human Services also issues fraud
    alerts and advisory opinions. For example, directives concerning double billing,
    home health services, the provision of medical supplies to nursing facilities,
    and most recently, contractual joint venture relationships have been released.
    It is anticipated that areas addressed by these advisories may come under
    closer scrutiny by the government. While GHC has reviewed government guidance,
    it cannot accurately predict the impact of any such initiatives.





Laws Governing
    Health Information





GHC faces
    additional federal requirements that mandate major changes in the transmission
    and retention of health information. The Health Insurance Portability and
    Accountability Act of 1996 was enacted to ensure, first, that employees can
    retain and at times transfer their health insurance when they change jobs,
    and secondly, to simplify healthcare administrative processes. This simplification
    includes expanded protection of the privacy and security of personal medical
    data and requires the adoption of standards for the exchange of electronic
    health information. Among the standards that the Department of Health and
    Human Services has or may adopt pursuant to the Health Insurance Portability
    and Accountability Act are standards for the following: electronic transactions
    and code sets, unique identifiers for providers, employers, health plans and
    individuals, security and electronic signatures, privacy, and enforcement.





Although
      HIPAA was intended to ultimately reduce administrative expenses and burdens
      faced within the healthcare industry,
    GHC believes that implementation of this law will result in additional costs.
      GHC has established a HIPAA
    task force consisting of clinical, financial and informational services professionals
    focused on HIPAA compliance.





The Department
    of Health and Human Services has released three rules to date mandating the
    use of new standards with respect to certain healthcare transactions and health
    information. The first rule establishes uniform standards for common healthcare
    transactions, including:





| |  | healthcare
          claims information;                             
| | - | ---------------------------------------------------------------------
| |   |                                                                      
| |  | plan
          eligibility, referral certification and authorization;
| |   |                                                                      
| |  | claims
          status;                                             
| |   |                                                                      
| |  | plan
          enrollment and disenrollment;                         
| |   |                                                                      
| |  | payment
          and remittance advice;                             
| |   |                                                                      
| |  | plan
          premium payments; and                                 
| |   |                                                                      
| |  | coordination
          of benefits.                                  




Second, DHHS
      has released standards relating to the privacy of individually identifiable
      health information. These standards
    not only require GHCs compliance with rules governing the use and disclosure
     of protected health information, but they also require it to impose those

    rules, by contract, on any business associate to whom GHC discloses information. Third, DHHS has released rules governing the security of health information maintained or transmitted in electronic form.





DHHS finalized
      the transaction standards on August 17, 2000. DHHS issued the privacy standards
    on December 28, 2000, and, after certain delays, they became effective on
      April 14, 2001, with a compliance date of April 14, 2003. On February 20,
      2003, DHHS issued final rules governing
      the security of health information. This rule specifies a series of administrative,
      technical and physical security procedures to assure the confidentiality
      of
    electronic protected health information. Affected parties will have approximately
      two years to be fully compliant. Sanctions for failing to comply with HIPAA
      health information practices
    provisions include criminal penalties and civil sanctions.





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At this time, GHC management anticipates
      that GHC will be able to fully comply with those HIPAA requirements
      that have been adopted. As part of GHCs Corporate Integrity Program, GHC
	  will monitor its compliance with HIPAA. GHCs compliance and privacy
      officer will be responsible for administering the Corporate Integrity Program
      which includes HIPAA related compliance. However, GHC management cannot at
      this time estimate the cost of compliance, nor can GHC management estimate
      the cost of compliance with standards that have not yet been finalized
  by the DHHS.


It is not
	       possible to fully quantify the effect of recent legislation, potential
	      legislative
      or regulatory changes, the interpretation or administration of such legislation
	      or any other governmental initiatives on GHC’s business. Accordingly,
	      there can be no assurance that the impact of these changes or any future
	      healthcare
      legislation will notadversely
      affect GHC’s business.
        There can be no assurance that payments under governmental and private
        third-party
      payor programs will be timely, will remain at levels comparable to present
        levels or will, in the future, be sufficient to cover the costs allocable
        to patients eligible for reimbursement pursuant to such programs. GHC’s
        financial condition and results of operations may be affected by the
        reimbursement process,
      which in GHCs industry is complex and can involve lengthy delays between
        the time that revenue is recognized and the time that reimbursement amounts
        are
      settled.


Corporate Integrity Program





GHCs
    Corporate Integrity Program was developed to assure that it strives to achieve
    its goal of providing a high level of care and service in a manner consistent
    with all applicable state and federal laws and regulations and GHCs
    internal standard of conduct. This program is intended to allow personnel
    to prevent, detect and resolve any conduct or action that fails to satisfy
    all applicable laws and GHCs standard of conduct.





GHC has a
    corporate compliance officer responsible for administering the Corporate Integrity
    Program. The corporate compliance officer, with the approval of the chief
    executive officer or the board of directors, may use any of GHCs resources
    to evaluate and resolve compliance issues. The corporate compliance officer
    reports significant compliance issues to the board of directors.





GHC established
    the Corporate Integrity Program hotline, which offers a toll-free number available
    to all of its employees to report compliance issues, including any alleged
    privacy violations under the Health Insurance Portability and Accountability
    Act. All calls reporting alleged non-compliance are logged, investigated,
    addressed and remedied by appropriate company officials.





The corporate
    integrity subcommittee was established to ensure a mechanism exists for GHC
    to monitor compliance issues. The corporate integrity subcommittee members
    are senior members of the finance, human resources, information systems, legal,
    clinical practices, internal audit and operations departments.





Periodically,
    GHC receives information from the Department of Health and Human Services
    regarding individuals and providers that are excluded from participation in
    Medicare, Medicaid and other federal healthcare programs. Providers may include
    medical directors, attending physicians, vendors, consultants and therapists.
    On a monthly basis, management compares the information provided by the Department
    of Health and Human Services to databases containing providers and individuals
    doing business with GHC. Any potential matches are investigated and any necessary
    corrective action is taken to ensure GHC ceases doing business with that provider
    and/or individual.





Personnel





GHC employs
    over 35,000 people. It has 57 facilities that are covered by, or are negotiating,
    collective bargaining agreements. The agreements expire at various dates through
    2006 and cover approximately 4,700 employees. GHC believes that its relationship
    with its employees is generally good.





GHC and its
    industry continue to experience shortages in qualified professional clinical
    staff. GHC competes with other healthcare providers and with non-healthcare
    providers for both professional and non-professional employees. As the demand
    for these services continually exceeds the supply of available and qualified
    staff, GHC and its competitors have been forced to offer more attractive wage
    and benefit packages to these professionals and to utilize outside contractors
    for these services at premium rates. Furthermore, the competitive arena for
    this shrinking labor market has created high turnover among clinical professional
    staff as many seek to take advantage of the supply of available positions,
    each offering new and more attractive wage and benefit packages. In addition
    to the wage pressures inherent in this environment, the cost of training new
    employees amid the high turnover rates has created added pressure on GHCs
    operating margins. Lastly, increased attention to the quality of care provided
    in skilled nursing facilities has caused several states to mandate and other
    states to consider mandating minimum staffing laws that further increase the
    gap between demand for and supply of qualified individuals and lead to higher
    labor costs. While GHC has been able to retain the services of an adequate
    number of qualified personnel to staff its facilities and sites of service
    appropriately and maintain its standards of quality care, there can be no
    assurance that continued shortages will not affect its ability to attract
    and maintain an adequate staff of qualified healthcare





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personnel in the future. A lack of
    qualified personnel at a facility could result in significant increases in
    labor costs and an increased reliance on expensive temporary nursing agencies
    at such facility or otherwise adversely affect operations at such facility.
    Any of these developments could adversely affect GHCs operating results
    or expansion plans.





In recognition
    of the competitive nature of nurse recruitment and retention, GHC expects
    to create reward, recognition and professional development programs for nurses.
    Shared Governance, a structure to support the participation of nurses in the
    development and implementation of policies, projects and processes which affect
    their practice has been instituted. Additionally, STEPP (Steps To Excellence
    in Professional Practice), a clinical advancement program which allows nurses
    to receive recognition and compensation for clinical expertise, has been implemented.





Marketing





Marketing
    for eldercare centers is focused at the local level and is conducted primarily
    by a dedicated regional marketing staff that calls on referral sources such
    as hospitals, hospital discharge planners, doctors and various community organizations.
    In addition to those efforts, GHCs marketing objective is to maintain
    public awareness of its eldercare centers and their capabilities. GHC takes
    advantage of its regional concentrations in its marketing efforts, where appropriate,
    through consolidated marketing programs, which benefit more than one center.
    Toll-free regional phone lines assist the marketing staff and direct referral
    sources, which speeds admissions by automated tracking of bed availability
    and specialty care capabilities for each of GHCs centers and all of
    its affiliated centers.





GHC markets
    its rehabilitation therapy services, respiratory therapy and diagnostic services
    through a direct sales force which primarily calls on eldercare centers, hospitals,
    clinics and home health agencies.





Historically,
    GHC operated its core business under the name Genesis ElderCare. Its logos,
    trademarks and service marks are featured in print advertisements in publications
    serving the regional markets in which GHC operates. GHC is using advertising,
    including its toll free ElderCare lines, to promote its brand names in trade,
    professional and business publications and to promote services directly to
    consumers.





Competition





GHC competes
    with a variety of other companies in providing healthcare services. Certain
    competing companies have greater financial and other resources and may be
    more established in their respective communities than GHC is. Competing companies
    may offer newer or different centers or services than GHC and may thereby
    attract GHCs patients who are either presently residents of its eldercare
    centers or are otherwise receiving its healthcare services.





GHC operates
    eldercare centers in 13 states. In each market, GHCs eldercare centers
    may compete for patients with rehabilitation hospitals, subacute units of
    hospitals, skilled or intermediate nursing centers, and personal care or residential
    centers. Certain of these providers are operated by not-for-profit organizations
    and similar businesses that can finance capital expenditures on a tax-exempt
    basis or receive charitable contributions unavailable to GHC. In competing
    for patients, a centers local reputation is of paramount importance.
    Referrals typically come from acute care hospitals, physicians, religious
    groups, health maintenance organizations, the patients families and
    friends, and other community organizations.





Members of
    a patients family generally actively participate in the selection of
    an eldercare center. Competition for medically complex patients is intense
    among acute care hospitals with long-term care capability, rehabilitation
    hospitals and other specialty providers and is expected to remain so in the
    future. Important competitive factors include the reputation in the community,
    services offered, the appearance of a center, and the cost of services.





GHC competes
    in providing other healthcare services with a variety of different companies.
    Generally, this competition is regional and local in nature. The primary competitive
    factors in these businesses are similar to those in the inpatient services
    business and include reputation, the cost of services, the quality of clinical
    services, responsiveness to patient needs, and the ability to provide support
    in other areas such as third-party reimbursement, information management and
    patient record-keeping.





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Insurance





GHC has experienced
    an adverse effect on its operating cash flow due to an increase in the cost
    of certain of its insurance programs. Rising costs of eldercare malpractice
    litigation and losses stemming from these malpractice lawsuits and a constriction
    of insurers have caused many insurance carriers to raise the cost of insurance
    premiums or refuse to write insurance policies for skilled nursing facilities.
    Also, a tightening of the reinsurance market has affected property, auto and
    excess liability insurance carriers. Accordingly, the costs of all insurance
    premiums have increased.





This increase
    in insurance costs has prompted GHC to exit its otherwise profitable operations
    in the State of Florida. There is no assurance that liability exposure and
    the related costs of insurance will not migrate to other states.





Prior to June
    1, 2000, GHC purchased general and professional liability insurance coverage
    from various commercial insurers on a first dollar coverage basis. Beginning
    with the June 1, 2000 policy, GHC has purchased general and professional liability
    insurance coverage from a commercial insurer subject to per claim retentions.
    These retentions are insured by GHCs wholly-owned captive insurance
    company, Liberty Health Corp. Liberty Health Corp. is currently insuring GHCs
    workers compensation, auto and general and professional liability insurance
    retentions.





Workers
    compensation insurance has been maintained as statutorily required, and in
    certain jurisdictions for certain periods, GHC has qualified as exempt or
    self-insured. Most of the commercial insurance purchased is loss sensitive
    in nature. As a result, GHC is responsible for adverse loss development.





GHC provides
    several health insurance options to its employees, including a self-insured
    health plan and several fully-insured health maintenance organizations. Growth
    in health insurance premiums in the market has risen to 10% to 20% in recent
    years. GHCs business is a labor intensive business, and therefore health
    insurance costs represent a significant expense for it. In recent years, GHC
    has managed this increase with changes in program offerings and the shift
    in responsibility for cost increases to the employee. Continuing increases
    substantially in excess of inflation could have a negative impact on GHCs
    profitability, as further shifts in responsibility for these cost increases
    to the employee may not be possible.





GHC believes
    that adequate reserves are in place to cover the ultimate liability related
    to general and professional liability, workers compensation and health
    insurance claims exposure. However, there can be no assurance that any current
    or future claims will not exceed applicable insurance coverage.





Other





Environmental
    Matters





We are subject
    to various federal, state and local statutes and ordinances regulating the
    discharge of materials into the environment. Management does not believe that
    we will be required to expend any material amounts in order to comply with
    these laws and regulations or that compliance will materially affect our capital
    expenditures, results of operations or financial condition.





Reorganization





On October
    2, 2001, the effective date, we and The Multicare Companies, Inc., our 43.6%
    owned affiliate, consummated a joint plan of reorganization under Chapter
    11 of the Bankruptcy Code pursuant to a September 20, 2001 order entered by
    the U.S. Bankruptcy Court for the District of Delaware approving our joint
    plan of reorganization. We have been operating out of bankruptcy since October
    2, 2001.





See Part II,
    Item 7, Managements Discussion and Analysis of Financial Condition
    and Results of Operations  Certain Transactions and Events, of
    this Form 10-K for a further description of the nature and results of our
    reorganization and a description of other recent matters impacting our business
    and results of operations.





See Risk
    Factors.





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Available Information





Our Internet
    address is www.NeighborCare.com. During fiscal 2003, we made available free
    of charge on www.ghv.com and, as of December 1, 2003, we have made available
    free of charge on www.NeighborCare.com our annual report on Form 10K,
    quarterly reports on Form 10Q and current reports on Form 8K,
    and amendments to those reports filed or furnished pursuant to Section 13(a)
    or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically
    file such material with, or furnish it to, the SEC.





In addition,
    you may request a copy of these filings (excluding exhibits) at no cost by
    writing or telephoning us at the following address or telephone number:





|NeighborCare,
          Inc.           
|---------------------------------------
|7
          East Lee Street            
|Baltimore,
          MD 21202          
|Attention:
          Investor Relations
|Telephone:
          (410) 752-2600    




Information
    contained on our website is not part of this annual report on Form 10K
    and is not incorporated by reference in this document. Our website is and
    is only intended to be an inactive textual reference.





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|ITEM 2: | PROPERTIES
|------- | ----------




Pharmacy Sites of Service





The following
    table provides information by state as of December 2003 regarding the pharmacy
    service locations owned or leased by our NeighborCare pharmacy operations.





|State                    |  | Institutional
          
          Pharmacies |    | Medical
          Supply/ 
          Home Medical 
          Equipment Sites |  | Community-
          Based 
          Pharmacies |  | Total |    | Total
          Square 
          Feet | 
|------------------------ |  | --------------------------------------------- | -- | ---------------------------------------------------------------------------- |  | ------------------------------------------------ |  | ----- | -- | -------------------------------------- | 
|                         |  |                                               |    |                                                                              |  |                                                  |  |       |    |                                        | 
|Pennsylvania             |  |                                               | 6  |                                                                              |  | 3                                                |  |       | 2  |                                        | 
|Maryland                 |  |                                               | 6  |                                                                              |  | 5                                                |  |       | 27 |                                        | 
|New
          Jersey     |  |                                               | 4  |                                                                              |  | 1                                                |  |       | 1  |                                        | 
|Virginia                 |  |                                               | 4  |                                                                              |  | 1                                                |  |       | 2  |                                        | 
|Florida                  |  |                                               | 4  |                                                                              |  | 1                                                |  |       |   |                                        | 
|California               |  |                                               | 4  |                                                                              |  | 1                                                |  |       |   |                                        | 
|Indiana                  |  |                                               | 3  |                                                                              |  |                                                 |  |       |   |                                        | 
|Wisconsin                |  |                                               | 4  |                                                                              |  |                                                 |  |       |   |                                        | 
|Massachusetts            |  |                                               | 2  |                                                                              |  | 1                                                |  |       |   |                                        | 
|Illinois                 |  |                                               | 3  |                                                                              |  | 1                                                |  |       |   |                                        | 
|Texas                    |  |                                               | 2  |                                                                              |  |                                                 |  |       |   |                                        | 
|Rhode Island             |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|South
          Carolina |  |                                               | 3  |                                                                              |  |                                                 |  |       |   |                                        | 
|New Hampshire            |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|Oregon                   |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|Colorado                 |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|Ohio                     |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|West Virginia            |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|Oklahoma                 |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|Connecticut              |  |                                               | 1  |                                                                              |  | 1                                                |  |       |   |                                        | 
|Michigan                 |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|North Carolina           |  |                                               | 2  |                                                                              |  |                                                 |  |       |   |                                        | 
|Iowa                     |  |                                               | 2  |                                                                              |  |                                                 |  |       |   |                                        | 
|New York                 |  |                                               | 2  |                                                                              |  | 1                                                |  |       |   |                                        | 
|Washington               |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|Kentucky                 |  |                                               | 1  |                                                                              |  |                                                 |  |       |   |                                        | 
|                         |  |                                               |    |                                                                              |  |                                                  |  |       |    |                                        | 
|Totals                   |  |                                               | 62 |                                                                              |  | 16                                               |  |       | 32 |                                        | 




In addition
    to the locations listed in the table above, we also operate 20 on-site pharmacies
    which are located in customers facilities and serve only customers of
    that facility.





All but 3
    of these sites are leased. Our inability to make rental payments under these
    leases could result in loss of the leased property through eviction or other
    proceedings. Certain leases do not provide for nondisturbance from the
    mortgagee of the fee interest in the property and consequently these leases
    are subject to termination in the event that the mortgage is foreclosed following
    a default by the owner.





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Inpatient Sites of Service





The following
    table provides information by state as of December 2003 regarding the eldercare
    centers we owned, leased and managed. Included in the center count are 23
    stand-alone assisted living facilities with 2,133 units and 16 skilled nursing
    facilities with 550 assisted living units.





|                         |  | Wholly-Owned
          Centers |     | Leased
          Centers |  | Managed
          Centers (1) |  | Total |   
|------------------------ |  | ------------------------------ | --- | ------------------------ |  | ----------------------------- |  | ----- | --
|                         |  |                                |     |                          |  |                               |  |       |   
|State                    |  | Facilities                     |     | Beds                     |  | Facilities                    |  | Beds  |   
|                         |  |                                |     |                          |  |                               |  |       |   
|Pennsylvania             |  |                                | 31  |                          |  | 4,167                         |  |       | 9 
|New
          Jersey     |  |                                | 18  |                          |  | 2,654                         |  |       | 10
|Maryland                 |  |                                | 13  |                          |  | 1,613                         |  |       | 6 
|Massachusetts            |  |                                | 13  |                          |  | 1,742                         |  |       | 2 
|West
          Virginia  |  |                                | 14  |                          |  | 1,306                         |  |       | 5 
|Connecticut              |  |                                | 10  |                          |  | 1,511                         |  |       |  
|New
          Hampshire  |  |                                | 8   |                          |  | 814                           |  |       | 4 
|Delaware                 |  |                                | 5   |                          |  | 583                           |  |       |  
|Wisconsin                |  |                                | 2   |                          |  | 404                           |  |       |  
|Virginia                 |  |                                | 3   |                          |  | 367                           |  |       | 1 
|Rhode
          Island   |  |                                | 3   |                          |  | 373                           |  |       |  
|North
          Carolina |  |                                |    |                          |  |                              |  |       |  
|Vermont                  |  |                                | 3   |                          |  | 314                           |  |       |  
|                         |  |                                |     |                          |  |                               |  |       |   
|Total                    |  |                                | 123 |                          |  | 15,848                        |  |       | 37




|(1) | Managed
          facilities include 22 properties with 3,086 beds that are jointly-owned
          by us and independent third-parties. On a weighted average basis, we
          have an approximate 22% ownership interest in our jointly-owned properties.
          Also included in managed centers are 16 transitional care
          units with 412 beds located in hospitals principally in the Commonwealth
          of Massachusetts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Included in
    the total centers listed above are two facilities with 404 beds located in
    the State of Wisconsin that have been identified as held for sale.





We believe
    that our physical properties are well maintained and are in a suitable condition
    for the conduct of our business.





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|ITEM 3: | LEGAL
          PROCEEDINGS
|------- | ---------------------------




We are a
      party  to litigation arising in the ordinary course of business. See Cautionary
       Statements Regarding Forward-Looking Statements.





U.S. ex rel Scherfel v. Genesis
    Health Ventures et al.





In this action,
    brought in United States District Court for the District of New Jersey on
    March 16, 2000, the plaintiff alleges that a pharmacy purchased by NeighborCare
    failed to process Medicaid credits for returned medications. The allegations
    are vaguely alleged for other jurisdictions. While the action was under seal
    in United States District Court, we fully cooperated with the Department of
    Justices evaluation of the allegations. On or about March 2001, the
    Department of Justice declined to intervene in the suit and prosecute the
    allegations. The U.S. District court action is no longer under seal but remains
    administratively stayed pending resolution of the bankruptcy issues.





The plaintiff
    filed a proof of claim in our bankruptcy proceedings initially for approximately
    $650 million and subsequently submitted an amended claim in the amount of
    approximately $325 million. We believe the allegations have no merit and objected
    to the proof of claim. In connection with an estimation of the proof of claim
    in the bankruptcy proceeding, we filed a motion for summary judgment urging
    that the claim be estimated at zero. On or about January 24, 2002, the U.S.
    Bankruptcy Court for the district granted Debtors motion and estimated
    the claim at zero.





On or about
    February 11, 2002, the plaintiff appealed the bankruptcy courts granting
    of summary judgment to the U.S. District Court in Delaware and sought an injunction
    preventing the distribution of assets according to the plan of reorganization.
    The injunction was subsequently denied by the U.S. District Court for several
    reasons, including that the plaintiff was unlikely to succeed on the merits.
    When the injunction was denied by the U.S. District Court, the assets previously
    reserved for the plaintiffs claim were distributed in accordance with
    the plan of reorganization. On March 27, 2003, the U.S. District Court denied
    the plaintiffs appeal and upheld the summary judgment decision rendered
    by the United States Bankruptcy Court. On or about April 25, 2003, the plaintiff
    filed an appeal to the Third Circuit Court of Appeals. The appeal is currently
    pending with the Third Circuit and it is most likely to be heard by the Court
    of Appeals in 2004.





The Company
    believes that the settlement of this matter will not be significant to the
    results of operations or financial condition of the Company.





Pending DEA Investigation





In August
    2001, and March 2002, our pharmacy located in Colorado reported missing inventory
    and potential diversion to the Drug Enforcement Administration (DEA),
    the local police and the Colorado Board of Pharmacy. As a result of the pharmacy
    reporting these incidents, the DEA commenced an audit of the pharmacys
    operations. Under the Controlled Substance Act the government may seek the
    potential value of the inventory diverted as well as other damages. The Civil
    Division of the U.S. Attorneys Office for the District of Colorado has
    advised us that there is potential civil liability relating to the violations
    of the Controlled Substance Act. The Company has cooperated with all requests
    for information, including making its personnel and documents available to
    the government. The government and the Company are currently in discussions
    regarding the allegations.





The Company
    believes that the settlement of this matter will not be significant to the
    results of operations or financial condition of the Company.





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|ITEM 4: | SUBMISSION
          OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | -------------------------------------------------------------




There were
    no matters submitted to a vote of shareholders during the fourth quarter of
    fiscal 2003.





|ITEM 4A: | EXECUTIVE
          OFFICERS OF THE REGISTRANT
|-------- | ----------------------------------------------




The following
    table sets forth certain information with respect to our executive officers
    following the spin-off:





|Name                                 |  | Age |  | Position                                                                                    
|------------------------------------ |  | --- |  | --------------------------------------------------------------------------------------------
|                                     |  |     |  |                                                                                             
|John
          J. Arlotta            |  | 54  |  | Chairman,
          President and Chief Executive Officer                                   
|Robert
          A. Smith            |  | 55  |  | Chief
          Operating Officer                                                           
|John
          L. Kordash            |  | 61  |  | Executive
          Vice President and Assistant to the Chairman and Chief Executive Officer
|Richard
          W. Sunderland, Jr. |  | 43  |  | Senior
          Vice President and Chief Financial Officer                                 
|John
          F. Gaither, Jr.       |  | 54  |  | Senior
          Vice President, General Counsel and Secretary                              




John J. Arlotta
       has served as our vice chairman with primary responsibility for the NeighborCare

    business since July 2003.  Following the spin-off, Mr. Arlotta has become
     our chairman, president and chief executive officer.  Prior to joining
      us, Mr. Arlotta served as a consultant to Caremark Pharmaceutical Services. 
    Mr. Arlotta was president and chief operating officer of Caremark Pharmaceutical
     Services from May 1998 to February 2002 and chief operating officer of Caremark

    Pharmaceutical Services from September 1997 to May 1998.





Robert A.
       Smith served as our president and chief operating officer of NeighborCare

    since May 2001. Following the spin-off, Mr. Smith has become our chief operating
       officer. Prior to May 2001, Mr. Smith served as executive vice president
      and
    chief operating officer of NeighborCares Allegheny region since November
     1999. He served as senior vice president of NeighborCares Allegheny
      region since August 1998, a position he held with Vitalink Pharmacy Services

    prior to its acquisition by NeighborCare. Mr. Smith has held senior management
      positions in several longterm care pharmacy organizations since 1988.





John L. Kordash
    has served as our executive vice president and assistant to the vice chairman
    since July 2003.  Following the spin-off, Mr. Kordash has become executive
    vice president and assistant to the chairman and chief executive officer. 
    Prior to joining us, Mr. Kordash was chairman and chief executive officer
    of Medical Scientists, Inc., a healthcare company that provides predictive
    modeling medical software and healthcare consulting services to organizations
    at risk for medical care costs, since 1997.





Richard W.
    Sunderland, Jr. has served as senior vice president and corporate controller
    of NeighborCare since April 2000 and has assumed the role of chief financial
    officer following the spin-off.  From August 1998 until April 2000, Mr.
    Sunderland served as vice president and controller of NeighborCare. 
    From November 1995 to August 1998, Mr. Sunderland served as vice president
    and controller of Genesis ElderCare Services, Genesis Managed Care Services
    and the Genesis ElderCare Chesapeake region.  Mr. Sunderland joined the
    company in 1993 as controller of Genesis ElderCare Services.





John F. Gaither,
    Jr. joined NeighborCare as senior vice president, general counsel and secretary
    in September 2003.  From April 2000 to September 2003, Mr. Gaither served
    as vice president, general counsel and corporate secretary of Global Healthcare
    Exchange, LLC, a supplier of business-to-business procurement solutions for
    the healthcare industry.  From 1982 to 2000, Mr. Gaither held various
    positions with Baxter International, Inc., a leading manufacturer and marketer
    of healthcare products and services.





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PART II





|ITEM 5: | MARKET
          FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | -----------------------------------------------------------------------------------




Our common
    stock currently trades on the Nasdaq National Market System under the symbol
    NCRX. From February 8, 2002 until December 1, 2003, our common
    stock traded on the Nasdaq National Market System under the symbol GHVI.
    From October 15, 2001 until February 7, 2002 our common stock traded on the
    OTC Bulletin Board under the symbol GHVE. Our common stock that
    was cancelled in connection with our reorganization was traded on the New
    York Stock Exchange through June 22, 2000 and on the OTC Bulletin Board thereafter.
    The following table indicates, for each of the quarters in the fiscal year
    ended September 30, 2003, the range of high and low closing prices of our
    common stock as reported on the Nasdaq National Market.  The table also
    includes the range of the high and low closing prices of our common stock
    for each of the quarters in the fiscal year ended September 30, 2002 on the
    OTC Bulletin Board for the period through February 7, 2002 and on the Nasdaq
    National Market thereafter.





|Fiscal
          Year Ended  |  | High |       | Low |  
|---------------------------- |  | ---- | ----- | --- | -
|                             |  |      |       |     |  
|September
          30, 2003 |  |      |       |     |  
|First Quarter                |  | $    | 17.51 |     | $
|Second
          Quarter     |  |      | 16.79 |     |  
|Third Quarter                |  |      | 17.90 |     |  
|Fourth
          Quarter     |  |      | 24.21 |     |  
|September
          30, 2002 |  |      |       |     |  
|First
          Quarter      |  | $    | 26.00 |     | $
|Second
          Quarter     |  |      | 21.00 |     |  
|Third
          Quarter      |  |      | 21.23 |     |  
|Fourth
          Quarter     |  |      | 19.50 |     |  




We consummated
       the spin-off on December 1, 2003 by distributing, on a pro rata basis,
      all
    the shares of GHC common stock that we owned to holders of record of our
      common  stock at the close of business on October 15, 2003, the record
      date for the
    spin-off. Holders of shares of GHC common stock were not entitled to preemptive
       rights. Our common stock price as of the close of business on December
      2, 2003 was $22.05, as adjusted to give effect to the spin-off of GHC.





Based on the
    total number of shares of our common stock outstanding at the close of business
    on the record date for the spin-off (39,796,209 shares), each record holder
    of our common stock received 0.5 shares of GHC common stock for each share
    of our common stock held at the close of business on the record date or cash
    in lieu of a fractional share of GHC common stock.





Additionally,
    immediately after the spin-off, we issued a small number of shares of GHC
    common stock into an escrow account for future delivery to former unsecured
    claimants of NeighborCare and its subsidiaries that were entitled to receive
    common equity securities under the terms of our 2001 joint plan of reorganization.
    We refer to these shares of GHC common stock as the unsecured claimant
    shares. The number of unsecured claimant shares was equal to the product
    of the distribution ratio and the number of shares of our common stock reserved
    as of the spin-off date for issuance to former unsecured claimants of NeighborCare.
    As of October 15, 2003, the number of shares of our common stock reserved
    for issuance to the unsecured claimants was 260,493.





As of December
       15, 2003, there were 6,243 shareholders of record of our common stock.
      We
    have never declared or paid cash dividends on our common stock. Our ability
       to pay dividends on our common stock is restricted by our revolving credit

    facility and senior subordinated notes agreements. See Part II, Item 7, Managements
    Discussion and Analysis of Financial Condition and Results of Operations —  Liquidity
    and Capital Resources, of this Form 10-K. Management does
    not anticipate the payment of cash dividends on our common stock in the foreseeable
     future.





See Part
      III,  Item 11, Executive Compensation — Benefit Plans, and
      Item  12, Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters — Equity Compensation Plans, of
    this  Form 10-K for disclosure regarding our equity compensation plans.





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On October
       2, 2001, we and The Multicare Companies, Inc. consummated a joint plan
      of
    reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September
       20, 2001 order entered by the Bankruptcy Court approving our joint plan
      of
    reorganization. In connection with our joint plan of reorganization, we issued
       or will issue without registration under the Securities Act of 1933 in
      reliance
    on Section 1145 of the Bankruptcy Code and the Bankruptcy Court order confirming
       our joint plan of reorganization: (a) 41,000,000 shares of our common
      stock
    to our and Multicares creditors as identified in our joint plan of
    reorganization,  of which 40,739,507 of the shares were issued on various
    dates from December
    2, 2001 to December 15, 2003, and as of December 15, 2003, 260,493 of these
     shares of common stock have not yet been issued, and (b) 425,946 shares
    of
    our Series A convertible preferred stock to our and Multicares senior
     secured creditors as identified in our joint plan of reorganization on various

    dates in fiscal 2002.





Effective
       December 16, 2003, our board of directors exercised its option to require
      the
    mandatory conversion of the Series A convertible preferred stock, at a per
       share conversion price of $12.60 (as adjusted from $20.33 in connection
      with
    the spin-off), into 3,464,255 shares of our common stock pursuant to the
      terms  of our amended and restated articles of incorporation, as amended.





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|ITEM 6: | SELECTED
          FINANCIAL DATA
|------- | ---------------------------------




|                                                                |  | Successor
          Company |           |      | Predecessor
          Company |          
|--------------------------------------------------------------- |  | --------------------------- | --------- | ---- | ----------------------------- | ---------
|                                                                |  |                             |           |      |                               |          
|(Years
          ended September 30, )                          |  | 2003                        |           | 2002 |                               |          
|                                                                |  |                             |           |      |                               |          
|Statement
          of Operations Data (1)                      |  |                             |           |      |                               |          
|(in
          thousands, except per share data)                 |  |                             |           |      |                               |          
|Net
          revenues                                          |  | $                           | 2,648,979 |      | $                             | 2,485,788
|Income
          (loss) from continuing operations              |  |                             | 51,112    |      |                               | 78,508   
|Net
          income (loss) attributable to common shareholders |  |                             | 29,987    |      |                               | 70,167   
|Per
          common share data (diluted):                      |  |                             |           |      |                               |          
|Earnings
          (loss) from continuing operations            |  | $                           | 1.25      |      | $                             | 1.87     
|Net
          income (loss) attributable to common shareholders |  |                             | 0.74      |      |                               | 1.68     
|Weighted
          average common shares  diluted              |  |                             | 40,757    |      |                               | 43,351   
|Other
          Financial Data:                                 |  |                             |           |      |                               |          
|Capital
          expenditures (in thousands)                   |  | $                           | 59,758    |      | $                             | 51,635   
|Operating
          Data:                                       |  |                             |           |      |                               |          
|Pharmacy
          Services                                     |  |                             |           |      |                               |          
|Payor
          Mix                                             |  |                             |           |      |                               |          
|Long-term
          care facilities and other                   |  |                             | 56        | %    |                               | 58       
|Medicaid                                                        |  |                             | 42        | %    |                               | 40       
|Medicare
          Part B                                       |  |                             | 2         | %    |                               | 2        
|Average
          institutional pharmacy beds served            |  |                             | 246,628   |      |                               | 247,114  
|Inpatient
          Services                                    |  |                             |           |      |                               |          
|Payor
          Mix                                             |  |                             |           |      |                               |          
|Medicaid                                                        |  |                             | 50        | %    |                               | 48       
|Medicare                                                        |  |                             | 28        | %    |                               | 29       
|Private
          pay and other                                 |  |                             | 22        | %    |                               | 23       
|Average
          owned/leased eldercare center beds (1)        |  |                             | 22,758    |      |                               | 24,139   
|Occupancy
          Percentage                                  |  |                             | 91        | %    |                               | 92       
|Average
          managed eldercare center beds (1)             |  |                             | 6,320     |      |                               | 7,898    




|                                            |  | Successor
          Company |           |      | Predecessor
          Company |          
|------------------------------------------- |  | --------------------------- | --------- | ---- | ----------------------------- | ---------
|                                            |  |                             |           |      |                               |          
|(As
          of September 30,)             |  | 2003                        |           | 2002 |                               | 2001     
|                                            |  |                             |           |      |                               |          
|Balance
          Sheet Data (in thousands) |  |                             |           |      |                               |          
|Working
          capital                   |  | $                           | 446,657   |      | $                             | 449,006  
|Total
          assets                      |  |                             | 1,938,729 |      |                               | 2,010,477
|Liabilities
          subject to compromise |  |                             |          |      |                               |         
|Long-term
          debt                    |  |                             | 611,619   |      |                               | 689,683  
|Redeemable
          preferred stock        |  |                             | 46,831    |      |                               | 44,765   
|Shareholders
          equity (deficit)    |  | $                           | 916,163   |      | $                             | 914,123  




Please refer
    to Part II, Item 7, Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Certain Transactions and Events,
    of this 10-K for a description of significant transactions. See also





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Managements Discussion
    and Analysis of Financial Condition and Results of Operations  Results
    of Operations  Factors Affecting Comparability of Financial Information.





|(1) | The
          statement of operations data from continuing operations for all prior
          year periods has been adjusted for operations identified as discontinued.
          Inpatient services payor mix and occupancy data has also been adjusted
          to exclude discontinued operations. See Managements Discussion
          and Analysis of Financial Condition and Results of Operations 
          Certain Transactions and Events  Assets Held for Sale and Discontinued
          Operations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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|ITEM 7: | MANAGEMENTS
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -----------------------------------------------------------------------------------------------




General





NeighborCare,
    Inc. was incorporated in May 1985 as a Pennsylvania corporation and was formerly
    named Genesis Health Ventures, Inc.





Prior to
      December  1, 2003, our operations were comprised of two primary business
      segments: pharmacy
    services and inpatient services. On December 1, 2003, we completed the distribution
       (the spin-off) of the common stock of Genesis HealthCare Corporation
        (GHC) and on December 2, 2003 we changed our name to NeighborCare,
         Inc. and changed our trading symbol to NCRX. The spin-off
         was  effected by way of a pro-rata tax free distribution of the common
         stock of
    GHC to holders of NeighborCares common stock on December 1, 2003 at
     a rate of 0.5 shares of GHC stock for each share of NeighborCare stock owned

    as of October 15, 2003. We received a private letter ruling from the Internal
     Revenue Service to the effect that, for United States federal income tax
    purposes,
    the distribution of GHC stock qualified as tax free for GHC and our shareholders,
     with the exception of cash received for fractional shares.  The common
      stock of GHC began trading publicly on the Nasdaq National Market System
     on
    December 2, 2003 under the symbol GHCI.  As a result of
    the  spin-off, we continue to own and operate our pharmacy services business
    and
    our group purchasing business and GHC owns and operates what was formerly
     our inpatient services business (as well as our former rehabilitation therapy,

    diagnostic, respiratory and management services businesses). See 
    Certain Transactions and Events. As used herein, unless the context
     otherwise requires, NeighborCare, the Company, we,
    our or us refers to NeighborCare, Inc. and its subsidiaries.





Because the
    spin-off occurred subsequent to our fiscal year ended September 30, 2003 but
    before the filing of this report on Form 10-K, we have included the required
    business and financial disclosures of the consolidated organization herein.
    We will treat the operations of GHC as discontinued in our consolidated financial
    statements beginning in fiscal 2004.





We provide
      pharmacy services nationwide through our NeighborCare integrated pharmacy
      operation that serves approximately 246,000 institutional beds in longterm
    care settings. We also operate 32 communitybased retail pharmacies and
    a group purchasing organization.





GHC provides
       inpatient services through skilled nursing and assisted living centers
      primarily
    located in the eastern United States. GHC currently owns, leases, manages
       or jointlyowns 217 eldercare centers with 26,470 beds, of which
       two  centers with 404 beds have been identified as either held for sale
       or discontinued
    operations. See  Certain Transactions and Events  Assets
     Held for Sale and Discontinued Operations. GHC also provides rehabilitation
     therapy,  diagnostic, respiratory, and management services.





Certain Transactions
    and Events





The Spin-Off:





Pharmacy services
    businesses and inpatient services businesses are distinct businesses with
    significant differences in their markets, products, investment needs and plans
    for growth. Our board of directors determined that the separation into two
    independent public companies would resolve existing sales and marketing issues
    by eliminating customer/competitor conflicts, isolate inherent business risks,
    provide each organization with the ability to independently access capital
    markets, and better align management incentives with business-specific operating
    performance.  The decision of our board of directors to pursue the spin-off
    was based on, among other things, the following considerations and assumptions.





Sales and
    Marketing and Customer/Competition Issues





The vast majority
    of our pharmacy services business customers are in GHCs business, the
    ownership or operation of eldercare properties. Many of the pharmacy services
    business customers or potential customers that operate in GHCs geographic
    regions are GHCs competitors. Many customers or potential customers
    believe that purchasing pharmacy services from us strengthens a competitor
    and, therefore, resist doing business with us.





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The spin-off
    of GHCs businesses from us and the resulting elimination of the customer/competitor
    conflict are important to the future growth of our pharmacy services business.





Inherent
    Business Risks





The inpatient
    services business and the pharmacy services business face uncertainty because
    the rate of Medicare and Medicaid reimbursements, which are set by government
    regulators, are not constant and can be unpredictable. Each business
    reimbursement risks pose problems for the other. In the event that revenues
    of the inpatient services business or the pharmacy services business are reduced
    as a result of regulatory changes, we may be forced to use profits from one
    business to cover the costs of the other, or to cover a disproportionate part
    of shared costs such as corporate overhead, resulting in a reduction in the
    amount of capital available to the business that did not suffer the revenue
    reduction, thereby limiting such business ability to expand in new markets
    or explore new products. In addition to risks associated with Medicare and
    Medicaid reimbursement, the inpatient services business and pharmacy
    services business participation in the Medicare and Medicaid reimbursement
    systems exposes each business to the risk that one business may cause the
    other to be burdened by onerous federal and state anti-fraud statutes.





The inpatient
    services business is exposed to general and professional liability risks relating
    to the quality of care that are much greater than those present in the pharmacy
    services business. The inpatient services business potential malpractice
    liability exposures create financial uncertainty and potentially reduce the
    amount of capital available for investment in the pharmacy services business.
    These exposures also cause us to divert human and financial resources from
    the pharmacy services business in favor of the eldercare businesses.





Direct
    Access to Capital Markets





After the
    spin-off, we and GHC will no longer need to compete with each other for limited
    capital resources, and each company will be able to access the debt or equity
    capital markets directly. As a result of the defined focus of each company,
    investors should be better able to evaluate the different strategies, investment
    profiles, operating characteristics and credit fundamentals of the two companies,
    thereby enhancing the likelihood that each company will achieve appropriate
    market valuations. As a result, the management of each company will be able
    to adjust goals and evaluate strategic opportunities in light of investor
    expectations within its respective industry, without undue attention to investor
    expectations in other industries. In addition, each company will be able to
    focus its public relations efforts on cultivating its own separate identity.





Targeted
    Incentives and Greater Accountability for Employees





The spin-off
    will permit each company to implement employee compensation and benefit programs,
    including stock-based and other incentive programs, that reward employees
    of each company based on the success of the individual companys operations.
    Both companies expect the motivation of their employees and the focus of their
    management to be strengthened by incentive compensation programs that are
    tied to their core businesses financial results and the market performance
    of their common stock, without regard to the performance of other businesses
    that are dependent on different growth and performance profiles. As a result,
    both companies expect the distribution to enhance their ability to attract
    and retain qualified personnel.





Distribution Transactions:





As a result
    of the spin-off, as of December 1, 2003, we and GHC operate independently
    of one another. We have agreed contractually to continue certain transitional
    arrangements and practices for a limited time after the spin-off. In addition,
    we have agreed to certain mutually beneficial commercial arrangements.





We and GHC
    have entered into a separation and distribution agreement, a tax sharing agreement,
    a transition services agreement, a group purchasing agreement, an employee
    benefits agreement, a pharmacy services agreement, a pharmacy benefit management
    agreement and a durable medical equipment agreement.





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Separation
    and Distribution Agreement





On October
    27, 2003, we and GHC entered into the separation and distribution agreement,
    which sets forth the agreements between us and GHC with respect to the principal
    corporate transactions required to consummate the spin-off, and a number of
    other agreements governing the relationship between us and GHC following the
    spin-off.





The Separation.     
    Pursuant to the separation and distribution agreement, we transfered to GHC,
    or caused our subsidiaries to transfer to GHC, the legal entities comprising
    the eldercare businesses.





Series
    A Preferred Stock.     We adjusted the conversion
    price of our Series A Preferred Stock in accordance with the terms thereof. 
    See Part II, Item 5, Market For the Registrants Common Equity
    and Related Stockholder Matters, of this Form 10-K.





Unsecured
    Bankruptcy Claimants.     GHC agreed to issue
    130,247 common shares into an escrow account for future delivery to our and
    our subsidiaries former unsecured claimants who are entitled to receive
    common equity securities under the terms of our 2001 joint plan of reorganization.
    We refer to these common shares of GHC as the unsecured claimant shares. 
    As of October 15, 2003, the most recent date for which information is available,
    the number of our common shares reserved for issuance to the unsecured claimants
    was 260,493.





Releases
    and Indemnification.     The separation and distribution
    agreement generally provides for a full and complete release and discharge
    as of the date of the consummation of the spin-off of all liabilities existing
    or arising from all acts and events occurring or failing to occur or alleged
    to have occurred or to have failed to occur and all conditions existing or
    alleged to have existed on or before the date of the consummation of the spin-off
    between or among us and our affiliates, on the one hand, and GHC and its affiliates,
    on the other hand, including any contractual agreements or arrangements existing
    or alleged to exist between or among those parties on or before that date.





GHC has agreed
    to indemnify, defend and hold harmless us and our affiliates, and each of
    our directors, officers and employees, from and against all liabilities relating
    to, arising out of or resulting from:





| |  | the
          failure of GHC, or its affiliates, or any other person to pay, perform
          or otherwise promptly discharge any of the liabilities of the eldercare
          businesses;                                
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                             
| |  | any
          liabilities of the eldercare businesses and the operation of the eldercare
          businesses at any time before or after the spin-off;                                                                     
| |   |                                                                                                                                                                                                                             
| |  | any
          breach by GHC or its affiliates of the separation and distribution agreement
          or any of the ancillary agreements entered into in connection with the
          separation and distribution agreement;
| |   |                                                                                                                                                                                                                             
| |  | one-half
          of any liabilities arising out of our 2001 joint plan of reorganization
          (other than certain liabilities specifically allocated in the separation
          and distribution agreement); and    
| |   |                                                                                                                                                                                                                             
| |  | specified
          disclosure liabilities.                                                                                                                                                                                 




We have agreed
    to indemnify, defend and hold harmless GHC and its affiliates, and each of
    its directors, officers and employees, from and against all liabilities relating
    to, arising out of or resulting from:





| |  | the
          failure of us, or our affiliates, or any other person to pay, perform
          or otherwise promptly discharge any of our liabilities, other than liabilities
          of the eldercare businesses;        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                            
| |  | any
          of our liabilities, other than liabilities of the eldercare businesses,
          and the operation of our business other than the eldercare businesses
          at any time before or after the spin-off;  
| |   |                                                                                                                                                                                                                            
| |  | any
          breach by us or our affiliates of the separation and distribution agreement
          or any of the ancillary agreements entered into in connection with the
          separation and distribution agreement;
| |   |                                                                                                                                                                                                                            
| |  | one-half
          of any liabilities arising out of our 2001 joint plan of reorganization
          (other than certain liabilities specifically allocated in the separation
          and distribution agreement); and   
| |   |                                                                                                                                                                                                                            
| |  | specified
          disclosure liabilities.                                                                                                                                                                                




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The separation
    and distribution agreement also specifies procedures for claims for indemnification
    made under the provisions described above.





Amendments
    and Waivers.     The separation and distribution
    agreement provides that no provisions of it or any ancillary agreement will
    be deemed waived, amended, supplemented or modified by any party unless the
    waiver, amendment, supplement or modification is in writing and signed by
    the authorized representative of the party against whom that waiver, amendment,
    supplement or modification is sought to be enforced.





Tax Sharing
    Agreement





For periods
    prior to the spin-off, GHC will be included in our U.S. federal consolidated
    income tax group, and GHCs tax liability thus will be included in our
    and our subsidiaries consolidated federal income tax liability. GHC
    also will be included with us or certain of our subsidiaries in consolidated,
    combined or unitary income tax groups for state and local tax purposes until
    the spin-off occurs.





The tax sharing
    agreement governs the respective rights, responsibilities, and obligations
    of us and GHC after the spin-off, with respect to tax liabilities and benefits,
    tax attributes, tax contests and other matters regarding income taxes, other
    taxes and related tax returns.





In general,
    we will prepare and file the federal consolidated return, and any combined,
    consolidated or unitary tax returns that include both us or one of our subsidiaries
    and GHC or one of its subsidiaries and will be responsible for all income
    taxes and other taxes with respect to such returns. GHC will prepare and file
    any tax return required to be filed by GHC or any of its subsidiaries that
    does not include us or any entity that will be our subsidiary after the spin-off
    and will be responsible for all income taxes or other taxes with respect to
    any such tax return. In general, we will be responsible for any increase (and
    will receive the benefit of any decrease) in the income tax of any entity
    that is or was reflected on a tax return filed by us and we will control all
    audits and administrative matters relating to such tax returns.





GHC generally
    may not (i) take or fail to take any action that would cause any representations,
    information or covenants in the spin-off documents or documents relating to
    the private letter ruling request to be untrue, (ii) take or fail to take
    any action that would cause the spin-off to lose its tax-free status, (iii)
    sell, issue, redeem or otherwise acquire its equity securities for a period
    of two years following the spin-off, except in certain specified transactions,
    and (iv) sell or otherwise dispose of a substantial portion of its assets,
    liquidate, merge or consolidate with any other person for a period of two
    years following the spin-off. During that two-year period, GHC may take certain
    actions prohibited by the covenants if, for example, we obtain a supplemental
    private letter ruling or an unqualified opinion of counsel to the effect that
    these actions will not affect the tax-free nature of the spin-off, in each
    case satisfactory to us in our sole and absolute discretion. Notwithstanding
    the receipt of any such private letter ruling or opinion, GHC must indemnify
    us for any taxes and related losses resulting from (i) any act or failure
    to act described in the covenants above, (ii) any acquisition of GHCs
    equity securities or assets (or equity securities or assets of any member
    of GHCs group) and (iii) any breach by GHC or any member of GHCs
    group of certain representations in the spin-off documents or the documents
    relating to the private letter ruling.





In addition,
    the tax sharing agreement provides for cooperation and information sharing
    with respect to taxes.





Transition
    Services Agreement





The transition
    services agreement provides for the provision of certain transitional services
    by GHC to us. The services include the provision of information systems (e.g.,
    access to computer systems that are expected to be owned by GHC), tax services,
    investor relations services, corporate compliance services, treasury functions,
    financial systems and reporting, bankruptcy claims processing and certain
    additional services identified by the parties. The transition services agreement
    provides for a term of 18 months. In addition, we may extend the transition
    services agreement for an additional six months with adequate notice. The
    pricing is based on actual costs incurred by GHC in rendering the services.





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Tidewater
    Membership Agreement





The Tidewater
    membership agreement, referred to as the Tidewater agreement,
    provides group purchasing and shared service programs to skilled nursing facilities
    and assisted living facilities operated by GHC. Under the Tidewater agreement,
    GHC engaged Tidewater, our wholly-owned group purchasing subsidiary, as an
    independent group purchasing organization, and Tidewater will grant to GHC
    access to its vendor contracts. The initial term of the Tidewater agreement
    will be ten years. GHC will not make any payments to us under the Tidewater
    agreement. Instead, Tidewater will receive administrative fees from various
    suppliers. Such fees are based on a percentage of the volume of purchases
    made by all of Tidewaters members, including GHC. GHC will remain directly
    responsible to vendors for purchases through the Tidewater agreement. The
    Tidewater agreement will obligate GHC to purchase certain minimum amounts;
    however, GHC may be a member of other group purchasing organizations. GHC
    may earn financial incentives, such as fee sharing, for meeting certain purchasing
    volumes under the Tidewater agreement.





Employee
    Benefits Agreement





We and GHC
    entered into an employee benefits agreement which provides for certain employee
    compensation, benefit and labor-related matters. In general, after the spin-off,
    we and GHC will be responsible for all obligations and liabilities relating
    to our respective current and former employees and their dependents and beneficiaries.





As of the
    date of the spin-off, and except with respect to health and welfare plans
    and flexible benefit plans as set forth below, GHC will cease to participate
    in any benefit plan or trust under any such plan sponsored or maintained by
    us and we will cease to participate in any benefit plan or trust under any
    such plan sponsored or maintained by GHC. With respect to employees who are
    transferred to or from us or GHC, both parties will mutually recognize and
    credit service with the other employer.





Except as
    otherwise provided below, all liabilities relating to employee benefits incurred
    by or on behalf of either companys employees or their covered dependents
    on or before the date of the spin-off remain our liabilities. Liabilities
    and assets will be transferred from our retirement plan to a comparable plan
    to be established by GHC. Similarly, liabilities and assets will be transferred
    from our union retirement savings plan, the sponsorship of which will be assumed
    by GHC. Liabilities under our deferred compensation plan (a non-qualified
    plan) and assets relating to such plan held in a rabbi trust will be transferred
    to a comparable plan and trust established by GHC. In the event that we or
    GHC elect to contribute the full matching amount due to participants covered
    under each companys respective plan and entitled to a match at the end
    of the 2003 plan year, each company will reimburse the other for 50% of the
    amount contributed with respect to specified employees who are transferred
    between companies in connection with the spin-off. A similar arrangement will
    apply with respect to bonus amounts due for the 2003 fiscal year. In general,
    all liabilities relating to workers compensation claims incurred by
    or on behalf of either companys employees on or before December 1, 2003,
    the date of the spin-off, will remain liabilities of GHC.





To avoid the
    administrative inconvenience and expense that would result from our having
    to establish separate health and welfare plans and flexible benefit plans
    for the remainder of the calendar year during which the spin-off occurs, during
    the period beginning immediately following the spin-off and ending on December
    31, 2003, current and former employees of GHC will remain covered under our
    existing health and welfare plans and flexible benefit plans. GHC will reimburse
    us for all expenses we incur as a result of this arrangement. As of January
    1, 2004, current and former employees of ours and GHC will be covered under
    their own health insurance plans.





Master
    Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services





GHC and our
    subsidiary NeighborCare Pharmacy Services, Inc., or NCPS, entered
    into a master agreement for pharmacy, pharmacy consulting and related products
    and services, referred to as the pharmacy services agreement.
    The agreement has an initial term of ten years, plus a renewal term of five
    years if NCPS matches third-party bids for comparable services. The pharmacy
    services agreement provides the terms and conditions on which NCPS and its
    affiliates provides pharmacy, pharmacy consulting and medical supply products
    and services to all long-term care facilities owned or leased by GHC and its
    affiliates. These services include the provision of all of the needed prescription
    and non-prescription medications, pharmacy consulting services, Medicare Part
    B supplies and services, Medicare Part B claim filing services, enteral nutrition
    products, durable and disposable medical supplies and equipment, and related
    services as required by applicable law and as reasonably requested by each
    facility. NCPS also agreed to participate with GHC in a joint committee to
    review drug utilization at GHCs facilities, to





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establish a formulary, to provide
    reports reasonably requested by GHC relating to utilization, and to review
    the role of the consultant pharmacist. NCPS agreed to designate one dedicated
    full-time relationship representative to implement the terms of the pharmacy
    services agreement, as well as to address any concerns and resolve any issues
    raised by GHC with respect to pharmacy services. NCPS agreed to provide to
    GHC, as reasonably requested, a report comparing products which GHC has returned
    to NCPS to credits issued by NCPS for such returned products, and an explanation
    of the reasons why returned products did not entitle GHC to a credit. The
    agreement imposes restrictions on GHCs ability to purchase pharmaceutical
    products and supplies from other suppliers.





Each of GHCs
    eldercare facilities entered into an individual services agreement with NCPS
    that reflects the terms of the pharmacy services agreement. The individual
    services agreements govern the terms under which pharmacy, pharmacy consulting
    and medical supply products and services will be provided to each eldercare
    facility by NCPS.





Pricing under
    the pharmacy services agreement is at pre-negotiated prices or formulas consistent
    with market pricing for the applicable services and are set forth in the individual
    service agreements. NCPS has the right to adjust prices, other than those
    that are determined by formula, not more than once per year to account for
    increases in its costs in providing the services (including inflation). GHC
    is eligible for a pricing reduction at specified percentages for certain specified
    products and services if and so long as the aggregate number of skilled nursing
    facility beds served by NCPS increases to specified targets over a baseline
    amount. In addition, GHC and NCPS will negotiate in good faith to enter into
    arrangements whereby GHC will contract directly with certain manufacturers
    of enteral nutrition products, durable medical equipment and other non-pharmaceutical
    products historically purchased from NCPS to receive end user pricing,
    and NCPS will distribute enteral nutrition products and durable medical equipment
    to GHCs facilities for a fee priced at the fair market value of such
    distribution services. In addition, after five years, pricing may be reset
    depending upon NCPSs pricing to its other customers of similar size.





GHC may terminate
    the pharmacy services agreement with respect to any facility in connection
    with a sale of the facility to a third party or the closing of the facility
    so long as GHC uses its best efforts to persuade the buyer or successor of
    the facility, if any, to assume the applicable service agreement. This right
    is limited to five facilities through the first year, 10 facilities through
    the second year, 20 facilities through the third year, and a maximum of 30
    facilities over the 10-year term of the pharmacy services agreement.





If the pharmacy
    services agreement or any individual service agreement is terminated by GHC,
    then NCPS will be entitled to recover a specified amount per facility based
    on the remaining number of months in the term. Each of GHC and NCPS will indemnify
    the other against all claims, losses and liabilities arising out of the acts
    or omissions of the other party in connection with the pharmacy services agreement.





The pharmacy
    services agreement provides that GHC will not compete with NCPS or solicit
    NCPSs employees or customers until 2015 or, if later, two years following
    termination of the pharmacy services agreement.





Either party
    may assign the pharmacy services agreement, or any individual services agreement,
    upon receipt of written consent of the other (which consent may not be unreasonably
    withheld, conditioned or delayed), but NCPS may assign its interest without
    GHCs consent to an affiliate, joint venture or a provider whose service
    and/or quality levels are at least comparable to those currently provided
    by NCPS.





Pharmacy
    Benefit Management (CareCard) Agreement





GHC and our
    subsidiary, CareCard, Inc., entered into a pharmacy benefit management agreement,
    referred to as the CareCard agreement. The CareCard agreement
    sets forth the agreements between GHC and CareCard relating to the provision
    of services to GHC by our CareCard business. The term of the CareCard
    agreement expires on December 31, 2004. Under the CareCard agreement, CareCard
    provides pharmacy benefit management services to GHC and access to retail
    and mail pharmacy services. GHC agreed to enroll all of its employees participating
    in a GHC self-insured health plan in the CareCard program. The CareCard agreement
    may be assigned by either party upon receipt of the written consent of the
    other (which consent may not be unreasonably withheld, conditioned or delayed),
    but CareCard may assign its interest without GHCs consent to a provider
    whose service and/or quality levels are at least comparable to those currently
    provided by CareCard.





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Master
    Agreement for Specialty Beds and Oxygen Concentrators





The master
    agreement for specialty beds and oxygen concentrators, referred to as the
    durable medical equipment agreement, sets forth the agreements
    between GHC and NCPS relating to the provision of certain equipment and related
    services to GHCs skilled nursing and assisted living facilities. The
    durable medical equipment agreement provides for an initial five-year term
    with one-year automatic renewals (unless terminated upon 90 days notice
    prior to the expiration of the then-current term). Under the durable medical
    equipment agreement, NCPS agreed to provide GHCs facilities with durable
    medical equipment (specialty beds and oxygen concentrators), equipment maintenance
    and warehousing of equipment at prices set forth in the durable medical equipment
    agreement. The durable medical equipment agreement provides that, except as
    otherwise required by law, NCPS will be the exclusive provider of specialty
    beds and oxygen concentrators to the contracting facilities. Either party
    may assign the agreement upon receipt of the written consent of the other
    (which consent may not be unreasonably withheld, conditioned or delayed),
    but NCPS may assign its interest without GHCs consent to a provider
    whose service and/or quality levels are at least comparable to those currently
    provided by NCPS.





Strategic Planning, Severance
    and Other Related Costs:





We have incurred
    costs that were attributable to our long-term objective of transforming to
    a pharmacy based business, including the costs of the spin-off. Certain of
    these costs are expected to continue into fiscal 2004 and are segregated in
    the consolidated statement of operations as Strategic planning, severance
    and other related costs. Details of these costs follow (in thousands):





Fiscal 2003:





|                                      |  | Accrued
          at Beginning
          of Year |       | Provision |   | Paid   |  | Non-cash
          Charges |        | Accrued
          at
          End of Year |  
|------------------------------------- |  | ------------------------------------------------ | ----- | --------- | - | ------ |  | -------------------------- | ------ | ------------------------------------------ | -
|                                      |  |                                                  |       |           |   |        |  |                            |        |                                            |  
|Severance
          and related costs |  | $                                                | 1,100 |           | $ | 14,247 |  | $                          | 5,916  |                                            | $
|Strategic
          consulting costs  |  |                                                  | 621   |           |   | 14,039 |  |                            | 11,280 |                                            |  
|                                      |  |                                                  |       |           |   |        |  |                            |        |                                            |  
|Total                                 |  | $                                                | 1,721 |           | $ | 28,286 |  | $                          | 17,196 |                                            | $
|                                      |  |                                                  |       |           |   |        |  |                            |        |                                            |  




Fiscal 2002:





|                                      |  | Accrued
          at Beginning
          of Year |   | Provision |   | Paid   |  | Non-cash
        Charges |        |  | Accrued
          at
          End of Year |      
|------------------------------------- |  | ------------------------------------------------ | - | --------- | - | ------ |  | ------------------------ | ------ |  | ------------------------------------------ | -----
|                                      |  |                                                  |   |           |   |        |  |                          |        |  |                                           
|Severance
          and related costs |  | $                                                |  |           | $ | 16,410 |  | $                        | 10,599 |  | $                                          | 4,711
|Strategic
          consulting costs  |  |                                                  |  |           |   | 4,730  |  |                          | 3,089  |  |                                            | 1,020
|Asset
          impairments           |  |                                                  |  |           |   | 358    |  |                          |       |  |                                            | 358  
|                                      |  |                                                  |   |           |   |        |  |                          |        |  |                                            |      
|Total                                 |  | $                                                |  |           | $ | 21,498 |  | $                        | 13,688 |  | $                                          | 6,089
|                                      |  |                                                  |   |           |   |        |  |                          |        |  |                                            |      




Severance
    and Related Costs





In fiscal
    2002, we announced an expense reduction program, which included the termination
    of over 100 individuals resulting in $3.8 million of severance related costs
    in that year. In fiscal 2003, in a continuation of that expense reduction
    initiative, additional overhead terminations resulted in a charge of severance,
    and related costs of $2.2 million.  At September 30, 2003, $1.0 million
    remained unpaid, which is expected to be paid in the first fiscal quarter
    of 2004.





In fiscal
    2002, Michael R. Walker resigned as our chief executive officer. Our board
    of directors appointed Robert H. Fish as our interim chief executive officer.
    Also, in that period, David C. Barr resigned as vice chairman.





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In fiscal 2002, we recognized $12.6
    million in severance and related costs relating to the transition agreements
    with Mr. Walker and Mr. Barr.





In fiscal
    2003, Richard R. Howard resigned as vice chairman. We recognized $4.8 million
    in severance and related costs in fiscal 2003 in connection with Mr. Howards
    transition agreement. The final payment of this agreement was made in January
    2003.





On April 1,
    2003, we extended an offer to our employees, including executive officers
    except for our chief executive officer, to tender all options to purchase
    shares of our common stock, par value $.02 per share, outstanding under our
    2001 Stock Option Plan, for the following consideration: (a) for those holders
    of options who had received awards of more than 2,000 restricted shares of
    common stock under our 2001 Stock Incentive Plan, the acceleration of vesting
    of all such restricted shares plus a cash payment of $2.50 per share underlying
    the option for options that had an exercise price below $20.00 per share,
    and (b) with respect to those holders of options who had not received awards
    of more than 2,000 restricted shares, (i) for those options that had an exercise
    price of at least $20.00 per share, a cash payment of $2.00 per share underlying
    the option, and (ii) for those options that had an exercise price below $20.00
    per share, a cash payment of $2.50 per share subject to the option. The offer
    expired on May 12, 2003. We accepted for exchange and cancellation options
    to purchase 1,724,000 shares of our common stock, which represented all of
    the eligible outstanding options properly tendered for exchange by eligible
    option holders, on May 13, 2003. All eligible options held by our employees
    were tendered in the offer, with the exception of options to purchase 35,000
    shares. As a result of this offer and exchange, we expensed $7.2 million in
    fiscal 2003, of which $1.4 million was disbursed in cash, with the remainder
    distributed in common stock.





Strategic
    Consulting Costs





During fiscal
    2003 and 2002, we incurred strategic consulting costs of $14.0 million and
    $4.7 million respectively, in connection with several of our new strategic
    objectives. Initially, these strategic consulting firms were engaged to assist
    our board of directors and management in the evaluation of our existing business
    model and the development of our strategic alternatives. Additional services
    were procured to assist in the evaluation of our pharmacy sales and marketing
    function, the bid selection process in connection with the potential sale
    or spin-off of the eldercare business and, more recently, the legal, accounting
    and other professional fees directly attributed to the spin-off transaction.
    Strategic consulting costs in fiscal 2003 also include executive compensation
    of $2.2 million which relates to certain incentive compensation to recruit
    John J. Arlotta as the Company's new chief executive officer and incentive
    compensation paid to Robert H. Fish for services rendered during his term
    as the interim chief executive officer. During Mr. Fishs term as interim
    chief executive officer, his primary objectives were focused on the Companys
    pharmacy transformation initiatives.





We recognize
    the cost of such consulting fees as the services are performed.





We expect
    to incur approximately $30 million of additional strategic planning, severance
    and other related costs (excluding deferred financing costs) in fiscal 2004,
    principally to consummate the spin-off transaction.





Asset
    Impairments





During fiscal
    2002, we incurred $0.4 million of asset impairment charges consisting of the
    write-down in carrying value of one idle eldercare real estate property.





ElderTrust Transactions:





On September
    11, 2003, GHC entered into agreements with ElderTrust, a real estate investment
    trust from who GHC currently or previously leased or subleased 18 of its eldercare
    facilities and eight managed and jointly-owned facilities. The principal terms
    of the agreements are as follows:





| |  | GHC
          will purchase two skilled nursing facilities having 210 skilled nursing
          beds and 67 assisted living beds, and three assisted living facilities
          having 257 beds, for $24.8 million. GHC leases these properties from
          ElderTrust at an annual cash basis and accrual basis lease cost of $2.4
          million and $1.5 million, respectively.  On October 29, 2003, GHC
          purchased one of the aforementioned eldercare facilities having 183
          beds for $10.3 million.  The remaining four properties are expected
          to be purchased by January 2004;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | GHC
          agreed to pay ElderTrust $32.3 million to reduce annual cash basis and
          accrual basis lease cost associated with nine properties by $6.9 million
          and $1.2 million, respectively, and acquire options to purchase seven
          properties currently subleased to GHC by ElderTrust.  On October
          29, 2003, GHC paid ElderTrust $2.3 million to reduce the rents of two
          of the nine aforementioned eldercare facilities, and on                                                                                                                                      




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| |   | November
          7, 2003 paid ElderTrust the remaining $30.0 million to reduce the rents
          of the other seven aforementioned eldercare facilities; and                                                                 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                  
| |  | NeighborCare
          paid ElderTrust $4.4 million upon consummation of the spin-off in exchange
          for ElderTrusts consent to the assignment of all remaining leases
          and guarantees from NeighborCare to GHC.




On August
    13, 2003, GHC acquired the remaining ownership interest in an unconsolidated
    joint-venture partnership that operates four skilled nursing facilities with
    600 skilled nursing and 125 assisted living beds. Each of the four eldercare
    centers had been leased to the partnership from ElderTrust. GHC purchased
    its joint venture partners interest in the unconsolidated partnership
    for $3.1 million and will subsequently purchase one of the four eldercare
    properties from ElderTrust for $2.6 million. Additionally, GHC paid ElderTrust
    $2.5 million to reduce the annual cash basis and accrual basis lease expense
    of one of the three remaining leased facilities by $0.4 million and $0.2 million,
    respectively. The lease terms of the three facilities that will continue to
    be leased from ElderTrust were extended from 2010 to 2015.





Reorganization:





Background





On June 22,
    2000, we and certain of our direct and indirect subsidiaries filed for voluntary
    relief under Chapter 11 of the United States Code (the Bankruptcy Code)
    with the United States Bankruptcy Court for the District of Delaware (the
    Bankruptcy Court). On the same date, our 43.6% owned affiliate,
    The Multicare Companies, Inc., and certain of its direct and indirect subsidiaries,
    and certain of its affiliates, also filed for relief under Chapter 11 of the
    Bankruptcy Code with the Bankruptcy Court (singularly and collectively referred
    to herein as the Chapter 11 cases, our bankruptcy
    or other general references to these cases, unless the context otherwise requires).





Our and Multicares
    financial difficulties were attributed to a number of factors. First, the
    federal government made fundamental changes to the reimbursement for medical
    services provided to individuals. The changes had a significantly adverse
    impact on the healthcare industry as a whole and on our and Multicares
    cash flows. Second, the federal reimbursement changes exacerbated a longstanding
    problem of inadequate reimbursement by the states for medical services provided
    to indigent persons under the various state Medicaid programs. Third, numerous
    other factors adversely affected our and Multicares cash flows, including
    increased labor costs, increased professional liability and other insurance
    costs, and increased interest rates. Finally, as a result of declining governmental
    reimbursement rates and in the face of rising inflationary costs, we and Multicare
    were too highly leveraged to service our debt, including our long-term lease
    obligations.





On October
    2, 2001, the effective date, we and Multicare consummated a joint plan of
    reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September
    20, 2001 order entered by the U.S. Bankruptcy Court approving our joint plan
    of reorganization. The principal provisions of our joint plan of reorganization
    were as follows:





| | Multicare
          became our wholly-owned subsidiary. We previously owned 43.6% of Multicare
          and managed its skilled nursing and assisted living facilities under
          the Genesis ElderCare brand name;                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | New
          senior notes, new convertible preferred stock, new common stock and
          new warrants were issued to our and Multicares creditors. Approximately
          93% of new common stock, $242.6 million in new senior notes and new
          preferred stock with a liquidation preference of $42.6 million were
          issued to our and Multicares senior secured creditors. New one
          year warrants to purchase an additional 11% of the new common stock
          were issued, and approximately 7% of the new common stock have been
          or will be issued to our and Multicares unsecured creditors;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Holders
          of our and Multicares pre-Chapter 11 preferred and common stock
          received no distribution and those instruments were canceled;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Claims
          between us and Multicare were set off against one another and any remaining
          claims were waived and released; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   




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| | A
          new board of directors was constituted.
|- | ---------------------------------------------------




On October
    2, 2001, and in connection with the consummation of the Plan, we entered into
    a senior credit facility agreement consisting of the following: (1) a $150
    million revolving line of credit (the Revolving Credit Facility);
    (2) a $285 million term loan (the Term Loan) and (3) an $80 million
    delayed draw term loan (the Delayed Draw Term Loan) (collectively
    the Senior Credit Facility).





In accordance
       with SOP 907 (as defined below under FreshStart Reporting),
        we recorded all expenses and gains incurred as a result of the bankruptcy

    filing separately as debt restructuring and reorganization costs. A summary
        of the principal categories of debt restructuring and reorganization
       costs
    and net (gain) on debt discharge from continuing operations follows (in thousands):





|                                                                                           |  | Successor
          Company |   |      | Predecessor
          Company |      
|------------------------------------------------------------------------------------------ |  | --------------------------- | - | ---- | ----------------------------- | -----
|                                                                                           |  |                             |   |      |                               |      
|                                                                                           |  | 2003                        |   | 2002 |                               |      
|                                                                                           |  |                             |   |      |                               |      
|Professional,
          bank and other fees                                                |  | $                           |  |      | $                             | 2,570
|Employee
          benefit related costs, including severance                              |  |                             |  |      |                               |     
|Exit
          costs of terminated businesses                                              |  |                             |  |      |                               |     
|Fresh
          start valuation adjustments (1)                                            |  |                             |  |      |                               |     
|Gain
          on debt discharge (2)                                                       |  |                             |  |      |                               |     
|Post
          confirmation mortgage adjustment                                            |  |                             |  |      |                               | 1,700
|                                                                                           |  |                             |   |      |                               |      
|Total
          debt restructuring and reorganization costs and net gain on debt discharge |  | $                           |  |      | $                             | 4,270
|                                                                                           |  |                             |   |      |                               |      




|(1) | The
          fresh-start valuation adjustment represents the net write-down to fair
          value of NeighborCares assets and liabilities from continuing
          operations at September 30, 2001, and does not include $101.3 million
          of net write-downs attributed to discontinued operations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                  
|(2) | The
             gain on debt discharge in 2001 represents the relief of NeighborCares
              obligations for liabilities subject to compromise from continuing
             operations, and does not include
          $63.9 million attributed to discontinued operations.                             




FreshStart
    Reporting





Upon emergence
    from our Chapter 11 proceedings, we adopted the principles of freshstart
    reporting in accordance with the American Institute of Certified Public Accountants
    Statement of Position 907, Financial Reporting By Entities
    in Reorganization Under the Bankruptcy Code (SOP 907)
    / (freshstart reporting). For financial reporting purposes,
    we adopted the provisions of freshstart reporting effective September
    30, 2001. In connection with the adoption of freshstart reporting, a
    new entity was deemed created for financial reporting purposes, the provisions
    of our joint plan of reorganization were implemented, assets and liabilities
    were adjusted to their estimated fair values and our accumulated deficit was
    eliminated.





NCS Transaction Termination Fee





On July 28,
    2002, we and our wholly-owned subsidiary, Geneva Sub, Inc., entered into an
    agreement and plan of merger (the Merger Agreement) with NCS HealthCare,
    Inc. (NCS), pursuant to which NCS was to become a wholly-owned
    subsidiary of us (the NCS Transaction). After the Merger Agreement
    was entered, Omnicare, Inc. made a cash tender offer for all of the NCS shares.





On December
    11, 2002, the Court of Chancery of the State of Delaware, pursuant to an order
    of the Delaware Supreme Court dated December 10, 2002 which reversed prior
    determinations of the Court of Chancery, entered an order preliminary enjoining
    the consummation of the NCS transaction pending further proceedings.





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On December
       15, 2002, we entered into a termination and settlement agreement with
      Omnicare
    whereby we agreed to terminate the Merger Agreement and  Omnicare agreed
      to pay to us $22 million. In addition, we and Omnicare each
    agreed to release the other from any claims arising from the Merger Agreement
       and not commence any action against one another in connection with the
      Merger
    Agreement. On December 16, 2002 we provided notice to NCS terminating the
       Merger Agreement. In fiscal 2003, we recognized a $10.2 million gain resulting

    from the $22 million break-up fee, net of $11.8 million of costs associated
       with the proposed NCS transaction.





Medical Supplies Service Agreement





During the
    third quarter of fiscal 2002, we entered into a seven year agreement with
    Medline Industries, Inc. for the fulfillment of our bulk medical supply services
    to its customers. Under the agreement, Medline provides order intake, warehousing,
    delivery and invoicing services. NeighborCare earns a service fee from Medline
    for providing sales and marketing services, calculated as a percentage of
    the revenues earned by Medline for sales to NeighborCare customers. As a result
    of this agreement, NeighborCare no longer recognizes revenue for the sale
    of bulk medical supplies to its customers. The agreement does not include
    certain products and services that NeighborCare continues to sell directly
    to customers. It is estimated that the agreement resulted in a reduction of
    pharmacy service revenue of approximately $40.0 million in fiscal 2003 with
    no significant impact on EBITDA or net income. This agreement was terminated
    in connection with the spin-off.





Arbitration Award





On February
    14, 2002, an arbitrator ruled in favor of NeighborCare on all claims and counterclaims
    in the lawsuit involving HCR Manor Care, Inc. and certain of its affiliates.
    The arbitrator found that HCR Manor Care did not lawfully terminate the Master
    Service Agreements with NeighborCare, so that those contracts remain in full
    force and effect until the end of September 2004. The arbitrator awarded NeighborCare
    $21.9 million in damages, which were recognized in fiscal 2002, for respondents
    failure to allow NeighborCare to exercise its right under the Master Service
    Agreements to service facilities owned and operated by a subsidiary of respondent
    HCR Manor Care. In addition, the arbitrator terminated his prior ruling that
    allowed respondents to withhold 10% of their payments to NeighborCare, and
    respondents paid NeighborCare $9.1 million in funds representing the amounts
    withheld during the course of the Arbitration pursuant to the arbitrators
    prior ruling.





Amended Pharmacy Service Agreements





On August 15,
    2002, we announced that we and HCR Manor Care, Inc. agreed to withdraw all
    outstanding legal actions against each other stemming from our acquisition
    of HCR Manor Cares pharmacy subsidiary, Vitalink. We and HCR Manor Care
    also agreed to withdraw the prior pharmacy service agreement that was set
    to expire in 2004 and entered into a new pharmacy service agreement. The new
    pharmacy service agreement runs through January 2006 and covers approximately
    200 of HCR Manor Cares facilities. The pricing in the new pharmacy service
    agreement was reduced by approximately $12.8 million annually based upon then
    current sales volumes.





In September
    2002, we were awarded a contract to serve 6,892 beds owned by the State of
    New Jersey under a three year agreement with the option for two one-year extensions.
    NeighborCare was the encumbant pharmacy provider serving these beds under
    a 1996 agreement of an initial term of three years which was extended through
    September 30, 2002. The new contract was awarded through New Jerseys
    competitive bidding process, and was bid by us at reimbursement rates lower
    than the prior agreement. The revenue reduction associated with the new pharmacy
    agreement is approximately $7.2 million annually based upon then current sales
    volumes.





Assets Held for Sale and Discontinued
    Operations





In the normal
    course of business, we continually evaluate the performance of our operating
    units, with an emphasis on selling or closing under-performing or non-strategic
    assets. On September 30, 2001, we adopted the provisions of Statement of Financial
    Accounting Standards No. 144, Accounting for the Impairment of Long-Lived
    Assets and for Long-Lived Assets to be Disposed of (SFAS 144). Under
    SFAS 144, discontinued businesses, including assets held for sale, are removed
    from the results of continuing operations. The results of operations in the
    current and prior year periods, along with any cost to exit such businesses
    in the year of discontinuation, are





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classified as discontinued operations
    in the consolidated statements of operations. Businesses sold or closed prior
    to our adoption of SFAS 144 continue to be reported in the results of continuing
    operations.





Since our
    adoption of SFAS 144, we have classified several businesses as held for sale
    or closed. An increasing trend in malpractice litigation claims, rising costs
    of eldercare malpractice litigation, losses associated with these malpractice
    lawsuits and a constriction of insurers have caused many insurance carriers
    to raise the cost of insurance premiums or refuse to write insurance policies
    for nursing homes. These problems are particularly acute in the state of Florida
    where, because of higher claim amounts, general liability and professional
    liability costs have become increasingly expensive. This increase in insurance
    costs prompted us to sell our otherwise profitable operations in the state
    of Florida during fiscal 2003. Since our inception, we have continued to develop
    our eldercare network in concentrated geographic markets in the eastern United
    States. The geographic location of our eldercare centers in the states of
    Illinois and Wisconsin relative to our strategic geographic markets, combined
    with the operating performance of those centers, prompted us to identify those
    assets as held for sale during fiscal 2002. In addition to these assets, we
    identified 13 eldercare centers in other states, one rehabilitation services
    clinic, two physician services practice and our ambulance business as held
    for sale or closed due to under-performance.





Consolidated
    interest expense has been allocated to discontinued operations for all periods
    presented based on allocated debt expected to be repaid in connection with
    the sale of the assets. The amount of after-tax interest expense allocated
    to discontinued operations in fiscal 2003, fiscal 2002 and fiscal 2001 was
    $2.3 million, $3.8 million, and $8.6 million, respectively.





We have separately
    classified $18.3 million and $46.1 million of carrying value associated with
    our assets held for sale in our consolidated balance sheets at September 30,
    2003 and 2002, respectively.





The following
    table sets forth net revenues and the components of loss from discontinued
    operations for the years ended September 30, 2003, 2002, and 2001 (in thousands):





|                                                          |  | Successor
          Company |         |      | Predecessor
          Company                               |        
|--------------------------------------------------------- |  | --------------------------- | ------- | ---- | ----------------------------------------------------------- | -------
|                                                          |  |                             |         |      |                                                             |        
|                                                          |  | Years Ended September 30,   |         |      | Year
          Ended
          September 30,
          2001 |        
|                                                          |  |                            
|                                                          |  | 2003                        |         | 2002 |                                                             |        
|                                                          |  |                             |         |      |                                                             |        
|Net
          revenues                                    |  | $                           | 144,279 |      | $                                                           | 261,879
|                                                          |  |                             |         |      |                                                             |        
|                                                          |  |                             |         |      |                                                             |        
|Net
          operating loss of discontinued businesses   |  | $                           | (20,779 | )    | $                                                           | (2,296 
|Loss
          on discontinuation of businesses           |  |                             | (14,168 | )    |                                                             | (11,004
|Income
          tax benefit                              |  |                             | 13,822  |      |                                                             | 4,959  
|                                                          |  |                             |         |      |                                                             |        
|Loss
          from discontinued operations, net of taxes |  | $                           | (21,125 | )    | $                                                           | (8,341 
|                                                          |  |                             |         |      |                                                             |        




The loss on
    discontinuation of businesses includes the write-down of assets to estimated
    net realizable value.





The operations
    of GHC spun-off on December 1, 2003 will be reported as discontinued operations
    beginning in fiscal 2004.





Results of Operations





Factors Affecting Comparability
    of Financial Information





As a consequence
    of the implementation of fresh-start reporting effective September 30, 2001,
    the financial information presented in the consolidated statements of operations
    and the statements of cash flows for the fiscal years ended September 30,
    2003 and 2002 are generally not comparable to the financial results for the
    corresponding period in fiscal 2001. To highlight the lack of comparability,
    a solid vertical line separates the pre-





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emergence financial information from
    the post-emergence financial information in the accompanying consolidated
    financial statements and the notes thereto. Any financial information herein
    labeled Predecessor Company refers to periods prior to the adoption
    of fresh-start reporting, while those labeled Successor Company
    refer to periods following adoption of fresh-start reporting.





The lack of
    comparability in the accompanying consolidated financial statements is most
    apparent in our capital costs (lease, interest, depreciation and amortization),
    as well as with debt restructuring and reorganization costs and net (gain)
    on debt discharge, and preferred dividends. We believe that business segment
    operating revenue and EBITDA of the Predecessor Company are generally comparable
    to those of the Successor Company.





Fiscal 2003,
    fiscal 2002 and fiscal 2001 financial information has been adjusted to exclude
    operations identified as discontinued, including assets held for sale, since
    our September 30, 2001 adoption of SFAS No. 144. Properties identified as
    discontinued prior to our September 30, 2001 adoption of SFAS No. 144 continue
    to be reflected in the results from continuing operations. See  
    Certain Transactions and Events  Assets Held for Sale and Discontinued
    Operations.





Reconciliation of Net Income to
    EBITDA





The following
    table reconciles our non-GAAP measure of EBITDA to our net income available
    to common shareholders.  See  Reasons for Non-GAAP Financial
    Disclosure (in thousands):





|                                                                    |  | Successor
          Company       |         |      | Predecessor
          Company            |        
|------------------------------------------------------------------- |  | --------------------------------- | ------- | ---- | ---------------------------------------- | -------
|                                                                    |  |                                   |         |      |                                          |        
|                                                                    |  | Years
        ended September 30, |         |      | Year
        ended
        September 30, |        
|                                                                    |  | 2003                              |         | 2002 |                                          |        
|                                                                    |  |                                   |         |      |                                          |        
|Net
          income available to common shareholders - as reported |  | $                                 | 29,987  |      | $                                        | 70,167 
|Add
          back:                                                 |  |                                   |         |      |                                          |        
|Loss
          from discontinued operations, net of taxes           |  |                                   | 21,125  |      |                                          | 8,341  
|Preferred
          stock dividends                                 |  |                                   | 2,701   |      |                                          | 2,599  
|Equity
          in (net income) loss of unconsolidated affiliates  |  |                                   | (1,184  | )    |                                          | (2,165 
|Minority
          interests                                        |  |                                   | 5,194   |      |                                          | 2,838  
|Income
          tax expense                                        |  |                                   | 28,674  |      |                                          | 35,103 
|Interest
          expense                                          |  |                                   | 40,917  |      |                                          | 41,183 
|Depreciation
          and amortization expense                     |  |                                   | 66,384  |      |                                          | 59,449 
|                                                                    |  |                                   |         |      |                                          |        
|EBITDA                                                              |  | $                                 | 193,798 |      | $                                        | 217,515
|                                                                    |  |                                   |         |      |                                          |        




The results
    of operations discussion includes EBITDA. For purposes of SEC Regulation G,
    a non-GAAP financial measure is a numerical measure of a registrants
    historical or future financial performance, financial position or cash flows
    that excludes amounts, or is subject to adjustments that have the effect of
    excluding amounts, that are included in the most directly comparable measure
    calculated and presented in accordance with GAAP in the statement of operations,
    balance sheet or statement of cash flows (or equivalent statements) of the
    registrant; or includes amounts, or is subject to adjustments that have the
    effect of including amounts, that are excluded from the most directly comparable
    measure so calculated and presented. In this regard, GAAP refers to generally
    accepted accounting principles in the United States. Pursuant to the requirements
    of Regulation G, we have provided reconciliations of the non-GAAP financial
    measures to the most directly comparable GAAP financial measures.





Management
    believes that the presentation of EBITDA provides useful information to investors
    regarding our results of operations because it is useful for trending, analyzing
    and benchmarking the performance and value of our business. We use EBITDA
    primarily as a performance measure. We use EBITDA as a measure to assess the
    relative performance of our operating businesses, as well as the employees
    responsible for operating such businesses. EBITDA is useful in this regard
    because it does not include such costs as interest expense, income taxes and
    depreciation and amortization expense, which may vary from business unit to
    business unit depending upon such factors as the method used to finance the
    original purchase of the business unit or the tax law in the state in which
    a business unit operates. By excluding such factors, when measuring financial
    performance, many of which are outside of the control of the employees responsible
    for operating our business units, management is better able to evaluate operating
    performance of the business unit and the employees responsible for business
    unit performance. Consequently, management uses EBITDA to determine the extent
    to which our employees have met financial performance goals, and therefore
    may or may not be eligible for incentive compensation awards. We also use





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EBITDA in our annual budget process.
    We believe EBITDA facilitates internal comparisons to historical operating
    performance of prior periods and external comparisons to competitors
    historical operating performance. Although we use EBITDA as a financial measure
    to assess the performance of our business, the use of EBITDA is limited because
    it does not consider certain material costs necessary to operate our business.
    These costs include the cost to service our debt, the non-cash depreciation
    and amortization associated with our long-lived assets, the cost of our federal
    and state tax obligations, our share of the earnings or losses of our less
    than 100% owned operations and the operating results of our discontinued businesses.
    Because EBITDA does not consider these important elements of our cost structure,
    a user of our financial information who relies on EBTIDA as the only measure
    of our performance could draw an incomplete or misleading conclusion regarding
    our financial performance. Consequently, a user of our financial information
    should consider net income an important measure of our financial performance
    because it provides the most complete measure of our performance.  EBITDA
    should be considered in addition to, not as a substitute for, or superior
    to, GAAP financial measures or as indicators of operating performance.





We define
    EBITDA as earnings from continuing operations before equity in net income
    (loss) of unconsolidated affiliates, minority interests, interest, taxes,
    depreciation and amortization. Other companies may define EBITDA differently
    and, as a result, our measure of EBITDA may not be directly comparable to
    EBITDA of other companies. EBITDA does not represent net income (loss) as
    defined by GAAP.





Fiscal 2003 Compared to Fiscal
    2002





Consolidated
    Overview





For the current
    fiscal year, revenues were $2,649.0 million, an increase of $163.2 million,
    or 6.6%, over the prior fiscal year.  Of this growth, pharmacy services
    revenue to external customers increased by $113.5 million, inpatient services
    revenue increased by $28.2 million and all other business lines grew $21.5
    million. See  Segment Results below for a discussion of
    inpatient services and pharmacy services revenue fluctuations.  The other
    revenue increase of $21.5 million is principally attributed to growth in our
    rehabilitation services business due to the net addition of 85 new customers,
    which contributed an additional $21.3 million of revenues.





Net income
    available to common shareholders for the current fiscal year declined $40.2
    million, or 57.3%, to $30.0 million compared to $70.2 million for the prior
    fiscal year.  The decline in net income is principally attributed to
    $12.8 million of higher after-tax losses reported by our discontinued operations,
    $6.9 million of growth in depreciation and amortization expense, $3.3 million
    of higher earnings levels of our less than 100% owned subsidiaries attributed
    to our investment partners, partially offset by $6.4 million of reduced income
    tax expense from continuing operations.  The reasons for each of the
    above mentioned fluctuations are addressed in the paragraphs that follow.
    The remaining decline in net income available to common shareholders of approximately
    $23.6 million is attributed to the matters described under the following bullets:





| |  | A
          $14.3 million increase in the EBITDA of our pharmacy services segment,
          principally due to revenue growth and the realization of our pharmacy
          margin expansion initiatives.  See  Segment Results
          for a more in-depth discussion of the results of our pharmacy services
          segment.                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | A
          $20.1 million decline in the EBITDA of our inpatient services segment,
          principally due to the negative impact of the Skilled Nursing Facility
          Medicare Cliff.  See  Segment Results for a more
          in-depth discussion of the results of our inpatient services segment.                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | An $8.3 million decline
        in all other businesses EBITDA, principally due to a decline in
        the operating performance of our hospitality service business. $6.3 million
        of this decline is attributed to a change in the pricing charged by our
        hospitality service business to our inpatient services segment for dietary,
        housekeeping and laundry management services.  The remaining 
        $2 million of deterioration is primarily the result of lost external hospitality
        service business.  The hospitality service business is not considered
        a component of our core businesses or strategy.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | A
          $5.3 million decrease in fiscal 2003 general and administrative costs
          principally due to the results of our overhead reductions initiatives
          and reduced stock based compensation expenses in the current year period.                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | A
          $6.8 million increase in fiscal 2003 costs incurred in connection with
          our strategic planning, severance and other related costs versus the
          same period in the prior year.  The cost increase was centered
          in strategic consulting costs.  See  Certain Transactions
          and Events  Change in Strategic Direction and Objectives
          for the composition of such costs incurred in the current year.                                                                                                                                                                                              




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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A
          $4.3 million decrease in debt restructuring and reorganization costs
          as a result of the recognition in the prior year-to-date period of approximately
          $2.6 million of reorganization costs for post confirmation liabilities
          payable to the United States Trustee related to the Chapter 11 proceedings,
          as well as recording debt restructuring and reorganization costs resulting
          from a settlement reached with a lender of a pre-petition mortgage obligation
          for an amount that exceeded the estimated loan value established in
          the September 30, 2001 fresh-start balance sheet by approximately $1.7
          million.                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | A
             $12.4 million decrease in fiscal 2003 net gains from break-up fees
            and
          other settlements (net gains).  In the current year-to-date period
           we recorded $11.3 million of net gains composed of a $10.2 million
          net
          break-up fee earned in connection with the proposed NCS transaction
           (see    Certain Transactions and Events 
          NCS Transaction Termination Fee) and $1.1 million of net gain
          resulting from the early extinguishment of debt.  In the prior
          year-to-date period we recorded a net gain of approximately $23.8 million,
          principally
          related
          to an arbitration award.




Depreciation
    and amortization expense increased $6.9 million, or 11.7%, to $66.4 million
    for the current fiscal year compared to $59.5 million for the prior fiscal
    year.  The increase is attributed to incremental depreciation expense
    on capital expenditures made since the prior year in excess of fixed asset
    retirements, and from the amortization of certain identifiable intangible
    assets acquired since the prior year.





Interest expense
    was relatively flat with a $0.3 million, or 0.6%, decrease for the current
    fiscal year to $40.9 million, compared to $41.2 million in the prior fiscal
    year.  Debt levels and the corresponding interest expense attributable
    to our continuing operations are lower than the same period in the prior year
    due to unscheduled debt repayments.  This reduction is offset with the
    incremental costs of our derivative financial instruments entered into in
    the fourth quarter of fiscal 2002, which fixed or capped our interest cost
    on $275 million of debt.





Income tax
    expense for the current and prior year to date periods were offset by tax
    credits of $4.4 million and $10.3 million, respectively, pursuant to the Job
    Creation and Worker Assistance Act of 2002.  Our income tax expense is
    otherwise estimated using an effective tax rate of approximately 40.1% in
    the current year to date period and 39.1% in the prior year to date period. 
    The increase in the current year effective tax rate is due to the non-deductibility
    of certain costs related to the spin-off of GHC.





Equity in
    net income of unconsolidated affiliates for the current fiscal year was $1.2
    million compared to our equity in net income of unconsolidated affiliates
    of $2.2 million for the prior fiscal year.  The $1.0 million decrease
    in the current year is primarily due to the negative impact of the Skilled
    Nursing Facility Medicare Cliff on the operating results of eldercare centers
    that we jointly-own, as well as our purchase in July 2003 of four eldercare
    centers that were previously jointly-owned and are therefore no longer accounted
    for under the equity method of accounting.





Minority interests
    expense increased $2.4 million for the current fiscal year to $5.2 million
    compared to $2.8 million for the comparable prior fiscal year due primarily
    to the operational growth and improved operating performance of certain consolidated
    pharmacy joint-venture partnerships.





Preferred
    stock dividends were relatively unchanged at $2.7 million for the current
    fiscal year versus $2.6 million for the prior fiscal year.  Preferred
    stock dividends are accrued in the form of additional shares of preferred
    stock (paid-in-kind).





Loss from
    discontinued operations, net of taxes, was $21.1 million in the current fiscal
    year and $8.3 million in the prior fiscal year.  The change is due in
    part to an $8.9 million (after-tax) write-down of assets classified as discontinued
    in the current fiscal year compared to $6.7 million (after-tax) recorded in
    the prior fiscal year, combined with the relative results of operations of
    those businesses identified as discontinued operations.  The





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deterioration in the operating results
    of our discontinued businesses is attributed to the impact of the Skilled
    Nursing Facility Medicare Cliff on such operations and adverse self-insured
    liability claims development associated with our discontinued Florida properties. 
    See  Certain Transactions and Events  Assets Held For Sale
    and Discontinued Operations.





Segment Results





For fiscal
    2003 and 2002, we had two reportable segments: (1) pharmacy services and (2)
    inpatient services. For a reconciliation of segment financial information
    to the consolidated statements of operations, see note 21 to our consolidated
    financial statements  Segment Information of Part II, Item
    8, Financial Statements and Supplementary Data, of this Form 10-K.





Pharmacy
    Services





Pharmacy services
    revenue (before intersegment eliminations) increased $91.0 million, or 7.4%,
    to $1,313.4 million in the current fiscal year compared to $1,222.4 million
    for the same period in the prior year. Revenues from intersegment customers,
    which are eliminated in consolidation, decreased $22.5 million, or 22.4%,
    to $78.0 million for the current fiscal year compared to $100.5 million for
    the same period in the prior year. The increase in pharmacy service revenues
    (before intersegment eliminations) is net of approximately $40.0 million of
    reduced medical supply revenue resulting from transferring the fulfillment
    of medical supply services to Medline and net of approximately $20.0 million
    of reduced revenue related to price concessions afforded in the extension
    of our contracts with Manor Care and the State of New Jersey.  The gross
    increase of $151.0 million in pharmacy services revenue is attributable to
    favorable changes in bed mix, higher patient acuity mix and drug price inflation.





EBITDA of
    the pharmacy services segment increased $14.3 million, or 12.8 %, to $126.7
    million for the current fiscal year from $112.3 million for the prior fiscal
    year. EBITDA margin improved to 9.6% in the current fiscal year from 9.2%
    for the same period in the prior year.  EBITDA growth is attributed to
    the net growth in revenues previously described and improved cost controls. 
    Cost of sales (before intersegment eliminations) increased $64.0 million,
    or 8.4%, for the current fiscal year, to $828.0 million from $764.0 million
    for the same period in the prior year. Of this growth, $56.9 million is attributed
    to pharmacy services revenue growth and $7.1 million is due to margin compression
    related changes in payor mix and reductions in reimbursement rates. As a percentage
    of revenue, cost of sales was 63.0% for the current fiscal year and 62.5%
    for the same period in the prior year. Included in other operating expenses
    for this segment are salaries, wages and benefits which increased $10.4 million,
    or 4.9%, to $222.1 million from $211.7 in the prior year.  As a percentage
    of revenue, salaries, wages and benefits declined to 16.9% as compared to
    17.3% in the prior year.  The remainder of the segments other operating
    expenses include selling, general and administrative expenses which increased
    to $1.0 million to $99.9 million, or 1%, from $98.9 million in the prior year. 
    As a percentage of revenues, selling, general and administrative expense declined
    to 7.6% compared to 8.1% in the prior year.  These declines in operating
    costs are attributed to improved cost control and the leveraging of fixed
    costs against increased revenues.





Inpatient
    Services





Inpatient
    services revenue increased $28.2 million, or 2.3%, to $1,229.2 million in
    the current fiscal year from $1,201.1 million for the same period in the prior
    year.  Of this increase, $23.5 million is attributed to increased payment
    rates.  Our average rate per patient day in the current fiscal year was
    $188 compared to $184 for the comparable period in the prior year. This increase
    in the average rate per patient day is principally driven by increased average
    Medicaid rates ($148 in 2003 versus $138 in 2002), offset by a decline in
    our average Medicare rate per patient day ($314 in 2003 versus $340 in 2002)
    due to the $24.8 million net impact of the October 1, 2002 Skilled Nursing
    Facility Medicare Cliff. $10.0 million of the overall revenue increase resulted
    from the revenues of four eldercare centers acquired in July 2003.  Such
    increases were offset by a decrease in revenue of $7.8 million resulting from
    an overall decrease in occupancy, partially mitigated by $2.5 million of increased
    revenues primarily due to a favorable shift in payor mix.  The favorable
    shift in payor mix resulted from Medicare census representing 0.8% more of
    total census in 2003 than in 2002.  Total patient days increased 7,983
    to 6,545,759 in the current fiscal year compared to 6,537,776 for the same
    period in the prior year.  Of this increase, 59,042 patient days are
    attributed to the aforementioned four eldercare centers acquired in July 2003,
    offset by decreased operating census of 51,059 patient days as the result
    of a decline in overall occupancy.  Our occupancy was 91% and 92% in
    the current and prior year periods, respectively.





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EBITDA for
    the inpatient services segment in the current fiscal year decreased $20.1
    million, or 14.3%, to $120.8 million compared to $140.9 million for the same
    period last year.  EBITDA margin declined to 9.8% from 11.7% for the
    same periods, respectively.  Operating margins were adversely impacted
    by the $24.8 million impact of the Skilled Nursing Facility Medicare Cliff,
    an overall reduction in occupancy and increased operating expenses. 
    The preceding were partially mitigated by the favorable increases in state
    Medicaid rates and less reliance on agency labor.  Operating expenses,
    including salaries, wages and benefits, and other operating expenses, grew
    by $48.3 million, or 4.6%, to $1,108.5 million for the current fiscal year
    compared to the same period in the prior year.  $9.2 million of such
    growth was due to eldercare centers acquired in July 2003. The remaining $39.1
    million of growth in operating expense is principally attributed to wage rate
    pressures related to a highly competitive market for healthcare professionals
    and increased ancillary utilization resulting from increased Medicare census. 
    Nursing labor costs, including both employed and agency labor, increased to
    $77.73 per patient day in the current fiscal year, or 5.3%, from the same
    period in the prior year.  This increase is principally driven by inflationary
    factors which were partially mitigated by less reliance on agency labor (primarily
    nursing costs), resulting from improved hiring and retention trends. 
    Other operating expense declined in the current fiscal year by $9.1 million,
    principally due to reduced agency utilization and reduced pricing from our
    hospitality service business for dietary, housekeeping and laundry management
    services, partially offset by increased ancillary costs.





Fiscal 2002 Compared to Fiscal
    2001





Consolidated Overview





For fiscal
    2002 revenues grew $158.7 million, or 6.8%, to $2,485.8 million compared to
    $2,327.1 million for the same period in the prior year. Of this growth, external
    pharmacy services revenue increased by $86.7 million, inpatient services revenue
    grew by $64.8 million and all other business lines grew $7.2 million. See
      Segment Results discussed further in this section for
    a discussion of revenue fluctuations.





Net income
       available to common shareholders in fiscal 2002 declined $176.3 million,
      or
    71.5%, to $70.2 million compared to $246.5 million for the prior fiscal year. 
    The decline in net income is principally attributed to $35.1 million of growth
     in income tax expense, partially offset by $16.0 million of decreased after-tax

    losses reported by our discontinued operations, $7.3 million of lower earnings
     levels of our less than 100% owned subsidiaries attributed to our investment

    partners, $43.0 million of decreased preferred stock dividends and decreases
     of $73.2 million and $40.5 million in interest expense and depreciation
    and
    amortization expense, respectively.  The reasons for each of the above
    mentioned fluctuations are addressed in the paragraphs that follow. The remaining
    decline in net income available to common shareholders of approximately $321.2
    million is attributed to the matters described under the following bullets:





| |  |  | An
          $11.8 million increase in the EBITDA of our pharmacy services segment,
          principally due to revenue growth and increased margins.  See 
          Segment Results for a more in-depth discussion of the results
          of our pharmacy services segment.                                                                                                                                                                                                                                                                     
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | A
          $24.9 million increase in the EBITDA of our inpatient services segment,
          principally due to increased payment rates.  See  Segment
          Results for a more in-depth discussion of the results of our inpatient
          services segment.                                                                                                                                                                                                                                                                                 
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | A
          $2.0 million increase in all other businesses EBITDA, principally
          due to the improved operating performance of our rehabilitation services
          business.                                                                                                                                                                                                                                                                                                                                                                   
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | An
            $18.6 million increase in fiscal 2002 general and administrative
            costs
          resulting from approximately $9 million of additional expenses for
            self-insured liability claims, approximately $5 million due to changes
            in our employee
          incentive compensation program and the remainder is principally attributed
            to inflationary increases in cost.                                                                                                                       
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | A
          $450.5 million increase in fiscal 2002 debt restructuring and reorganization
          costs and net gain on debt discharge primarily due to $1,460.9 million
          of gains recognized during fiscal 2001 in connection with the discharge
          of liabilities subject to compromise pursuant to our joint plan of reorganization,
          partially offset by $1,014.5 of costs recognized during fiscal 2001,
          primarily consisting of fresh-start valuation adjustments. Fresh-start
          valuation adjustments




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| |  |   | were
           recorded pursuant to the provisions of SOP 90-7, which require entities

        to record their assets and their liabilities at estimated fair values.
           The fresh-start valuation adjustment as described relates only to
          continuing
        operations and is principally the result of the elimination of predecessor
           company goodwill and the revaluation of property, plant and equipment

        to estimated.  In fiscal 2002, $4.3 million of debt restructuring
         and reorganization costs were recognized.                                                                                                                                                                                         
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  | A $106.4
        million decrease in fiscal 2002 operating expenses due to the recognition
        in fiscal 2001 of costs in connection with certain uncollectible receivables,
        insurance related costs and other charges included in other operating
        expenses.  Cost components included:  (a) $30.0 million of notes
        receivable, advances, and trade receivables, due from affiliated businesses
        formerly owned or managed deemed uncollectible, (b) $38.9 million of uncollectible
        trade receivables, (c) $15.1 million of self-insured and related program
        costs, (d) $22.4 million of other charges principally related to contract
        and litigation matters and settlements, and certain other charges.
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  | A $23.8
        million increase in fiscal 2002 net gains from break-up fees and other
        settlements (net gains). During fiscal 2002, we recorded a net gain of
        $21.9 million resulting from the award in the Manor Care arbitration.
        In addition, we also recorded $1.9 million of gains on other legal settlements
        in fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  | A $21.5
        million decrease in fiscal 2002 costs incurred in connection with our
        strategic planning, severance and other related costs in fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  | A $0.5
        million net loss on sale of eldercare centers recognized in fiscal 2001.
        In October 2000, we sold an idle 232 bed eldercare center for cash consideration
        of $7 million, resulting in a net gain on sale of $1.8 million. In April
        2001, we sold an operational 121 bed eldercare center for cash consideration
        of $0.5 million, resulting in a net loss of $2.3 million.                                                                                                                                                                                                                                                                                                                                            




Depreciation
    and amortization expense decreased $40.5 million to $59.4 million in fiscal
    2002 compared to $99.9 million for the same period in the prior year. The
    decrease was primarily caused by the impact of fresh-start reporting on the
    carrying value of our property, plant and equipment, which were adjusted to
    their estimated fair values as of September 30, 2001, and our September 30,
    2001 adoption of an accounting pronouncement which no longer requires the
    amortization of goodwill.





Interest expense
    decreased $73.2 million in fiscal 2002 to $41.2 million, compared to $114.4
    million for the same period in the prior year. In fiscal 2001, in accordance
    with SOP 90-7, we ceased accruing interest following the petition date, June
    22, 2000, on certain long-term debt instruments classified as liabilities
    subject to compromise. Our contractual interest expense in fiscal 2001 was
    $209.8 million, leaving $95.4 million of interest expense unaccrued for that
    period as a result of the Chapter 11 cases. Interest expense in fiscal 2002
    was accrued at the contractual rates. Contractual interest expense in fiscal
    2002 decreased by $168.6 million compared to the same period in the prior
    year. This decrease is attributed to the overall reduction of debt levels
    following our emergence from bankruptcy in addition to a lower weighted average
    borrowing rate.





Income tax
    expense in fiscal 2002 of $45.4 million was offset by a $10.3 million tax
    credit realized pursuant to the Job Creation and Worker Assistance Act of
    2002. Our income tax expense is otherwise estimated using an effective tax
    rate of 39.1%. We did not record any income tax expense in fiscal 2001 due
    to our operating losses.





Equity in
    net income of unconsolidated affiliates in fiscal 2002 was $2.2 million compared
    to equity in net loss of unconsolidated affiliates of $10.2 million for the
    same period in the prior year, which is attributed to changes in the earnings
    / losses reported by our unconsolidated affiliates.  The less favorable
    operating performance of our unconsolidated affiliates in fiscal 2001 is attributed
    to certain asset impairment charges recorded by our affiliates in that year.





Minority interests
    expense increased by $5.1 million in fiscal 2002 to expense of $2.8 million
    compared to income of $2.2 million for the comparable period in the prior
    year.  The increase is primarily due to a pharmacy joint-venture partnership
    initiated in 2002 and improved operating performance of certain other consolidated
    pharmacy joint-venture partnerships.





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Preferred
    stock dividends decreased $43.0 million to $2.6 million in fiscal 2002 compared
    to $45.6 million for the comparable period in the prior year. This decrease
    is attributed to the cancellation of our predecessor company preferred stock
    and related dividends, and offset with dividends on $42.6 million of the preferred
    stock issued in connection with our joint plan of reorganization.





Losses from
    discontinued operations decreased $16.1 million in fiscal 2002, to $8.3 million
    from $24.4 million for the same period in the prior year. The decrease in
    losses from discontinued operations in fiscal 2002 compared to the same period
    in the prior year is principally due to the level of fixed asset write-downs
    to fair value in the 2001 period by the discontinued businesses in connection
    with their adoption of fresh start reporting. See  Certain Transactions
    and Events  Assets Held For Sale and Discontinued Operations.





Segment Results





Pharmacy
    Services





Pharmacy services
    revenue (before intersegment eliminations) increased $89.1 million, or 7.9%,
    to $1,222.4 million in fiscal 2002 compared to $1,133.3 million for the same
    period in the prior year. Revenues from intersegment customers, which are
    eliminated in consolidation, increased $2.4 million, or 2.4%, to $100.5 million
    in fiscal 2002 compared to $98.1 million for the same period in the prior
    year. Pharmacy service revenues with external customers increased $86.7 million,
    or 8.4%, due to favorable changes in bed mix and patient acuity, and drug
    price inflation.





EBITDA of
       the pharmacy services segment increased $11.8 million, or 11.7%, to $112.3

    million in fiscal 2002 from $100.6 million for the same period in the prior
       year. EBITDA margin improved to 9.2% in fiscal 2002 from 8.9% in the same

    period in the prior year. EBITDA growth is attributed to the net growth in
       revenues previously described and improved cost controls.  Cost of
       sales  (before intersegment eliminations) increased $61.3 million, or
       8.7%, in fiscal
    2002, to $764.0 million from $702.7 million for the same period in the prior
        year. Of this growth, $55.7 million is attributed to pharmacy and medical

    supply revenue growth, and $5.6 million is due to margin compression related
        changes in payor mix and reductions in reimbursement rates. As a percentage

    of revenue, cost of sales in fiscal 2002 and 2001 was 62.5% and 62.0%, respectively.
        Other operating expenses for this segment, including salaries, wages
       and benefits,
    increased $16.0 million, or 4.8%, to $346.0 million in fiscal 2002 compared
        to $330.0 million for the same period in the prior year. As a percentage
       of
    revenue, other operating costs declined to 28.3% in fiscal 2002 from 29.1%
        for the comparable period in the prior year. This decline is attributed
       to
    improved cost control and the leveraging of fixed costs against increased
        revenues.





Inpatient
    Services





Inpatient
    services revenue increased $64.8 million, or 5.7%, to $1,201.1 million in
    fiscal 2002 from $1,136.3 million for the same period in the previous year.
    Of this increase, $67.2 million is principally attributed to increased payment
    rates. Our average rate per patient day in fiscal 2002 was $184 compared to
    $171 for the comparable period in the prior year. This increase in the average
    rate per patient day is principally driven by the full year effect of the
    April, 2001 implementation of the Benefits Improvement and Protection Act
    on our average Medicare rate per patient day ($340 in 2002 versus $327 in
    2001), as well as increased Medicaid rates ($138 in 2002 versus $128 in 2001)
    in certain states, most notably in Maryland.  Revenues improved by $11.7
    million due to a favorable shift in payor mix resulting from Medicare census
    representing 1.5% more of total census in 2002 than in 2001.   The
    preceding were offset by a decrease in revenue of $17.5 million resulting
    from eldercare center divestitures.  Total patient days decreased 114,361
    to 6,537,776 in fiscal 2002 compared to 6,652,137 in fiscal 2001. Of this
    decrease, 121,768 patient days are attributed to eldercare center divestitures
    being offset by increased operating census of 7,407 patient days as the result
    of an increase in overall occupancy.  Our occupancy was 92% in both fiscal
    year 2002 and 2001. Increased Medicare Part B volume was the primary reason
    for the remaining $3.4 million of increased revenue in fiscal 2002.





EBITDA for
    the inpatient services segment in fiscal 2002 increased $24.9 million, or
    21.5%, to $140.9 million in fiscal 2002 from $116.0 million in fiscal 2001.
    EBITDA margin increased to 11.7% from 10.2% for the same periods, respectively. 
    The improvement in operating margins was primarily the result of improved
    Medicare and Medicaid payment rates.  Operating expenses, including salaries,
    wages and





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benefits, and other operating expenses,
    grew by $39.9 million, or 3.9%, to $1,060.2 million in fiscal 2002 compared
    to the same period in the prior year. The primary cost for this segment is
    salary, wage and benefit costs, which increased $18.9 million, or 3.4% in
    fiscal 2002 to $576.6 million from $557.7 million for the same period in the
    prior year. This increase is net of $12.2 million of reduced salary, wage
    and benefit costs resulting from eldercare center divestitures. Salary, wage
    and benefit costs, considering the impact of divested eldercare centers, increased
    $31.1 million, or 5.7%, driven by inflationary cost increases and the relative
    mix of employed labor versus agency labor costs. As a percentage of net revenue,
    salary, wage and benefit costs, once adjusted for the impact of divested eldercare
    centers, was 48.0% in fiscal 2002 compared to 48.8% for the comparable period
    in the prior year. The decline in this ratio is attributed to a disproportionate
    increase in revenue as a result of the full year impact of the Benefits Improvement
    Protection Act in 2002 as compared to the increase in labor related costs.
    The inpatient services segment has experienced continued pressure on wage
    and benefit related costs mitigated by less reliance on agency labor (primarily
    nursing costs) resulting from improved hiring and retention trends. Other
    operating expenses, once reduced for the impact of divested eldercare centers
    ($8.1 million in fiscal 2001), increased $28.4 million, or 6.3%, to $483.0
    million in fiscal 2002 compared to $454.5 million in fiscal 2001. The increase
    was primarily driven by $12.2 million of additional ancillary supply costs
    to treat a higher acuity customer base, increased property and general liability
    insurance of $9.5 million and other operating costs of $6.7 million.





Liquidity and
    Capital Resources





Working Capital and Cash Flows





At September
    30, 2003, we had cash and equivalents of $132.7 million, net working capital
    of $446.7 million and $149.1 million of unused commitment under our $150 million
    revolving credit facility.





At September
    30, 2003, we had restricted investments in marketable securities of $90.6
    million, which are held by Liberty Health Corp. LTD., referred to as LHC,
    our wholly-owned captive insurance subsidiary incorporated under the laws
    of Bermuda. The investments held by LHC are restricted by statutory capital
    requirements in Bermuda. In addition, certain of these investments are pledged
    as security for letters of credit issued by LHC. As a result of such restrictions
    and encumbrances, we and LHC are precluded from freely transferring funds
    through intercompany loans, advances or cash dividends.





Our cash flow
    from operations before debt restructuring and reorganization costs in fiscal
    2003 generated cash of $115.2 million compared to $233.4 million in fiscal
    2002. A year-over-year comparison of the primary operating cash flow activities
    follows:





| |  |  | A reduction
        in cash flow from operations of $60.8 million, net of charges not requiring
        funds, principally driven by the $24.8 million negative impact of the
        Skilled Nursing Facility Medicare Cliff, $11.3 million of reduced cash
        received in fiscal 2003 from unusual gains associated with the previously
        described arbitration awards, break-up fees and other settlements, and
        $12.8 million of increased losses from discontinued operations;
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | Timing
        of payments for vendor and employee obligations accounted for a $34.1
        million decline in operating cash flow in fiscal 2003 versus fiscal 2002;
        and                                                                                                                                                                                                                                                                                                                   
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | A use
        of cash of $17.8 million in fiscal 2003 driven by increased trade accounts
        receivable caused by growth in operations.                                                                                                                                                                                                                                                                                                                                                          




Cash payments
    for debt restructuring and reorganization costs were $4.7 million in fiscal
    2003 compared to $54.2 million for the same period in the prior year.





We believe
    that cash flow from operations, along with available borrowings under our
    new financing arrangements described below, are sufficient to meet our current
    liquidity needs.





Our days sales
    outstanding at September 30, 2003 was 50 days compared to 54 days at September
    30, 2002. This reduction is principally due to improvement in the collection
    of accounts receivable.





Our net cash
    used in investing activities in fiscal 2003 was $11.6 million, and includes
    $59.8 million of capital expenditures, $5.3 million of cash used to purchase
    two eldercare centers, $5.9 million to purchase a rehabilitation





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services business, offset by $55.1
    million of proceeds for the sale of eldercare centers principally located
    in Florida and Illinois. Capital expenditures consist primarily of betterments
    and expansion of eldercare centers and investments in computer hardware and
    software.





Our investing
    activities in fiscal 2003 also include $4.2 million in net investments in
    restricted investments in marketable securities, representing the current
    period net funding of self-insured workers compensation and general
    / professional liability insurance retentions held by LHC.





Our financing
       activities in fiscal 2003 resulted in net cash outflows of $113.6 million,

    and include $77.4 million of debt repayments and $36.2 million of common
      stock  repurchases. Of the $77.4 million of debt repayments made in fiscal
      2003,
    $24.8 million was the result of an excess cash flow recapture provision,
      $17.3  million was paid from the net proceeds of the sale of eight skilled
      nursing
    facilities in the state of Illinois and the remaining $35.3 million of debt
       repayments during fiscal 2003 were the result of the early extinguishment

    of four fixed rate secured loans and scheduled principal payments on all
      debt  instruments. In fiscal 2003, our board of directors authorized us
      to repurchase
    up to $50.0 million of our common stock through privately negotiated third
       party transactions or in the open market. As of September 30, 2003, we
      had
    purchased 2.3 million shares of common stock for an aggregate amount of $36.2
       million, representing 5.8% of the common stock outstanding.





Following
    the spin-off, our need for funds arises primarily from our working capital
    requirements, including the need to finance our receivables, inventory and
    equipment used to provide services to our pharmacy customers. At the date
    of the spin-off we had approximately $72.1 million of cash to fund working
    capital needs. We currently have a $37.9 million deposit with our primary
    pharmaceutical wholesaler which equates to negative four days payment terms.
    The deposit is fully refundable to us at our request. This, combined with
    our contractual ability to go to 15 day payment terms, provides us the ability
    to use these funds as an additional reserve to meet our working capital requirements,
    debt service and other cash needs over the next year, if needed. We believe
    that net cash provided by our operating activities will provide sufficient
    resources to meet our working capital requirements, debt service and other
    cash needs over the next year. We also believe that funds available through
    the revolving line of credit described below under  New Financing
    Arrangements will provide the necessary resources to expand and grow
    our pharmacy business either through internal growth or acquisitions.





New Financing Arrangements





In connection
    with the spin-off of GHC, the Company restructured and refinanced nearly all
    of its indebtedness. At September 30, 2003, the Company had a senior secured
    credit facility of $315.0 million, senior secured notes of $240.2 million
    and other secured debt of $56.4 million, along with an undrawn $150.0 million
    revolving credit facility.  In the first quarter of fiscal 2004, prior
    to the spin-off, both we and GHC entered into new financing arrangements in
    an effort to extinguish all senior secured joint and several debt and to provide
    adequate capital to both separate organizations. As such, we and GHC entered
    into the following new financing arrangements:





NeighborCare:





| |  |  | $250.0
        million, 6.875% senior subordinated notes due 2013; and                                                                                                        
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                               
| |  |  | $100.0
        million, undrawn revolving credit facility due 2008. Interest at LIBOR
        plus 2.00% on borrowings and a commitment fee of 0.50% on any unused commitment.




GHC:





| |  |  | $225.0
        million, 8% senior subordinated notes due 2013;                                                                                                                        
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                                       
| |  |  | $185.0
        million, fully drawn term loan due 2010. Interest at LIBOR plus 2.75%;
        and                                                                                     
| |  |   |                                                                                                                                                                                       
| |  |  | $75.0
        million, undrawn revolving credit facility due 2008. Interest at LIBOR
        plus 3.00% on borrowings; and a commitment fee of 0.50% on any unused
        commitment.




The $660.0
      million  of proceeds from the new financing arrangements were used to repay
      our previously
    held senior credit facility of $315.0 million ($246.0 million term loan and
       $68.2 million delayed drawn term loan) and our previously held $240.2
      million
    senior secured notes, which occurred in the first quarter of fiscal 2004.





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The remaining
    proceeds of approximately $104.8 million were used to pay for approximately
    $21.0 million of financing fees related to the new financing arrangements,
    with the remaining $83.8 million used to provide additional liquidity to both
    organizations to fund both working capital and other requirements.





The agreements
    and instruments governing our new financing arrangements contain various restrictive
    covenants that, among other things, require us to comply with or maintain
    certain financial tests and ratios and restrict our ability to:





| |  |  | incur
          more debt;                                        
| |  | - | ------------------------------------------------------------------
| |  |   |                                                                   
| |  |  | pay
          dividends, redeem stock or make other distributions;
| |  |   |                                                                   
| |  |  | make
          certain investments;                               
| |  |   |                                                                   
| |  |  | create
          liens;                                           
| |  |   |                                                                   
| |  |  | enter
          into transactions with affiliates;                
| |  |   |                                                                   
| |  |  | make
          acquisitions;                                      
| |  |   |                                                                   
| |  |  | merge
          or consolidate; and                               
| |  |   |                                                                   
| |  |  | transfer
          or sell assets.                                




Our new financing
    arrangements require us to maintain compliance with certain financial and
    nonfinancial covenants, including minimum EBITDA (earnings before interest,
    taxes, depreciation and amortization); limitations on capital expenditures,
    maximum leverage ratios, minimum fixed charge coverage ratios and minimum
    net worth.





Under the
      terms of NeighborCares and GHCs
      senior subordinated notes, the notes are not redeemable until on or after
      November 15, 2008 and October 28, 2008, respectively. We and
      GHC may, however, use the net proceeds from one or more equity
  offerings to redeem up to 35% of the aggregate principal amount of the notes
      issued on or before November 15, 2006 and October 15, 2006,
      respectively at 106.875% and 108.000%, respectively, of the principal amount
      thereof, plus accrued and unpaid interest to the redemption date, subject
  to the terms of the notes.





Contractual Obligations and Commitments





We have future
    obligations for debt repayments, capital leases, and future minimum rentals
    under operating leases. The obligations as of September 30, 2003 are summarized
    as follows (in thousands):





|                                    |  |       |         |                                       | Payments
          Due by Period |                    
|----------------------------------- |  | ----- | ------- | ------------------------------------- | -------------------------------- | -------------------
|                                    |  |       |         |                                       |                                  |                    
|Contractual
          Obligation    |  | Total |         | Less
          than 1 
          year |                                  | 1-3
          years
|                                    |  |       |         |                                       |                                  |                    
|Long-term
          debt            |  | $     | 601,746 |                                       | $                                | 15,872             
|Capital
          lease obligations |  |       | 9,873   |                                       |                                  | 4,263              
|Operating
          leases          |  |       | 137,851 |                                       |                                  | 29,109             
|                                    |  |       |         |                                       |                                  |                    
|                                    |  | $     | 749,470 |                                       | $                                | 49,244             
|                                    |  |       |         |                                       |                                  |                    




Certain of
    our underlying long-term debt and lease obligations require us to maintain
    compliance with financial and nonfinancial covenants, including minimum
    EBITDAR (earnings before interest, taxes, depreciation, amortization and rents);
    limitations on capital expenditures, maximum leverage ratios, minimum fixed
    charge coverage ratios and minimum net worth. Failure to meet these covenants
    or the occurrence of other defaults, such as non-payment, could result in
    the acceleration of the maturity of such obligations.





A majority
    of the Companys long-term debt obligations were repaid subsequent to
    September 30, 2003 in connection with the spin-off. See  New Financing
    Arrangements. All of the capital lease obligations and a portion of
    the operating lease obligations are attributed to NeighborCare and will continue
    to be our commitments after the spin-off.





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Off-Balance Sheet Commitments





In addition
    to the contractual obligations and commitments described above, we also have
    contingent obligations related to outstanding lines of credit, letters of
    credit and guarantees. These commitments as of September 30, 2003 are summarized
    as follows (in thousands):





|                                        |  |       |        | Amount
          of Commitment Expiration Per Period |  
|--------------------------------------- |  | ----- | ------ | ---------------------------------------------------- | -
|                                        |  |       |        |                                                      |  
|Off-Balance
          Sheet Commitments |  | Total |        | Less
          than 1
          year                 |  
|                                        |  |       |        |                                                      |  
|Lines
          of credit               |  | $     | 2,765  |                                                      | $
|Letters
          of credit             |  |       | 894    |                                                      |  
|Guarantees                              |  |       | 23,184 |                                                      |  
|                                        |  |       |        |                                                      |  
|                                        |  | $     | 26,843 |                                                      | $
|                                        |  |       |        |                                                      |  




Requests for
    providing commitments to extend financial guarantees and extend credit are
    reviewed and approved by senior management. Management regularly reviews all
    outstanding commitments, letters of credit and financial guarantees, and the
    results of these reviews are considered in assessing the need for any reserves
    for possible credit and guarantee loss.





The Company
       has an agreement with a vendor, which supplies approximately 98% of the
      Companys
    pharmaceutical products, pursuant to which the Company is required to maintain
       a deposit to secure purchase terms. The deposit of $37.9 million and $32.7

    million at September 30, 2003 and 2002, respectively, is refundable upon
      the  Companys election of alternative purchase terms.





We have extended
    $7.4 million in working capital lines of credit to certain jointly owned and
    managed companies, of which $4.6 million were unused at September 30, 2003.
    Credit risk represents the accounting loss that would be recognized at the
    reporting date if the affiliate companies were unable to repay any amounts
    utilized under the working capital lines of credit. Commitments to extend
    credit to third parties are conditional agreements generally having fixed
    expiration or termination dates and specific interest rates and purposes.





We have posted
    $0.9 million of outstanding letters of credit. The letters of credit guarantee
    performance to third parties of various trade activities. The letters of credit
    are not recorded as liabilities on our balance sheet unless they are probable
    of being utilized by the third party. The financial risk approximates the
    amount of outstanding letters of credit.





We are a party
    to joint venture partnerships whereby our ownership interests are 50% or less
    of the total capital of the partnerships. We account for these partnerships
    using the equity method of accounting and, therefore, the assets, liabilities
    and operating results of these partnerships are not consolidated with ours.
    The carrying value of our investment in joint venture partnerships is $8.8
    million at September 30, 2003. Our share of the income (loss) of these partnerships
    for the years ended September 30, 2003, 2002 and 2001 was $1.2 million, $2.2
    million and ($10.2) million, respectively. Although we are not contractually
    obligated to fund operating losses of these partnerships, in certain cases,
    we have extended credit to such joint venture partnerships in the past and
    may decide to do so in the future in order to realize economic benefits from
    our joint venture relationship. Management assesses the creditworthiness of
    such partnerships in the same manner it does other thirdparties. We
    have provided $10.8 million of financial guarantees related to loan commitments
    of four jointly owned and managed companies. As of September 30, 2003, we
    have also provided $12.4 million of financial guarantees related to lease
    obligations of one jointlyowned and managed company of GHC that operates
    four eldercare centers. This obligation was subsequently relieved in October
    2003 upon the sale of the jointly-owned partnerships leasehold rights
    to an independent third party. The guarantees are not recorded as liabilities
    on our balance sheet unless we are required to perform under the guarantee.
    Credit risk represents the accounting loss that would be recognized at the
    reporting date if counterparties failed to perform completely as contracted.
    The credit risk amounts are equal to the contractual amounts, assuming that
    the amounts are fully advanced and that no amounts could be recovered from
    other parties.





Our business
    activities do not include the use of unconsolidated special purpose entities.
    All of the off-balance sheet commitments presented above are attributed to
    GHCs business and, consequently, will not be our obligations after the
    spin-off.





Income Taxes





Pursuant to
    the Job Creation and Worker Assistance Act of 2002, which extended the net
    operating loss carryback period to five years, the Company was able to carryback
    certain net operating losses (NOL) originating





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in the year ended September 30, 2001.
    This enabled the Company to record $4.4 million and $10.3 million in federal
    tax refunds during the years ended September 30, 2003 and 2002, respectively.





Following
    consummation of the Plan, and after reduction for (1) the aforementioned NOL
    carrybacks and (2) cancellation of prepetition indebtedness as provided under
    Section 108 of the Internal Revenue Code, the Company had Predecessor Company
    NOL carry-forwards of $278.0 million, which expire between September 30, 2020
    and September 30, 2021. Under applicable limitations imposed by Section 382
    of the Internal Revenue Code, the Companys ability to utilize these
    loss carry-forwards became subject to an annual limitation of $43.3 million,
    inclusive of a separate limitation for Multicare. During the years ended September
    30, 2003 and 2002, the Company utilized $5.0 million and $8.0 million, respectively,
    of Predecessor loss carry-forwards. Pursuant to SOP 907, the income
    tax benefit of any Predecessor NOL utilization ultimately serves to reduce
    goodwill and, thereafter, to increase additional paid-in-capital. The Company
    has Predecessor NOL carry-forwards of $265.0 million remaining at September
    30, 2003. There can be no assurances that the Company will be able to utilize
    these NOLs and, consequently, a 100% valuation allowance against these
    NOLs has been provided. During fiscal 2003, the Successor Company generated
    an additional NOL of $27.2 million not subject to annual limitation which
    is available for carry-forward through the year ended September 30, 2023.
    Other deferred tax assets include $3.3 million for builtin losses recognized
    by Multicare during fiscal 2002 in excess of its separate limitation under
    Section 382.





Revenue Sources





We receive
    revenues from Medicare, Medicaid, private insurance, self-pay residents, other
    third party payors and long-term care facilities which utilize our pharmacy
    and other specialty medical services. The healthcare industry is experiencing
    the effects of the federal and state governments trend toward cost containment,
    as government and other third party payors seek to impose lower reimbursement
    and utilization rates and negotiate reduced payment schedules with providers.
    These cost containment measures, combined with the increasing influence of
    managed care payors and competition for patients, have resulted in reduced
    rates of reimbursement for services we provide.





The recently
    enacted Medicare Modernization Act may have an effect upon our business or
    to the business of our primary customers, nursing facilities.  Specifically,
    it increases payments to nursing facilities to cover the high costs of care
    associated with treatment for AIDS patients, subject to applicable sunsets,
    while potentially reducing payments for certain outpatient pharmaceutical
    drugs and biologicals currently reimbursed under the average wholesale
    price methodology.  The legislation shifts the payment methodology
    from average wholesale price to average sales price.  DHHS
    will have the authority to adjust payment rates where the average sales price
    does not reflect widely available market prices.  In addition, the legislation
    will have a significant impact on reimbursement rates for durable medical
    equipment by freezing durable medical equipment rates from 2004 through 2006. 
    DHHS will have the authority to adjust rates for the top five most widely
    used durable medical equipment codes to reflect reimbursement rates paid under
    the Federal Employee Health Benefit Plan.  The Medicare Modernization
    Act also provides for increased federal resources being available for prescription
    drug benefits coverage in 2006.  Finally, the Medicare Modernization
    Act authorizes an interim federally sponsored prescription drug discount plan
    to provide group discounts for Medicare beneficiaries between 2004 and 2006.





Because of
    the recent enactment of the Medicare Modernization Act and its broad scope,
    we are not in a position to fully assess its impact on our business. 
    The impact of the legislation depends upon a variety of factors, including
    patient mix.  It is not clear at this time whether this new legislation
    will have an overall negative impact on institutional and long-term care pharmacy
    services.  This legislation may reduce revenue and impose additional
    costs to the industry.  DHHS has not yet promulgated any final regulations
    under the Act, as the Act requires it to do.  The impact of these regulations
    when promulgated, including those regulations relating to the prescription
    drug discount plan discussed above, is unclear.





Critical Accounting Policies





An accounting
      policy is considered to be critical if it is important to the registrants
       financial condition and results, and requires significant judgment and
      estimates
       on the part of management in its application. Our critical accounting
      estimates





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and the related assumptions are evaluated
    periodically as conditions warrant, and changes to such estimates are recorded
    as new information or changed conditions require revision. Application of
    the critical accounting policies requires managements significant judgments,
    often as the result of the need to make estimates of matters that are inherently
    uncertain. If actual results were to differ materially from the estimates
    made, the reported results could be materially affected. Our senior management
    has reviewed these critical accounting policies. We believe that the following
    represents our critical accounting
    policies. For a summary of all of our significant
    accounting policies, including critical accounting policies discussed below,
    see note 1 Summary of Significant Accounting Policies to
    Part II, Item 8, Financial Statements and Supplementary Data,
    of this Form 10-K.





Allowance for Doubtful Accounts





We utilize
    the Aging Method to evaluate the adequacy of our allowance for
    doubtful accounts. This method is based upon applying estimated standard allowance
    requirement percentages to each accounts receivable aging category for each
    type of payor. We have developed estimated standard allowance requirement
    percentages by utilizing historical collection trends and our understanding
    of the nature and collectibility of receivables in the various aging categories
    and the various segments of our business. The standard allowance percentages
    are developed by payor type as the accounts receivable from each payor type
    have unique characteristics. The allowance for doubtful accounts is determined
    utilizing the aging method described above while also considering accounts
    specifically identified as uncollectible. Accounts receivable that we specifically
    estimate to be uncollectible, based upon the age of the receivables, the results
    of collection efforts or other circumstances, are fully reserved for in the
    allowance for doubtful accounts until they are writtenoff.





In fiscal
    2001, we performed a reevaluation of our allowance for doubtful accounts
    triggered by deterioration in the agings of certain categories of receivables.
    We believe that such deteriorations were due to several prolonged negative
    factors related to the operational effects of our bankruptcy filings, personnel
    shortages, the time demands required in normalizing relations with vendors
    and addressing a multitude of other bankruptcy issues. As a result of this
    reevaluation, we determined that an increase to the allowance for doubtful
    accounts of $38.9 million was necessary, and certain changes to the aging
    method resulting in higher levels of allowance for doubtful accounts requirements
    were also necessary.





Over the past
    three years, we have continued to refine our assumptions and methodologies
    underlying the aging method. We believe the assumptions used in aging method
    employed in fiscal 2003 and 2002, coupled with continued improvements in our
    collection patterns, suggest that our allowance for doubtful accounts is adequately
    provided for. However, because the assumptions underlying the aging method
    are based upon historical collection data, there is a risk that our current
    assumptions are not reflective of more recent collection patterns. Changes
    in overall collection patterns can be caused by market conditions and/or budgetary
    constraints of government funded programs such as Medicare and Medicaid. Such
    changes can adversely impact the collectibility of receivables, but not be
    addressed in a timely fashion when using the aging method, until updates to
    our periodic historical collection studies are completed and implemented.





At least annually,
    we update our historical collection studies in order to evaluate the propriety
    of the assumptions underlying the aging method. Any changes to the underlying
    assumptions are implemented immediately. Changes to these assumptions can
    have a material impact on our bad debt expense, which is reported in the consolidated
    statements of operations as a component of other operating expenses.





Loss Reserves For Certain SelfInsured
    Programs





General
    and Professional Liability and Workers Compensation





General and
    professional liability costs for the longterm care industry have become
    increasingly expensive. Specifically, rising costs of eldercare malpractice
    litigation, and losses stemming from these malpractice lawsuits and a constriction
    of insurers have caused many insurance carriers to raise the cost of insurance
    premiums or refuse to write insurance policies for nursing homes. These problems
    are particularly acute in the State of Florida where, because certain laws
    allow for significantly higher liability awards than in other states, general
    liability and professional liability costs have increased substantially. In
    fiscal 2003, we sold all of our approximately 1,500





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skilled nursing and assisted living
    beds in the State of Florida, representing six percent of our then owned and
    leased beds.





Prior to June
    1, 2000, we had first dollar coverage for general and professional liability
    costs with third party insurers; accordingly, we have no exposure for claims
    prior to that date. Effective June 1, 2000, we began insuring a substantial
    portion of our professional liability risks through our whollyowned
    insurance company, LHC. LHC was a wholly-owned subsidiary of GHC
    as of the date of the spin-off and as a result will not be included in the
    consolidated financial statements of the Company after the spin-off. Specifically,
    we are responsible for the first dollar of each claim (on a claimsmade
    basis), up to a selfinsurance retention limit determined by the individual
    policies, subject to aggregate limits for each policy year. The selfinsured
    retention limits amount to $14 million, $22 million and $19 million for the
    policy years ended May 31, 2004, 2003 and 2002, respectively. For policy years
    2004 and 2002, any costs above these retention limits are covered by third-party
    insurance carriers. For policy year 2003 (June 2002 to May 2003), we have
    retained an additional selfinsurance layer of $5 million. Since the
    June 1, 2000 inception of the selfinsurance program through September
    30, 2003, our cumulative selfinsurance retention levels are $60 million
    and our provision for these losses is $45.8 million. Assuming our actual losses
    were to reach our retention limits in each of the policy years, our additional
    exposure is approximately $14.2 million which, if incurred, would be recognized
    as an increase to our other operating expenses in our consolidated statements
    of operations in the period such exposure became known. In addition, we have
    provided $5.3 million for the estimated costs of claims incurred but not reported
    as of September 30, 2003.





Beginning
    in 1994, we insured our workers compensation exposure, principally via selfinsurance
    retentions and large deductible programs through LHC. In addition, we inherited
    legacy workers compensation programs from acquisitions we completed.





Over the past
    three years, the majority of our workers compensation coverage was structured
    as follows: For policy years 20022004 (May 1, 2001  April 30,
    2004) we have large deductible programs, the deductibles for which are insured
    through LHC; and for policy year 2001 (May 1, 2000  April 30, 2001)
    we were insured on a first dollar coverage basis for our Multicare subsidiaries,
    and insured through an incurred loss retrospectively rated policy for our
    nonMulticare subsidiaries.





For policy
    years 2004, 2003 and 2002, we are self-insured through LHC up to the first
    $0.5 million per incident for workers compensation. All claims above $0.5
    million per incident are insured through a thirdparty insurer. We have
    annual aggregate selfinsured retentions of $47.4 million, $52.8 million
    and $48 million in policy years 2004, 2003 and 2002, respectively. Claims
    above these aggregate limits are insured through a third partyinsurer
    as of September 30, 2003. Our provision for losses in these policy years is
    $53.4 million as of September 30, 2003. Our reserve levels are evaluated on
    a quarterly basis. Any necessary adjustments are recognized as an adjustment
    to salaries, wages and benefits in our consolidated statements of operations.





For policy
    year 2001, our incurred losses for our non-Multicare subsidiaries for workers
    compensation recognized through September 30, 2003 were $20.8 million. Our
    development factors are updated quarterly and are based upon commonly used
    industry standards. Any changes to the incurred losses are recognized quarterly
    as an adjustment to salaries, wages and benefits in our consolidated statements
    of operations. We are insured through a third party insurer for aggregate
    claims in excess of $44.1 million.





We record
    outstanding losses and loss expenses for both general and professional liability
    and workers compensation liability based on the estimates of the amount of
    reported losses together with a provision for losses incurred but not reported,
    based on the recommendations of an independent actuary, and managements
    judgment using our past experience and industry experience. As of September
    30, 2003, our estimated range of discounted outstanding losses for these liabilities
    is $60.2 million to $74.2 million. Our recorded reserves for these liabilities
    were $66.4 million as of September 30, 2003, and are included in selfinsurance
    liability reserves in our consolidated balance sheet. We (through LHC) have
    restricted investments in marketable securities of $90.6 million at September
    30, 2003 which are substantially restricted to securing the outstanding claim
    losses of LHC.





General and
    professional liability and workers compensation claims are discounted at a
    rate of 4.5% in 2003 and 2002, which estimates the present value of funds
    required to pay losses at a future date. Had we provided losses at undiscounted
    levels at September 30, 2003 and 2002, the reserve for outstanding losses
    and loss expenses would have been increased by approximately $12 million in
    2003 and $6.6 million in 2002.





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We believe
    that the provision for outstanding losses and loss expenses will be adequate
    to cover the ultimate net cost of losses incurred as of September 30, 2003,
    but the provision is necessarily an estimate and may ultimately be settled
    for a significantly greater or lesser amount. It is at least reasonably possible
    that we will revise our estimates significantly in the near term. Any subsequent
    differences arising are recorded in the period in which they are determined.





Health
    Insurance





We offer employees
    an option to participate in a selfinsured health plan. Health claims
    under this plan are selfinsured with a stoploss umbrella policy
    in place to limit maximum potential liability for both individual claims and
    total claims for a plan year. Health insurance claims are paid as they are
    submitted to the plan administrator. We maintain an accrual for claims that
    have been incurred but not yet reported to the plan administrator and therefore
    have not been paid. The incurred but not reported reserve is based on the
    historical claim lag period and current payment trends of health insurance
    claims (generally 23 months).





We charge
    our employees a portion of the cost of our selfinsured and non self-insured
    health plans, and we determine this charge at the beginning of each plan year
    based upon historical and projected medical utilization data, along with projected
    inflationary increases in medical costs. Any differences between our projections
    and our actual experience are borne by us. A one percent variance between
    our projections and the actual medical utilization or inflationary increases
    in cost would result in a $0.6 million change in our expense, which would
    be reflected in salaries, wages and benefits in our consolidated statements
    of operations.





Revenue Recognition / Contractual
    Allowances





Within our
    pharmacy and other ancillary service businesses, we record revenues at the
    time services or products are provided or delivered to the customer. Upon
    delivery of products or services, we have no additional performance obligation
    to the customer. We receive payments through reimbursement from Medicaid and
    Medicare programs and directly from individual residents (private pay), private
    thirdparty insurers and longterm care facilities.





Within our
    pharmacy services segment, we record an estimated contractual allowance against
    nonprivate pay revenues and accounts receivable. Accordingly, the net
    revenues and accounts receivable reported in our consolidated financial statements
    are recorded at the amount expected to be received. Contractual allowances
    are adjusted to actual as cash is received and claims are reconciled. We evaluate
    the following criteria in developing the estimated contractual allowance percentages
    each month: historical contractual allowance trends based on actual claims
    paid by third party payors; review of contractual allowance information reflecting
    current contract terms; consideration and analysis of changes in customer
    base, product mix, payor mix reimbursement levels or other issues that may
    impact contractual allowances.





Within our
    former inpatient services segment, revenue is recognized in the period the
    related services are rendered. We derived a substantial portion of our inpatient
    services revenue under Medicaid and Medicare reimbursement systems.





Within our
    former inpatient services segment, under certain prospective Medicaid systems
    and Medicare we are reimbursed at a predetermined rate based upon the historical
    cost to provide the service, demographics of the site of service and the acuity
    of the customer. The differences between the established billing rates and
    the predetermined rates are recorded as contractual adjustments and deducted
    from revenues. Under a prospective reimbursement system, there is no adjustment
    or settlement of the difference between the actual cost to provide the service
    and the predetermined rate.





We recorded
    contractual adjustments from continuing operations of $544.8 million, $505.8
    million and $474.7 million in fiscal year 2003, 2002 and 2001, respectively.





Longlived Asset Impairments





We account
    for longlived assets, other than goodwill with an indefinite useful
    life, in accordance with the provisions of SFAS No. 144, Accounting
    for the Impairment or Disposal of LongLived Assets.This statement
    requires that longlived assets be reviewed for impairment whenever events
    or changes in circumstances indicate the





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carrying amount of an asset may not
    be recoverable. Recoverability of assets to be held and used is measured by
    comparison of the carrying amount of an asset to the future cash flows expected
    to be generated by the asset. If the carrying amount of an asset exceeds its
    estimated future cash flows, an impairment charge is recognized to the extent
    the carrying amount of the asset exceeds the fair value of the asset. Assets
    to be disposed of are reported at the lower of the carrying amount or the
    fair value less costs to sell.





With regard
    to goodwill, we adopted SFAS No. 142 on September 30, 2001 in accordance with
    the early adoptions provisions of SOP 907. SFAS No. 142 provides that
    goodwill no longer be amortized on a recurring basis but rather is subject
    to periodic impairment testing. Prior to adopting SFAS No. 142, we amortized
    goodwill over periods not exceeding 40 years. The impairment test requires
    us to compare the fair value of our businesses to their carrying value including
    assigned goodwill. SFAS No.142 requires an impairment test annually. In addition,
    goodwill is tested more frequently if changes in circumstances or the occurrence
    of events indicate impairment exists. We performed the annual impairment test
    effective September 30, 2003. Virtually all of our goodwill is ascribed to
    our pharmacy services segment, and the results of this test indicated that
    the fair value of our pharmacy services segment exceeded carrying amounts.





We use a multiple
    of future pharmacy services cash flows to determine fair value. Our judgment
    is required in the estimation of cash flows results and to determine the appropriate
    multiple. Our estimate of future pharmacy services cash flows is derived from
    our operating budget for the forthcoming fiscal year, less an estimated corporate
    overhead allocation calculated as one percent of budgeted pharmacy segment
    revenues. The multiple is determined from comparable industry transactions.
    Future operating results and multiples could reasonably differ from the estimates.
    However, given the substantial margin by which fair value exceeded carrying
    amounts in the latest goodwill impairment review, we do not anticipate a material
    impact on the consolidated financial statements from differences in these
    assumptions.





In fiscal
    2001, we recognized a $258 million net writedown of our property, plant
    and equipment in connection with our adoption of freshstart reporting.
    Freshstart reporting requires companies that emerge from reorganization
    to adjust their longlived assets to fair value. We estimated fair value
    by using both thirdparty appraisals and commonly used discounted cash
    flow techniques. These adjustments were recognized as freshstart valuation
    adjustments and recorded as debt restructuring and reorganization costs and
    net gain on debt discharge in the consolidated statements of operations.





Other





Until December
    1, 2003, we managed the operations of 57 eldercare centers. Under a majority
    of these arrangements, we employed the operational staff of the managed business
    for ease of benefit administration and billed the related wage and benefit
    costs on a dollar-for-dollar basis to the owner of the managed property. In
    this capacity, we operated as an agent on behalf of the managed property owner
    and are not the primary obligor in the context of a traditional employee /
    employer relationship. Historically, we have treated these transactions on
    a net basis thereby not reflecting the billed labor and benefit
    costs as a component of our net revenue or expenses. For the fiscal years
    ended 2003, 2002 and 2001 we billed our managed clients $125.3 million, $140.5
    million, and $153.6 million, respectively for such labor related costs.





Seasonality





Our earnings
    generally fluctuate from quarter to quarter. This seasonality is related to
    a combination of factors, which include the timing of Medicaid rate increases
    and payroll tax obligations, seasonal census cycles, and the number of calendar
    days in a given quarter.





Impact of Inflation





The healthcare
       industry is labor intensive. Wages and other labor costs are especially
      sensitive
    to inflation and marketplace labor shortages. To date, we have offset our
       increased operating costs by increasing charges for our services and expanding

    our services. We have also implemented cost control measures to limit increases
       in operating costs and expenses but cannot predict our ability to control

    such operating cost increases in the future. See Cautionary Statements
     Regarding Forward-Looking Statements, Risk Factors and
     Part II, Item 7, Managements
      Discussion and Analysis of Financial Condition and Results of Operations, of
      this Form 10-K.





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|ITEM 7A: | QUANTITATIVE
          AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | --------------------------------------------------------------------




We are exposed
    to the impact of interest rate changes. We employ established policies and
    procedures to manage our exposure to changes in interest rates. Our objective
    in managing exposure to interest rate changes is to limit the impact of such
    changes on earnings and cash flows and to lower our overall borrowing costs.
    To achieve our objective, we primarily use interest rate swap and cap agreements
    to manage net exposure to interest rate changes related to our portfolio of
    borrowings. We do not enter into such arrangements for trading purposes.





After December
    1, 2003, we entered into our new senior credit facility consisting of a $100.0
    million revolving credit facility that bears interest based on variable rates. 
    If we were to borrow the $100.0 million available under the revolving credit
    facility without entering into any derivative financial instruments, a 1%
    increase in variable rates of interest would result in additional interest
    expense of $1.0 million annually.





In connection
    with the spin-off and the repayment of senior indebtedness the Company terminated
    the two variable to fixed rate swaps presented below with an aggregate notional
    amount of $200 million. As a consequence the Company paid the contracting
    parties approximately $3.5 million which will be accounted for as a spin-off
    related charge in the first fiscal quarter of 2004.





The information
    below summarizes our market risks associated with debt obligations and other
    significant financial instruments as of September 30, 2003, prior to the changes
    in our capital structure in connection with the spin-off. Fair values were
    based upon confirmations from third party financial institutions. For debt
    obligations, the table presents principal cash flows and related interest
    rates by expected fiscal year of maturity. For interest rate swaps and caps,
    the table presents the notional amounts and related weighted-average interest
    rates by fiscal year of maturity. The variable rates presented are the average
    forward rates for the term of each contract.





|                                      |  | Expected
          Maturity Date |        |      |  
|------------------------------------- |  | -------------------------------- | ------ | ---- | -
|                                      |  |                                  |        |      |  
|($ in
          thousands)            |  | 2004                             |        | 2005 |  
|                                      |  |                                  |        |      |  
|Fixed
          rate debt             |  | $                                | 2,075  |      | $
|Weighted
          average rate       |  |                                  | 8.20   | %    |  
|                                      |  |                                  |        |      |  
|Variable
          rate debt          |  | $                                | 13,797 |      | $
|Weighted
          average rate       |  |                                  | L+4.10 | %    |  
|                                      |  |                                  |        |      |  
|Variable
          to fixed swaps (2) |  | $                                |       |      | $
|Pay fixed
          rate              |  |                                  |       |      |  
|Receive
          variable rate       |  |                                  |       |      |  
|                                      |  |                                  |        |      |  
|Interest
          rate cap (1)       |  | $                                | 75,000 |      | $
|                                      |  |                                  |        |      |  




|L = | three-month
          LIBOR (approximately 1.16% at September 30, 2003)                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                    
|(1) | The
          interest rate cap pays interest to us when LIBOR exceeds 3%. The amount
          paid to us is equal to the notional principal balance of $75 million
          multiplied by (LIBOR minus 3%) in those periods in which LIBOR exceeds
          3%.
|    |                                                                                                                                                                                                                                                                    
|(2) | Amounts
          under expected maturity dates represent notional amounts.                                                                                                                                                                                        




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Our wholly-owned
    subsidiary, Liberty Health Corporation, LTD, holds investments in marketable
    securities. Securities that are affected by market rates of interest at September
    30, 2003 amounted to $16.6 million. A 1% change in the rate of interest would
    result in a change to operating income of $0.2 million annually.





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|ITEM 8: | FINANCIAL
          STATEMENTS AND SUPPLEMENTARY DATA
|------- | -----------------------------------------------------




INDEX TO CONSOLIDATED
    FINANCIAL STATEMENTS





|                                                                                                                                                               | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                                               |     
|Independent
          Auditors Report                                                                                                                         | 73  
|                                                                                                                                                               |     
|Consolidated
          Balance Sheets as of September 30, 2003 and 2002 (Successor)                                                                            | 74  
|                                                                                                                                                               |     
|Consolidated
          Statements of Operations for the years ended September 30, 2003, 2002
          (Successor), and 2001 (Predecessor)                     | 75  
|                                                                                                                                                               |     
|Consolidated
          Statements of Shareholders Equity (Deficit) for the years ended
          September 30, 2003, 2002 (Successor), and 2001 (Predecessor) | 76  
|                                                                                                                                                               |     
|Consolidated
          Statements of Cash Flows for the years ended September 30, 2003, 2002
          (Successor), and 2001 (Predecessor)                     | 77  
|                                                                                                                                                               |     
|Notes
          to Consolidated Financial Statements                                                                                                           | 78  
|                                                                                                                                                               |     




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Independent Auditors
    Report





The Board of Directors and Shareholders
    NeighborCare, Inc.





We have audited
       the accompanying consolidated balance sheets of NeighborCare, Inc. and
      subsidiaries
    (the Company) as of September 30, 2003 and 2002, and the related
     consolidated statements of operations, shareholders equity (deficit)
      and cash flows for each of the years in the three year period ended September

    30, 2003. These consolidated financial statements are the responsibility
     of  the Companys management. Our responsibility is to express an opinion
      on these consolidated financial statements based on our audits.





We conducted
    our audits in accordance with auditing standards generally accepted in the
    United States of America. Those standards require that we plan and perform
    the audit to obtain reasonable assurance about whether the financial statements
    are free of material misstatement. An audit includes examining, on a test
    basis, evidence supporting the amounts and disclosures in the financial statements.
    An audit also includes assessing the accounting principles used and significant
    estimates made by management, as well as evaluating the overall financial
    statement presentation. We believe that our audits provide a reasonable basis
    for our opinion.





In our opinion,
       the consolidated financial statements referred to above present fairly,
      in
    all material respects, the financial position of NeighborCare, Inc. and subsidiaries
       as of September 30, 2003 and 2002, and the results of their operations
      and
    their cash flows for each of the years in the three year period ended September
       30, 2003, in conformity with accounting principles generally accepted
      in the
    United States of America.





As disclosed
    in note 1 to the consolidated financial statements, the Company adopted the
    provisions of Statement of Financial Accounting Standards No. 145 with regard
    to accounting for extinguishment of debt effective October 1, 2002.





As described
    in note 3 to the consolidated financial statements, on October 2, 2001 the
    Company consummated a Joint Plan of Reorganization (the Plan)
    which had been confirmed by the United States Bankruptcy Court. The Plan resulted
    in a change in ownership of the Company and, accordingly, effective September
    30, 2001 the Company accounted for the change in ownership through freshstart
    reporting. As a result, the consolidated information prior to September 30,
    2001 is presented on a different cost basis than that as of and subsequent
    to September 30, 2001 and, therefore, is not comparable.





|                                                                                         | /s/
          KPMG LLP
|---------------------------------------------------------------------------------------- | ----------------------
|                                                                                         |                       
|Philadelphia,
          Pennsylvania                                                     |                       
|December
            1, 2003, except
  as to note 14, which is
  as of December 16, 2003 |                       




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NeighborCare,
    Inc.





Consolidated Balance
    Sheets





|                                                                                                                                                                                                                                                                     |  | Successor
          Company                               |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- | ---------
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|                                                                                                                                                                                                                                                                     |  | September
          30, 2003                              |          
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|                                                                                                                                                                                                                                                                     |  | (in
          thousands, except share and per share data) |          
|Assets:                                                                                                                                                                                                                                                              |  |                                                           |          
|Current
          assets:                                                                                                                                                                                                                                            |  |                                                           |          
|Cash
          and equivalents                                                                                                                                                                                                                                       |  | $                                                         | 132,726  
|Restricted
          investments in marketable securities                                                                                                                                                                                                            |  |                                                           | 29,320   
|Accounts
          receivable, net allowance for doubtful accounts 
             of $48,628 in 2003 and $55,791 in 2002                                                                                                                                              |  |                                                           | 366,886  
|Inventories                                                                                                                                                                                                                                                          |  |                                                           | 66,747   
|Prepaid
          expenses and other current assets                                                                                                                                                                                                                  |  |                                                           | 82,197   
|Assets
          held for sale                                                                                                                                                                                                                                       |  |                                                           | 7,721    
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Total
          current assets                                                                                                                                                                                                                                       |  |                                                           | 685,597  
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Property,
          plant and equipment, net                                                                                                                                                                                                                         |  |                                                           | 751,996  
|Assets
          held for sale                                                                                                                                                                                                                                       |  |                                                           | 10,624   
|Restricted
          investments in marketable securities                                                                                                                                                                                                            |  |                                                           | 61,271   
|Notes
          receivable and other investments                                                                                                                                                                                                                     |  |                                                           | 19,252   
|Other long-term
          assets                                                                                                                                                                                                                                     |  |                                                           | 42,606   
|Investments
          in unconsolidated affiliates                                                                                                                                                                                                                   |  |                                                           | 8,822    
|Identifiable
          intangible assets, net                                                                                                                                                                                                                        |  |                                                           | 20,866   
|Goodwill                                                                                                                                                                                                                                                             |  |                                                           | 337,695  
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Total
          assets                                                                                                                                                                                                                                               |  | $                                                         | 1,938,729
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Liabilities
          and Shareholders Equity:                                                                                                                                                                                                                      |  |                                                           |          
|Current
          liabilities:                                                                                                                                                                                                                                       |  |                                                           |          
|Current
          installments of long-term debt                                                                                                                                                                                                                     |  | $                                                         | 20,135   
|Accounts
          payable                                                                                                                                                                                                                                           |  |                                                           | 58,435   
|Accrued
          expenses                                                                                                                                                                                                                                           |  |                                                           | 29,493   
|Current
          portion of self-insurance liability reserves                                                                                                                                                                                                       |  |                                                           | 29,320   
|Accrued
          compensation                                                                                                                                                                                                                                       |  |                                                           | 92,774   
|Accrued
          interest                                                                                                                                                                                                                                           |  |                                                           | 4,667    
|Income
          taxes payable                                                                                                                                                                                                                                       |  |                                                           | 4,116    
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Total
          current liabilities                                                                                                                                                                                                                                  |  |                                                           | 238,940  
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Long-term
          debt                                                                                                                                                                                                                                             |  |                                                           | 591,484  
|Deferred
          income taxes                                                                                                                                                                                                                                      |  |                                                           | 50,022   
|Self-insurance
          liability reserves                                                                                                                                                                                                                          |  |                                                           | 37,093   
|Other long-term
          liabilities                                                                                                                                                                                                                                |  |                                                           | 47,837   
|Minority
          interests                                                                                                                                                                                                                                         |  |                                                           | 10,359   
|Redeemable
          preferred stock, including accrued dividends                                                                                                                                                                                                    |  |                                                           | 46,831   
|Commitments
          and contingencies                                                                                                                                                                                                                              |  |                                                           |          
|Shareholders
          equity:                                                                                                                                                                                                                                      |  |                                                           |          
|Common
          stock - par $0.02, 200,000,000 authorized, 41,813,603 and 39,872,740
          issued,
             39,514,351 and 39,872,740 outstanding, and 260,493
          and 811,153 to be issued at
             September 30, 2003 and 2002, respectively |  |                                                           | 842      
|Additional
          paid-in-capital                                                                                                                                                                                                                                 |  |                                                           | 853,540  
|Retained
          earnings                                                                                                                                                                                                                                          |  |                                                           | 101,290  
|Accumulated
          other comprehensive loss                                                                                                                                                                                                                       |  |                                                           | (3,301   
|Treasury
          stock, at cost  2,299,252 shares                                                                                                                                                                                                                 |  |                                                           | (36,208  
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Total
          shareholders equity                                                                                                                                                                                                                                 |  |                                                           | 916,163  
|                                                                                                                                                                                                                                                                     |  |                                                           |          
|Total
          liabilities and shareholders equity                                                                                                                                                                                                                 |  | $                                                         | 1,938,729
|                                                                                                                                                                                                                                                                     |  |                                                           |          




See accompanying Notes to Consolidated
    Financial Statements





74


---



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    to Index





NeighborCare,
    Inc.





Consolidated Statements
    of Operations





|                                                                                                                                                                                                                                     |  | Successor
          Company 
          Years ended September 30, |            |      | Predecessor
          
          Company 
          Year ended September 30, |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------- | ---------- | ---- | ---------------------------------------------------------------------------- | ----------
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|                                                                                                                                                                                                                                     |  | 2003                                                             |            | 2002 |                                                                              |           
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|                                                                                                                                                                                                                                     |  | (in
          thousands, except share and per share data)        |           
|Net
          revenues:                                                                                                                                                                                                              |  |                                                                  |            |      |                                                                              |           
|Inpatient
          services                                                                                                                                                                                                         |  | $                                                                | 1,229,239  |      | $                                                                            | 1,201,071 
|Pharmacy
          services                                                                                                                                                                                                          |  |                                                                  | 1,235,398  |      |                                                                              | 1,121,917 
|Other
          revenues                                                                                                                                                                                                             |  |                                                                  | 184,342    |      |                                                                              | 162,800   
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Total
          net revenues                                                                                                                                                                                                         |  |                                                                  | 2,648,979  |      |                                                                              | 2,485,788 
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Operating
          expenses:                                                                                                                                                                                                        |  |                                                                  |            |      |                                                                              |           
|Salaries,
          wages and benefits                                                                                                                                                                                               |  |                                                                  | 1,119,244  |      |                                                                              | 1,035,603 
|Cost
          of sales                                                                                                                                                                                                              |  |                                                                  | 783,895    |      |                                                                              | 705,524   
|Other
          operating expenses                                                                                                                                                                                                   |  |                                                                  | 506,869    |      |                                                                              | 498,727   
|Strategic
          planning, severance and other related costs                                                                                                                                                                      |  |                                                                  | 28,286     |      |                                                                              | 21,498    
|Net
          loss on sale of eldercare centers                                                                                                                                                                                      |  |                                                                  |           |      |                                                                              |          
|Net
          gain from break-up fee and other settlements                                                                                                                                                                           |  |                                                                  | (11,337    | )    |                                                                              | (23,768   
|Depreciation
          and amortization expense                                                                                                                                                                                      |  |                                                                  | 66,384     |      |                                                                              | 59,449    
|Lease
          expense                                                                                                                                                                                                              |  |                                                                  | 28,224     |      |                                                                              | 26,419    
|Interest
          expense (contractual interest for the year ended September 30, 2001
          was $209,822)                                                                                                                       |  |                                                                  | 40,917     |      |                                                                              | 41,183    
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Income
          (loss) before debt restructuring and reorganization costs and net (gain)
          on debt discharge, income tax expense, equity in net income (loss) of
          unconsolidated affiliates and minority interests |  |                                                                  | 86,497     |      |                                                                              | 121,153   
|Debt
          restructuring and reorganization costs and net (gain) on debt discharge                                                                                                                                               |  |                                                                  |           |      |                                                                              | 4,270     
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Income
          before income tax expense, equity in net income (loss) of unconsolidated
          affiliates and minority interests                                                                                                |  |                                                                  | 86,497     |      |                                                                              | 116,883   
|Income
          tax expense                                                                                                                                                                                                         |  |                                                                  | 28,674     |      |                                                                              | 35,103    
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Income
          before equity in net income (loss) of unconsolidated affiliates and
          minority interests                                                                                                                    |  |                                                                  | 57,823     |      |                                                                              | 81,780    
|Equity
          in net income (loss) of unconsolidated affiliates                                                                                                                                                                   |  |                                                                  | 1,184      |      |                                                                              | 2,165     
|Minority
          interests                                                                                                                                                                                                         |  |                                                                  | (5,194     | )    |                                                                              | (2,838    
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Income
          from continuing operations before preferred stock dividends                                                                                                                                                         |  |                                                                  | 53,813     |      |                                                                              | 81,107    
|Preferred
          stock dividends                                                                                                                                                                                                  |  |                                                                  | 2,701      |      |                                                                              | 2,599     
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Income
          from continuing operations                                                                                                                                                                                          |  |                                                                  | 51,112     |      |                                                                              | 78,508    
|Loss
          from discontinued operations, net of taxes                                                                                                                                                                            |  |                                                                  | (21,125    | )    |                                                                              | (8,341    
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Net
          income attributed to common shareholders                                                                                                                                                                               |  | $                                                                | 29,987     |      | $                                                                            | 70,167    
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Per
          Common Share Data:                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Basic:                                                                                                                                                                                                                               |  |                                                                  |            |      |                                                                              |           
|Income
          from continuing operations                                                                                                                                                                                          |  | $                                                                | 1.25       |      | $                                                                            | 1.90      
|Loss
          from discontinued operations                                                                                                                                                                                          |  |                                                                  | (0.52      | )    |                                                                              | (0.20     
|Net
          income                                                                                                                                                                                                                 |  | $                                                                | 0.74       |      | $                                                                            | 1.70      
|Weighted
          average shares                                                                                                                                                                                                    |  |                                                                  | 40,755,507 |      |                                                                              | 41,225,564
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           
|Diluted:                                                                                                                                                                                                                             |  |                                                                  |            |      |                                                                              |           
|Income
          from continuing operations                                                                                                                                                                                          |  | $                                                                | 1.25       |      | $                                                                            | 1.87      
|Loss
          from discontinued operations                                                                                                                                                                                          |  |                                                                  | (0.52      | )    |                                                                              | (0.20     
|Net
          income                                                                                                                                                                                                                 |  | $                                                                | 0.74       |      | $                                                                            | 1.68      
|Weighted
          average shares - income from continuing operations                                                                                                                                                                |  |                                                                  | 43,009,647 |      |                                                                              | 43,351,187
|Weighted
          average shares - net income                                                                                                                                                                                       |  |                                                                  | 40,756,587 |      |                                                                              | 43,351,187
|                                                                                                                                                                                                                                     |  |                                                                  |            |      |                                                                              |           




See accompanying Notes to Consolidated
    Financial Statements





75


---



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    to Index





NeighborCare,
    Inc.





Consolidated Statements
    of Shareholders Equity (Deficit)





|(in
          thousands)                                                    |  | Series
          G Cumulative 
          Convertible Preferred
           Stock |    | Common
          stock |   | Additional
          paid-in capital |   | Retained
          earnings 
          (deficit) |          | Accumulated
          other
          comprehensive
          income (loss) |   | Treasury
          stock |   | Total
          shareholders
          equity (deficit) |       
|--------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | -- | ---------------------- | - | ------------------------------------ | - | ------------------------------------------------ | -------- | --------------------------------------------------------------------------- | - | ------------------------ | - | -------------------------------------------------------- | ------
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Balance
          at September 30, 2000 (Predecessor Company)               |  | $                                                                               | 6  |                        | $ | 973                                  |   | $                                                | 803,202  |                                                                             | $ | (1,048,540               | ) | $                                                        | (1,789
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Comprehensive
          income                                              |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Net
          unrealized gain on marketable securities                      |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   |                         |   |                                                          | 1,981 
|Net
          income                                                        |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   | 292,097                  |   |                                                          |      
|Preferred
          Stock dividends                                         |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   | (45,623                  | ) |                                                          |      
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Total
          comprehensive income                                        |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Balance
          at September 30, 2001 (Predecessor Company)               |  | $                                                                               | 6  |                        | $ | 973                                  |   | $                                                | 803,202  |                                                                             | $ | (802,066                 | ) | $                                                        | 192   
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Fresh
          start adjustments                                           |  |                                                                                 | (6 | )                      |   | (973                                 | ) |                                                  | (803,202 | )                                                                           |   | 803,202                  |   |                                                          |      
|Issuance
          of common stock                                          |  |                                                                                 |   |                        |   | 820                                  |   |                                                  | 832,710  |                                                                             |   |                         |   |                                                          |      
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Balance
          at September 30, 2001 (Successor Company)                 |  | $                                                                               |   |                        | $ | 820                                  |   | $                                                | 832,710  |                                                                             | $ | 1,136                    |   | $                                                        | 192   
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Issuance
          of common stock                                          |  |                                                                                 |   |                        |   | 10                                   |   |                                                  | 10,915   |                                                                             |   |                         |   |                                                          |      
|Comprehensive
          income                                              |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Net
          unrealized gain on marketable securities                      |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   |                         |   |                                                          | 647   
|Net
          change in fair value of interest rate swap and cap agreements |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   |                         |   |                                                          | (2,474
|Net
          income                                                        |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   | 72,766                   |   |                                                          |      
|Preferred
          Stock dividends                                         |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   | (2,599                   | ) |                                                          |      
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Total
          comprehensive income                                        |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Balance
          at September 30, 2002 (Successor Company)                 |  | $                                                                               |   |                        | $ | 830                                  |   | $                                                | 843,625  |                                                                             | $ | 71,303                   |   | $                                                        | (1,635
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Issuance
          of common stock                                          |  |                                                                                 |   |                        |   | 12                                   |   |                                                  | 9,915    |                                                                             |   |                         |   |                                                          |      
|Purchases
          of common stock for the treasury                        |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   |                         |   |                                                          |      
|Comprehensive
          income                                              |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Net
          unrealized gain on marketable securities                      |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   |                         |   |                                                          | 262   
|Net
          change in fair value of interest rate swap and cap agreements |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   |                         |   |                                                          | (1,928
|Net
          income                                                        |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   | 32,688                   |   |                                                          |      
|Preferred
          Stock dividends                                         |  |                                                                                 |   |                        |   |                                     |   |                                                  |         |                                                                             |   | (2,701                   | ) |                                                          |      
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Total
          comprehensive income                                        |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       
|Balance
          at September 30, 2003 (Successor Company)                 |  | $                                                                               |   |                        | $ | 842                                  |   | $                                                | 853,540  |                                                                             | $ | 101,290                  |   | $                                                        | (3,301
|                                                                            |  |                                                                                 |    |                        |   |                                      |   |                                                  |          |                                                                             |   |                          |   |                                                          |       




See accompanying Notes to Consolidated
    Financial Statements





76


---



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    to Index





NeighborCare,
    Inc.





Consolidated Statements
    Of Cash Flows





|                                                                                                                 |  | Successor
          Company 
          Years ended September 30, |          |      | Predecessor
          
          Company 
          Year ended 
          September 30, |        
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------- | -------- | ---- | --------------------------------------------------------------------------------------- | -------
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|                                                                                                                 |  | 2003                                                             |          | 2002 |                                                                                         |        
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|                                                                                                                 |  |                                                                  |          |      | (in
          thousands)                                                                |        
|Cash
          flows from operating activities:                                                                  |  |                                                                  |          |      |                                                                                         |        
|Net
          income attributed to common shareholders                                                           |  | $                                                                | 29,987   |      | $                                                                                       | 70,167 
|Adjustments
          to reconcile net income to net cash provided by operating activities:                      |  |                                                                  |          |      |                                                                                         |        
|Charges
          (credits) included in operations not requiring funds:                                          |  |                                                                  |          |      |                                                                                         |        
|Debt
          restructuring and reorganization costs and net (gain) on debt discharge                           |  |                                                                  |         |      |                                                                                         | 4,270  
|Loss
          on impairment - Discontinuation of businesses                                                     |  |                                                                  | 13,215   |      |                                                                                         | 6,364  
|Depreciation
          and amortization                                                                          |  |                                                                  | 67,085   |      |                                                                                         | 65,768 
|Provision
          for losses on accounts receivable                                                            |  |                                                                  | 37,838   |      |                                                                                         | 44,712 
|Arbitration
          award and other legal settlements                                                          |  |                                                                  |         |      |                                                                                         | 1,139  
|Non-cash
          stock compensation                                                                            |  |                                                                  | 10,196   |      |                                                                                         | 6,936  
|Equity
          in (earnings) loss of unconsolidated affiliates and minority interests                          |  |                                                                  | 4,009    |      |                                                                                         | 1,259  
|Amortization
          of deferred gains and net unfavorable leases                                              |  |                                                                  | (4,660   | )    |                                                                                         | (5,575 
|Loss
          on sale of assets                                                                                 |  |                                                                  |         |      |                                                                                         |       
|Provision
          for deferred taxes                                                                           |  |                                                                  | 14,063   |      |                                                                                         | 37,693 
|Preferred
          stock dividends                                                                              |  |                                                                  | 2,701    |      |                                                                                         | 2,599  
|Net
          gain from break-up fee and other related costs                                                     |  |                                                                  | (1,125   | )    |                                                                                         |       
|Changes
          in assets and liabilities, excluding the effects of acquisitions:                              |  |                                                                  |          |      |                                                                                         |        
|Accounts
          receivable                                                                                    |  |                                                                  | (37,451  | )    |                                                                                         | (19,633
|Inventory                                                                                                        |  |                                                                  | (2,372   | )    |                                                                                         | 1,233  
|Prepaid
          expense and current assets                                                                     |  |                                                                  | (367     | )    |                                                                                         | 1,441  
|Accounts
          payable and accrued expenses                                                                  |  |                                                                  | (17,899  | )    |                                                                                         | 15,014 
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Net
          cash provided by operating activities before debt restructuring and
          reorganization costs |  |                                                                  | 115,220  |      |                                                                                         | 233,387
|Cash
          paid for debt restructuring and reorganization costs                                              |  |                                                                  | (4,659   | )    |                                                                                         | (54,202
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Net
          cash provided by operating activities                                                              |  |                                                                  | 110,561  |      |                                                                                         | 179,185
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Cash
          flows from investing activities:                                                                  |  |                                                                  |          |      |                                                                                         |        
|Capital
          expenditures                                                                                   |  |                                                                  | (59,758  | )    |                                                                                         | (51,635
|Proceedings
          on maturity or sales of restricted marketable securities                                   |  |                                                                  | 39,765   |      |                                                                                         | 52,202 
|Purchases
          of restricted marketable securities                                                          |  |                                                                  | (43,948  | )    |                                                                                         | (86,077
|Acquisition
          of rehabilitation services business                                                        |  |                                                                  | (5,923   | )    |                                                                                         |       
|Proceeds
          from sale of eldercare assets                                                                 |  |                                                                  | 55,123   |      |                                                                                         | 2,955  
|Purchase
          of eldercare assets                                                                           |  |                                                                  | (5,325   | )    |                                                                                         | (10,453
|Notes
          receivable and other investment additions                                                        |  |                                                                  | (2,183   | )    |                                                                                         | (2,655 
|Other,
          net                                                                                             |  |                                                                  | 9,961    |      |                                                                                         | 824    
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Net
          cash used in investing activities                                                                  |  |                                                                  | (12,288  | )    |                                                                                         | (94,839
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Cash
          flows from financing activities:                                                                  |  |                                                                  |          |      |                                                                                         |        
|Repayment
          of long-term debt and payment of sinking fund requirements                                   |  |                                                                  | (77,369  | )    |                                                                                         | (48,455
|Proceeds
          from issuance of long-term debt                                                               |  |                                                                  |         |      |                                                                                         | 80,000 
|Debt
          issuance costs                                                                                    |  |                                                                  |         |      |                                                                                         |       
|Net
          borrowings under prepetition working capital revolving credit facilities                           |  |                                                                  |         |      |                                                                                         |       
|Net
          borrowings under debtor-in-possession financing facility                                           |  |                                                                  |         |      |                                                                                         |       
|Repayment
          of debtor-in-possession financing facility                                                   |  |                                                                  |         |      |                                                                                         |       
|Repurchase
          of common stock                                                                             |  |                                                                  | (36,208  | )    |                                                                                         |       
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Net
          cash (used in) provided by financing activities                                                    |  |                                                                  | (113,577 | )    |                                                                                         | 31,545 
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Net
          (decrease) increase in cash and equivalents                                                        |  | $                                                                | (15,304  | )    | $                                                                                       | 115,891
|Cash
          and equivalents:                                                                                  |  |                                                                  |          |      |                                                                                         |        
|Beginning
          of year                                                                                      |  |                                                                  | 148,030  |      |                                                                                         | 32,139 
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|End
          of year                                                                                            |  | $                                                                | 132,726  |      | $                                                                                       | 148,030
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        
|Supplemental
          cash flow information:                                                                    |  |                                                                  |          |      |                                                                                         |        
|Interest
          paid                                                                                          |  | $                                                                | 41,767   |      | $                                                                                       | 58,284 
|Income
          taxes paid, net of refunds                                                                      |  |                                                                  | 3,941    |      |                                                                                         | (5,594 
|Non-cash
          financing activities:                                                                         |  |                                                                  |          |      |                                                                                         |        
|Issuance
          of preferred stock                                                                            |  |                                                                  |         |      |                                                                                         |       
|Capital
          leases                                                                                         |  |                                                                  | 5,453    |      |                                                                                         | 10,983 
|                                                                                                                 |  |                                                                  |          |      |                                                                                         |        




See accompanying Notes to Consolidated
    Financial Statements





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NeighborCare,
    Inc.





Notes to Consolidated
    Financial Statements





|(1) | Summary
          of Significant Accounting Policies
|--- | ----------------------------------------------------




Organization and Description
    of Business





NeighborCare,
    Inc. (NeighborCare or the Company) was incorporated
    in May 1985 as a Pennsylvania corporation and was formerly named Genesis Health
    Ventures, Inc.





Prior to
      December  1, 2003, the Companys operations were comprised of two
      primary business  segments: pharmacy services and inpatient services. On
      December 1, 2003, the
    Company completed the distribution (the spin-off) of the common
     stock of Genesis Healthcare Corporation (GHC) and on December
      2, 2003, the Company changed its name to NeighborCare, Inc. and changed
     its
    trading symbol to NCRX. The spin-off was effected by way of
    a pro-rata tax free distribution of the common stock of GHC to holders of
    NeighborCares
    common stock on December 1, 2003 at a rate of 0.5 shares of GHC stock for
     each share of NeighborCare stock owned as of October 15, 2003. NeighborCare

    received a private letter ruling from the Internal Revenue Service to the
     effect that, for United States federal income tax purposes, the distribution

    of GHC stock qualified as tax free for GHC and its shareholders, with the
     exception of cash received for fractional shares.  The common stock
     of  GHC began trading publicly on the Nasdaq National Market System on December

    2, 2003 under the symbol GHCI.  As a result of the spin-off,
     NeighborCare continues to own and operate its pharmacy services business
    and
    its group purchasing organization and GHC owns and operates what was formerly
     the Companys inpatient services business (as well as its former rehabilitation
      therapy, diagnostic, respiratory, and management services businesses).





In connection
    with the spin-off, NeighborCare and GHC have agreed contractually to continue
    certain transitional arrangements and practices for a limited time after the
    spin-off.  In addition, NeighborCare and GHC have entered into certain
    mutually beneficial commercial arrangements.  Specifically, NeighborCare
    and GHC entered into a separation and distribution agreement, a tax sharing
    agreement, a transition services agreement, a group purchasing agreement,
    an employee benefits agreement, a pharmacy services agreement, a pharmacy
    benefit management agreement and a durable medical equipment agreement.





The following
    unaudited pro forma financial information gives effect to the spin-off as
    if it occurred on October 1, 2002 after giving effect to certain adjustments
    including the treatment of GHC as a discontinued operation, an allocation
    of general and administrative expenses associated with GHC and changes to
    interest expense and debt as a result of changes in NeighborCares capital
    structure.  The unaudited pro forma financial information does not consider
    the impact of approximately $6 million of estimated incremental operating
    expense and reduced interest income beyond levels allocated for purposes of
    presenting the following pro forma information.   The unaudited
    pro forma data is for informational purposes only and does not purport to
    represent the results of future periods.  The pro forma data reflects
    adjustments based upon available information and certain assumptions that
    management of NeighborCare considers reasonable.  No changes in operating
    revenues and expenses have been made to reflect the results of any modifications
    to operations that might have been made had the spin-off of GHC been completed
    on the aforesaid effective date for purposes of the pro forma results. 
    The following unaudited pro forma information is presented in thousands,
    except per share information:





|                                                                  |  | As
          reported |           | Pro
          forma
          (Unaudited) |  
|----------------------------------------------------------------- |  | --------------------- | --------- | ----------------------------------------- | -
|                                                                  |  |                       |           |                                           |  
|Net
          revenues                                            |  | $                     | 2,648,979 |                                           | $
|Income
          from continuing operations                       |  |                       | 51,112    |                                           |  
|Diluted
          earnings per share  from continuing operations |  |                       | 1.25      |                                           |  
|Total assets                                                      |  |                       | 1,938,729 |                                           |  
|Long-term
          debt, including current installments          |  |                       | 611,619   |                                           |  
|Shareholders
          equity                                    |  |                       | 916,163   |                                           |  




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The Company
    provides pharmacy services nationwide through its NeighborCare® integrated
    pharmacy operation that serves approximately 246,000 institutional beds in
    longterm care settings. NeighborCare also operates 32 communitybased
    retail pharmacies and a group purchasing organization.





GHC provides
    inpatient services through skilled nursing and assisted living centers primarily
    located in the eastern United States. GHC currently has 217 owned, leased,
    managed and jointlyowned eldercare centers with 26,470 beds. Revenues
    of GHCs owned and leased centers are included in inpatient service revenues
    in the consolidated statements of operations. Management fees earned from
    GHCs managed and jointlyowned centers are included in other revenues
    in the consolidated statements of operations. GHC also provides rehabilitation,
    diagnostic and respiratory services, the revenues for which are included in
    other revenues in the consolidated statements of operations.





Factors Affecting Comparability
    of Financial Information





As a consequence
    of the implementation of freshstart reporting effective September 30,
    2001 (see note 2 Reorganization), the financial information
    presented in the consolidated statements of operations, shareholders
    equity (deficit) and cash flows for the year ended September 30, 2003 and
    2002 are generally not comparable to the financial results for the corresponding
    period in 2001. To highlight the lack of comparability, a solid vertical line
    separates the preemergence financial information from the postemergence
    financial information in the accompanying consolidated financial statements
    and the notes thereto. Any financial information herein labeled Predecessor
    Company refers to periods prior to the adoption of freshstart
    reporting, while those labeled Successor Company refer to periods
    following the Companys adoption of freshstart reporting.





The lack of
    comparability in the accompanying consolidated financial statements is most
    apparent in the Companys capital costs (lease, interest, depreciation
    and amortization), as well as with, debt restructuring and reorganization
    costs and net (gain) on debt discharge, and preferred dividends. Management
    believes that business segment operating revenues and EBITDA of the Successor
    Company are generally comparable to those of the Predecessor Company.





Principles of Consolidation





The accompanying
    consolidated financial statements include the accounts of the Successor Company
    of NeighborCare, Inc. and its subsidiaries as of September 30, 2003 and 2002
    and for the years ended September 30, 2003 and 2002, and the Predecessor Company
    of NeighborCare, Inc. and its subsidiaries for the year ended September 30,
    2001. All significant intercompany accounts and transactions have been eliminated
    in consolidation.





Investments
    in unconsolidated affiliated companies, owned 20% to 50% inclusive, are stated
    at cost of acquisition plus the Companys equity in undistributed net
    income (loss) since acquisition. The change in the equity in net income (loss)
    of these companies is reflected as a component of net income or loss in the
    consolidated statements of operations.





The accompanying
    consolidated financial statements have been prepared in accordance with accounting
    principles generally accepted in the United States of America. In the opinion
    of management, the consolidated financial statements for the periods presented
    include all necessary adjustments for a fair presentation of the financial
    position and results of operations for the periods presented.





Reclassifications





Certain prior
    year balances have been reclassified to conform to the current year presentation.





Revenue Recognition / Contractual
    Allowances





Within the
    Companys pharmacy and other ancillary service businesses, the Company
    records revenues at the time services or products are provided or delivered
    to the customer. Upon delivery of products or services, the Company has no
    additional performance obligation to the customer. The Company receives payments
    through reimbursement from Medicaid and Medicare programs and directly from
    individual residents (private pay), private thirdparty insurers and
    longterm care facilities.





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Within the
    Companys pharmacy services segment, the Company records an estimated
    contractual allowance against nonprivate pay revenues and accounts receivable.
    Accordingly, the net revenues and accounts receivable reported in the Companys
    financial statements are recorded at the amount expected to be received. Contractual
    allowances are adjusted to actual as cash is received and claims are reconciled.
    The Company evaluates the following criteria in developing the estimated contractual
    allowance percentages each month: historical contractual allowance trends
    based on actual claims paid by third party payors; review of contractual allowance
    information reflecting current contract terms; consideration and analysis
    of changes in customer base, product mix, payor mix reimbursement levels or
    other issues that may impact contractual allowances.





Within the
    Companys former inpatient services segment, revenue is recognized in
    the period the related services are rendered. The Company derives a substantial
    portion of its inpatient services revenue under Medicaid and Medicare reimbursement
    systems.





Within the
    Companys former inpatient segment, under certain prospective Medicaid
    systems and Medicare, the Company is reimbursed at a predetermined rate based
    upon the historical cost to provide the service, demographics of the site
    of service and the acuity of the customer. The differences between the established
    billing rates and the predetermined rates are recorded as contractual adjustments
    and deducted from revenues.





The Company
    recorded contractual allowances from continuing operations of $544.8 million,
    $505.8 million and $474.7 million in fiscal years 2003, 2002 and 2001, respectively.





Cash Equivalents





Shortterm
    investments that have a maturity of ninety days or less at acquisition are
    considered cash equivalents. Investments in cash equivalents are carried at
    cost, which approximates fair value. The Companys cash balances at September
    30, 2003 and 2002 include $4.7 million and $5.5 million of restricted cash,
    respectively. This restricted cash is held by the Companys whollyowned
    captive insurance subsidiary, Liberty Health Corp., LTD (LHC)
    and is substantially restricted to securing the outstanding claims losses
    of LHC.





Restricted Investments in Marketable
    Securities





Restricted
    investments in marketable securities, which are comprised of fixed interest
    securities, equity securities and money market funds are considered to be
    available for sale and accordingly are reported at fair value with unrealized
    gains and losses, net of related tax effects, included within accumulated
    other comprehensive income (loss) as a separate component of shareholders
    equity. Fair values for fixed interest securities and equity securities are
    based on quoted market prices.





A decline
    in the market value of any security below cost that is deemed other than temporary
    is charged to earnings, resulting in the establishment of a new cost basis
    for the security.





Premiums and
    discounts on fixed interest securities are amortized or accreted over the
    life of the related security as an adjustment to yield. Realized gains and
    losses for securities classified as available for sale are included in other
    revenue and are derived using the specific identification method for determining
    the cost of securities sold.





Marketable
       securities are held by the Companys whollyowned captive insurance
        subsidiary, LHC, and are substantially restricted to securing the outstanding

    claims losses of LHC.





Allowance for Doubtful Accounts





The Company
    utilizes the Aging Method to evaluate the adequacy of its allowance
    for doubtful accounts. This method is based upon applying estimated standard
    allowance requirement percentages to each accounts receivable aging category
    for each type of payor. The Company has developed estimated standard allowance
    requirement percentages by utilizing historical collection trends and its
    understanding of the nature and collectibility of receivables in the various
    aging categories and the various segments of the Companys business.
    The standard allowance percentages are developed by payor type as the accounts
    receivable from each payor type have unique characteristics. The allowance
    for doubtful accounts is determined utilizing the aging method described above
    while also considering accounts specifically identified as uncollectible.
    Accounts receivable that Company management





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specifically estimates to be uncollectible,
    based upon the age of the receivables, the results of collection efforts,
    or other circumstances, are reserved for in the allowance for doubtful accounts
    until they are writtenoff.





Management
    believes the assumptions used in the aging method employed in fiscal 2003
    and 2002, coupled with continued improvements in our collection patterns suggests
    the allowance for doubtful accounts is adequately provided for. However, because
    the assumptions underlying the aging method are based upon historical data,
    there is a risk that the Companys current assumptions are not reflective
    of more recent collection patterns. Changes in overall collection patterns
    can be caused by market conditions and/or budgetary constraints of government
    funded programs such as Medicare and Medicaid. Such changes can adversely
    impact the collectibility of receivables, but not be addressed in a timely
    fashion when using the aging method, until updates to the Companys periodic
    historical collection studies are completed and implemented.





Inventories and Cost of Sales





Inventories,
    consisting of drugs and supplies, are stated at the lower of cost or market.
    Cost is determined primarily on the firstin, firstout (FIFO)
    method.





Approximately
       92% of the Companys inventory is carried by the pharmacy segment.
       Physical  inventory counts are performed periodically at all sites. As
       the Company does
    not utilize a perpetual inventory system, cost of sales is estimated between
        physical counts and is adjusted to actual by recording the results of
       the
    periodic physical inventory counts. The Company evaluates the following criteria
        in developing estimated cost of sales:





| |  | Historical
          cost of sales trends based on prior physical inventory results;                                                                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                      
| |  | Review
          of cost of sales information reflecting current customer and vendor
          terms; and                                            
| |   |                                                                                                                                                      
| |  | Consideration
          and analysis of changes in customer base and product mix, payor mix,
          or other issues that may impact cost of sales.




Property, Plant and Equipment





As part of
    freshstart reporting, substantially all property, plant and equipment
    was revalued to estimated fair value as of September 30, 2001, which
    became the new cost basis. In addition, the depreciable lives of certain assets
    were changed. All capital additions made subsequent to September 30, 2001
    are stated at cost.





Depreciation
    is calculated on the straightline method over estimated useful lives
    of 2035 years for land and building improvements and buildings, and
    315 years for equipment, furniture and fixtures and information systems.
    Included in depreciation expense is the amortization of assets capitalized
    under capitalized lease obligations. Expenditures for maintenance and repairs
    necessary to maintain property and equipment in efficient operating condition
    are charged to operations as incurred. Costs of additions and betterments
    are capitalized. Interest costs associated with construction or renovation
    are capitalized in the period in which they are incurred.





Depreciation
    expense from continuing operations for the fiscal years ended September 30,
    2003, 2002 and 2001 was $56.2 million, $47.4 million and $55.5 million, respectively.





Deferred Financing Costs





Financing
       costs are deferred and are amortized on a straightline basis, which
        approximates the effective interest method, over the terms of the related

    debt. Deferred financing costs were $12.0 million ($7.6 million net of accumulated
        amortization) and $14.0 million ($10.1 million net of accumulated amortization)

    at September 30, 2003 and 2002, respectively, and are included in other longterm
     assets. Amortization of deferred financing fees is included in depreciation

    and amortization expense in the consolidated statements of operations.





LongLived Asset Valuation





The Company
    accounts for longlived assets, other than goodwill with an indefinite
    useful life, in accordance with the provisions of Statement of Financial Accounting
    Standards (SFAS) No. 144, Accounting for the Impairment
    or Disposal of LongLived Assets. This statement requires that
    longlived assets be reviewed for





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impairment whenever events or changes
    in circumstances indicate the carrying amount of an asset may not be recoverable.
    Recoverability of assets to be held and used is measured by comparison of
    the carrying amount of an asset to the future cash flows expected to be generated
    by the asset. If the carrying amount of an asset exceeds its estimated future
    cash flows, an impairment charge is recognized to the extent the carrying
    amount of the asset exceeds the fair value of the asset. Assets to be disposed
    of are reported at the lower of the carrying amount or the fair value less
    costs to sell.





With regard
    to goodwill, the Company adopted SFAS No. 142, Goodwill and Other
    Intangible Assets. on September 30, 2001. SFAS No. 142 provides
    that goodwill no longer be amortized on a recurring basis but rather is subject
    to periodic impairment testing. Prior to adopting SFAS No. 142, the Company
    amortized goodwill over periods not exceeding 40 years. The impairment test
    requires companies to compare the fair value of its businesses to their carrying
    value including assigned goodwill. SFAS No.142 requires an impairment test
    annually. In addition, goodwill is tested more frequently if changes in circumstances
    or the occurrence of events indicate impairment exists. The Company performed
    annual impairment tests effective September 30, 2003 and 2002 and the results
    of these tests indicated that the fair value of the Companys goodwill
    exceeded carrying amounts.





In fresh-start
    reporting, the Companys reorganization value in excess of fair value
    (goodwill) was allocated to the pharmacy segment and identifiable intangible
    assets were assigned to the specific reporting units that own these assets.





Loss Reserves For Certain SelfInsured
    Programs





Workers’ compensation and
    general and professional liability





Certain of
    the Companys workers compensation, and general and professional liability
    coverage is provided by the Companys whollyowned insurance company,
    Liberty Health Corp., LTD (LHC). LHC was a whollyowned
    subsidiary of GHC as of the date of the spinoff and as a result will
    not be included in the consolidated finanacial statements of the Company after
    the spinoff.





Outstanding
    losses and loss expenses comprise estimates of the amount of reported losses
    together with a provision for losses incurred but not reported, based on the
    recommendations of an independent actuary using the past experience of the
    Company and the industry.





Prior to
      June  1, 2000, the Company had first dollar coverage for general and professional

    liability costs with third party insurers; accordingly, the Company has no
       exposure for claims prior to that date. Effective June 1, 2000, the Company

    began insuring a substantial portion of its professional liability risks
      through  its whollyowned insurance company, LHC. Specifically, the
      Company is  responsible for the first dollar of each claim (on a claimsmade
      basis),  up to a selfinsurance retention limit determined by the
      individual policies,  subject to aggregate limits for each policy year.
      The selfinsured retention
    limits amount to $14 million, $22 million and $19 million for the policy
      years  ended May 31, 2004, 2003 and 2002, respectively. For policy years
      2004 and
    2002, any costs above these retention limits are covered by third-party insurance
       carriers. For policy year 2003 (June 2002 to May 2003), the Company has
      retained
    an additional selfinsurance layer of $5 million. Since the June 1,
    2000  inception of the selfinsurance program through September 30,
    2003, the  Companys cumulative selfinsurance retention levels
    are $60 million  and its provision for these losses is $45.8 million. Assuming
    the Companys
    actual losses were to reach its retention limits in each of the policy years,
     its additional exposure is approximately $14.2 million which, if incurred,

    would be recognized as an increase to other operating expenses in the Companys
     consolidated statements of operations in the period such exposure became
    known.
    In addition, the Company has provided $5.3 million for the estimated costs
     of claims incurred but not reported as of September 30, 2003.





Beginning
    in 1994, the Company insured its workers compensation exposure, principally
    via selfinsurance retentions and large deductible programs through LHC.
    In addition, the Company inherited legacy workers compensation programs from
    acquisitions it completed.





Over the past
    three years, the majority of the Companys workers compensation coverage
    was structured as follows: For policy years 20022004 (May 1, 2001 
    April 30, 2004) the Company has large deductible programs, the deductibles
    for which are insured through LHC; and for policy year 2001 (May 1, 2000 
    April 30, 2001) the Company was insured on a first dollar coverage basis for
    its Multicare subsidiaries, and insured through an incurred loss retrospectively
    rated policy for its nonMulticare subsidiaries.





For policy
    years 2004, 2003 and 2002, the Company is self-insured through through LHC
    up to the first $0.5 million per incident for workers compensation. All claims
    above $0.5 million per incident are insured through a





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thirdparty insurer. The Company
    has annual aggregate selfinsured retentions of $47.4 million, $52.8
    million and $48 million in policy years 2004, 2003 and 2002, respectively.
    Claims above these aggregate limits are insured through a third partyinsurer
    as of September 30, 2003. The Companys provision for losses in these
    policy years is $53.4 million as of September 30, 2003. The Companys
    reserve levels are evaluated on a quarterly basis. Any necessary adjustments
    are recognized as an adjustment to salaries, wages and benefits in the consolidated
    statements of operations.





For policy
    year 2001, the Companys incurred losses for the Companys non-Multicare
    subsidiaries for workers compensation recognized through September 30, 2003
    were $20.8 million. The Companys development factors are updated quarterly
    and are based upon commonly used industry standards. Any changes to the incurred
    losses are recognized quarterly as an adjustment to salaries, wages and benefits
    in the Companys consolidated statements of operations. The Company is
    insured through a third party insurer for aggregate claims in excess of $44.1
    million.





The Company
    records outstanding losses and loss expenses for both general and professional
    liability and workers compensation liabilitys based on the estimates
    of the amount of reported losses together with a provision for losses incurred
    but not reported, based on the recommendations of an independent actuary,
    and managements judgment using its past experience and industry experience.
    As of September 30, 2003, the Companys estimated range of discounted
    outstanding losses for these liabilities is $60.2 million to $74.2 million.
    The Companys recorded reserves for these liabilities were $66.4 million
    as of September 30, 2003, and is included in selfinsurance liability
    reserves in its consolidated balance sheet. The Company (through LHC) has
    restricted investments in marketable securities of $90.6 million at September
    30, 2003 which are substantially restricted to securing the outstanding claim
    losses of LHC.





General and
    professional liability and workers compensation claims are discounted at a
    rate of 4.5% in 2003 and 2002, which estimates the present value of funds
    required to pay losses at a future date. Had the Company provided losses at
    undiscounted levels at September 30, 2003 and 2002, the reserve for outstanding
    losses and loss expenses would have been increased by approximately $12 million
    in 2003 and $6.6 million in 2002.





Management
    believes based on the recommendations of an independent actuary, that the
    provision for outstanding losses and loss expenses will be adequate to cover
    the ultimate net cost of losses incurred as of the balance sheet date but
    the provision is necessarily an estimate and may ultimately be settled for
    a significantly different amounts. It is at least reasonably possible that
    management will revise this estimate significantly in the near term. Any subsequent
    revisions are recorded in the period in which they are determined.





SelfInsured Health Plan





The Company
    offers employees an option to participate in a selfinsured health plan.
    Health claims under this plan are selfinsured with a stoploss
    umbrella policy in place to limit maximum potential liability for both individual
    claims and total claims for a plan year. Health insurance claims are paid
    as they are submitted to the plan administrator. The Company maintains an
    accrual for claims that have been incurred but not yet reported (IBNR) to
    the plan administrator and therefore have not been paid. The IBNR reserve
    is based on the historical claim lag period and current payment trends of
    health insurance claims (generally 23 months). The liability for the
    selfinsurance health plan is recorded in accrued compensation in the
    accompanying consolidated balance sheets.





Income Taxes





Income taxes
    are accounted for under the asset and liability method. Deferred income taxes
    are recognized for the tax consequences of temporary differences
    by applying enacted statutory tax rates applicable to future years to differences
    between the financial statement carrying amounts and the tax bases of existing
    assets and liabilities. The effect on deferred taxes of a change in tax rates
    is recognized in income in the period that includes the enactment date. Provision
    is made for deferred income taxes applicable to temporary differences between
    financial statement and taxable income. In assessing the realizability of
    deferred tax assets, the Company considers whether it is more likely than
    not that some portion or all of the deferred tax assets will not be realized.
    To the extent that the deferred tax asset related to net operating loss carry-forwards
    are subject to a valuation allowance due to uncertainty regarding its utilization,
    the income tax benefit derived from its future utilization would ultimately
    be applied to reduce goodwill and, thereafter, to increase additional paid-in-capital.





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StockBased Compensation





The Company
       has adopted the disclosureonly provisions of Statement of Financial
        Accounting Standards No. 123, Accounting for StockBased
        Compensation,
    (SFAS 123) and applies APB Opinion No. 25 in accounting for its plans. Under
     the Companys stock option plan, the Company grants stock options to
      employees and directors at an exercise price equal to or greater than the

    fair market value on the date of grant. Accordingly, the Company has not
     recognized  compensation cost for stock options issued to employees and
     directors in its
    consolidated financial statements. Had the Company determined compensation
      cost based on the fair value at the grant date consistent with the provisions

    of SFAS 123, the Companys net income would have been changed to the
     pro forma amounts indicated below (in thousands):





|                                                       |  | 2003 |        | 2002 |   | 2001   | 
|------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | 
|                                                       |  |      |        |      |   |        | 
|Net
          income - as reported                     |  | $    | 29,987 |      | $ | 70,167 | 
|Net
          income - pro forma                       |  |      | 25,947 |      |   | 57,422 | 
|Net
          income per share - as reported (diluted) |  | $    | 0.74   |      | $ | 1.68   | 
|Net
          income per share - pro forma (diluted)   |  |      | 0.64   |      |   | 1.38   | 
|                                                       |  |      |        |      |   |        | 




The fair value
    of stock options granted in 2003 and 2002 was estimated at the grant date
    using the BlackScholes optionpricing model with the following
    assumptions for 2003 and 2002: dividend yield of 0% (2003 and 2002); expected
    volatility of 39.18% (2003) and 36.92% (2002); a riskfree return of
    2.69% (2003) and 3.8% (2002); and expected lives of 3.7 years (2003) and 8.1
    years (2002).





The Company
    did not make any stock option grants in 2001 and as a result of the Companys
    deteriorating stock price following its voluntary petition for relief under
    Chapter 11 bankruptcy, there were no outstanding stock options with intrinsic
    value during the year ended September 30, 2001. Consequently, there is no
    stock compensation cost in fiscal 2001 pursuant to SFAS 123.





Comprehensive Income





Comprehensive
    income includes all changes to shareholders equity during a period,
    except those resulting from investments by and distributions to shareholders.
    The components of comprehensive income are shown in the consolidated statements
    of shareholders equity (deficit).





Unfavorable Leases





At September
    30, 2003, an unfavorable lease credit of $11.3 million is carried on the consolidated
    balance sheet in longterm liabilities. The unfavorable lease credit
    was established at September 30, 2001 in accordance with the implementation
    of freshstart reporting. Amortization of unfavorable leases is computed
    using the straightline method over the individual terms of each unfavorable
    lease. See note 12, Leases and Lease Commitments.





Derivative Financial Instruments





The Company
    follows the provisions of SFAS No. 133, Accounting for Derivative
    Instruments and Hedging Activities, as amended. The Company is exposed
    to the impact of interest rate changes. The Company employs established policies
    and procedures to manage its exposure to changes in interest rates. The Companys
    objective in managing exposure to interest rate changes is to limit the impact
    of such changes on earnings and cash flows and to lower its overall borrowing
    costs. To achieve the objective, the Company primarily uses interest rate
    swap and cap agreements to manage net exposure to interest rate changes related
    to its portfolio of borrowings. The Company does not enter into such arrangements
    for trading purposes. The Company recognizes all derivatives on the consolidated
    balance sheet at fair value. Changes in the fair value of a derivative that
    is designated as and meets all the required criteria for a cash flow hedge
    are recorded in accumulated other comprehensive income (loss) and reclassified
    as an adjustment to interest expense as the underlying hedged item affects
    earnings.





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Reimbursement of Managed Property
    Labor Costs





The Company
    manages the operations of 57 eldercare centers. Under a majority of these
    arrangements, the Company employs the operational staff of the managed business
    for ease of benefit administration and bills the related wage and benefit
    costs on a dollar-for-dollar basis to the owner of the managed property. In
    this capacity, the Company operates as an agent on behalf of the managed property
    owner and is not the primary obligor in the context of a traditional employee
    / employer relationship. Historically, the Company has treated these transactions
    on a net basis, thereby not reflecting the billed labor and benefit
    costs as a component of its net revenue or expenses. For the years ended September
    30, 2003, 2002 and 2001 the Company billed its managed clients $125.3 million,
    $140.5 million, and $153.6 million, respectively, for such labor related costs.





Earnings or Loss Per Share





Basic earnings
    or loss per share is calculated by dividing net income or loss attributed
    to common shareholders by the weighted average of common shares outstanding
    during the period. Diluted earnings per share is calculated by using the weighted
    average of common shares outstanding adjusted to include the potentially dilutive
    effect of common stock equivalents.





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The following
    table sets forth the computation of basic and diluted earnings per share applicable
    to common shares (in thousands except per share data):





|                                                                                                                            |  | Successor
          Company |         |      | Predecessor
          Company
          2001 |       
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---- | -------------------------------------------- | ------
|                                                                                                                            |  |                             |         |      |                                             
|                                                                                                                            |  | 2003                        |         | 2002 |                                              |       
|                                                                                                                            |  |                             |         |      |                                              |       
|Earnings
          (loss) used in computation:                                                                              |  |                             |         |      |                                              |       
|Income
          from continuing operations  basic computation                                                             |  | $                           | 51,112  |      | $                                            | 78,508
|Elimination
          of preferred stock dividend requirements upon assumed conversion of
          preferred stock         |  |                             | 2,701   |      |                                              | 2,599 
|                                                                                                                            |  |                             |         |      |                                              |       
|Income
          from continuing operations  diluted computation                                                           |  | $                           | 53,813  |      | $                                            | 81,107
|                                                                                                                            |  |                             |         |      |                                              |       
|Loss
          from discontinued operations  basic and diluted computation                                                 |  | $                           | (21,125 | )    | $                                            | (8,341
|                                                                                                                            |  |                             |         |      |                                              |       
|Net
          income attributed to common shareholders  basic computation                                                  |  | $                           | 29,987  |      | $                                            | 70,167
|Elimination
          of preferred stock dividend requirements upon assumed conversion of
          preferred stock         |  |                             |        |      |                                              | 2,599 
|                                                                                                                            |  |                             |         |      |                                              |       
|Net
          income  diluted computation                                                                                  |  | $                           | 29,987  |      | $                                            | 72,766
|                                                                                                                            |  |                             |         |      |                                              |       
|Shares
          used in computation:                                                                                       |  |                             |         |      |                                              |       
|Weighted
          average shares outstanding  basic computation                                                           |  |                             | 40,756  |      |                                              | 41,226
|Assumed
          conversion of preferred stock                                                                             |  |                             | 2,253   |      |                                              | 2,091 
|Dilutive
          effect of outstanding stock options                                                                      |  |                             | 1       |      |                                              |      
|Contingent
          consideration related to an acquisition                                                                |  |                             |        |      |                                              | 34    
|                                                                                                                            |  |                             |         |      |                                              |       
|Weighted
          average shares outstanding  diluted computation,                                                        |  |                             |         |      |                                              |       
|income
          from continuing operations                                                                                 |  |                             | 43,010  |      |                                              | 43,351
|Less
          assumed conversion of preferred stock                                                                        |  |                             | (2,253  | )    |                                              |      
|                                                                                                                            |  |                             |         |      |                                              |       
|Weighted
          average shares outstanding  diluted computation, net income attributed
          to common shareholders |  |                             | 40,757  |      |                                              | 43,351
|                                                                                                                            |  |                             |         |      |                                              |       
|Earnings
          per common share:                                                                                        |  |                             |         |      |                                              |       
|Basic:                                                                                                                      |  |                             |         |      |                                              |       
|Income
          from continuing operations                                                                                 |  | $                           | 1.25    |      | $                                            | 1.90  
|Loss
          from discontinued operations                                                                                 |  |                             | (0.52   | )    |                                              | (0.20 
|Net
          income attributed to common shareholders                                                                      |  |                             | 0.74    |      |                                              | 1.70  
|Diluted:                                                                                                                    |  |                             |         |      |                                              |       
|Income
          from continuing operations                                                                                 |  | $                           | 1.25    |      | $                                            | 1.87  
|Loss
          from discontinued operations *                                                                               |  |                             | (0.52   | )    |                                              | (0.20 
|Net
          income attributed to common shareholders                                                                      |  |                             | 0.74    |      |                                              | 1.68  




* The basic weighted average shares
    calulation is used for all periods to calculated losses per share from discontinued
    operations.





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New Accounting
    Pronouncements





In May 2002,
    the Financial Accounting Standards Board (FASB) issued SFAS No.
    145, Recission of FASB Statements No. 4, 44 and 64, Amendment of
    FASB Statement No. 13 and Technical Corrections as of April 2002
    (SFAS 145). SFAS 145 rescinds SFAS No. 4, Reporting Gains
    and Losses from Extinguishment of Debt, which required that gains
    and losses from extinguishment of debt that were included in the determination
    of net income be aggregated and, if material, classified as an extraordinary
    item, net of the related income tax effect. Under SFAS 145, gains or losses
    from extinguishment of debt should be classified as extraordinary items only
    if they meet the criteria in Accounting Principles Board Opinion No. 30 (APB
    30), Reporting Results of Operations  Reporting the Effects
    of Disposal of a Segment of a Business. Applying the criteria in
    APB 30 will distinguish transactions that are part of an entitys recurring
    operations from those that are unusual or infrequent or that meet the criteria
    for classification as an extraordinary item. SFAS 145 is effective for fiscal
    years beginning after May 15, 2002 for provisions related to SFAS No. 4, effective
    for all transactions occurring after May 15, 2002 for provisions related to
    SFAS No. 13 and effective for all financial statements issued on or after
    May 15, 2002 for all other provisions of SFAS 145. The most significant impact
    of the adoption of SFAS 145 on the Company is that effective October 1, 2002
    any gains or losses on the extinguishment of debt that were classified as
    extraordinary items in prior periods that do not meet the new criteria of
    APB 30 for classification as extraordinary items have been reclassified. This
    reclassification includes the $1.5 billion gain recognized in fiscal 2001
    in connection with the discharge of liabilities subject to compromise upon
    the Companys emergence from Chapter 11 bankruptcy which is now included
    in income from continuing operations.





In November
    2002, FASB issued Interpretation No. 45, Guarantors Accounting
    and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness
    of Others (the Interpretation), which addresses the
    disclosures to be made by a guarantor in its interim and annual financial
    statements about its obligations under guarantees. The Interpretation also
    requires the recognition of a liability by a guarantor at the inception of
    certain guarantees. The new requirements are effective for interim and annual
    financial statements ending after December 15, 2002. The Interpretation requires
    the guarantor to recognize a liability for the non-contingent component of
    the guarantee. This is the obligation to stand ready to perform in the event
    that specified triggering events or conditions occur. The initial measurement
    of this liability is the fair value of the guarantee at inception. The recognition
    of the liability is required even if it is not probable that payments will
    be required under the guarantee or if the guarantee was issued with a premium
    payment or as part of a transaction with multiple elements. The Company applies
    the recognition and measurement provisions for all guarantees entered into
    or modified after December 31, 2002. The Company had provided $23.2 million
    of financial guarantees prior to December 31, 2002 that remain in effect as
    of September 30, 2003, related to loan and lease commitments of five jointly-owned
    and managed companies that remain in affect as of September 30, 2003. The
    adoption of the Interpretation did not have any impact on the consolidated
    financial statements of the Company.





In January
    2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation
    of Variable Interest Entities with the objective of improving financial
    reporting by companies involved with variable interest entities. A variable
    interest entity is a corporation, partnership, trust, or any other legal structure
    used for business purposes that either (a) does not have equity investors
    with voting rights, or (b) has equity investors that do not provide sufficient
    financial resources for the entity to support its activities. Historically,
    entities generally were not consolidated unless the entity was controlled
    through voting interests. FIN 46 changes that by requiring a variable interest
    entity to be consolidated by a company if that company is subject to a majority
    of the risk of loss from the variable interest entitys activities or
    entitled to receive a majority of the entitys residual returns or both.
    A company that consolidates a variable interest entity is called the primary
    beneficiary of that entity. FIN 46 also requires disclosures about variable
    interest entities that a company is not required to consolidate but in which
    it has a significant variable interest. The consolidation requirements of
    FIN 46 apply immediately to variable interest entities created after January
    31, 2003. The consolidation requirements of FIN 46 apply to existing entities
    in the first fiscal year or interim period beginning after June 15, 2003,
    with early adoption permitted. Also, certain disclosure requirements apply
    to all financial statements issued after January 31, 2003, regardless of when
    the variable interest entity was established. The Company has concluded that
    one of its joint venture partnerships that operates four eldercare centers
    requires consolidation under FIN 46 because the Company holds a majority of
    the related financial risks and rewards, despite the Companys lack of
    voting control. This partnership has assets of $7.3 million, annual





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revenues of approximately $15.5 million,
    and de minimus net income. Effective in the second fiscal quarter of 2003,
    the Company began consolidating this entity, which is held for sale. Upon
    consolidation, the Company eliminated its investment in this partnership.
    At September 30, 2003, the Companys maximum exposure to loss as a result
    of its involvement with this partnership was $12.4 million, consisting of
    the Companys financial guarantee related to the lease obligations of
    the joint venture partnership. Subsequent to September 30, 2003, the $12.4
    million guarantee was terminated in connection with the sale of the partnerships
    leasehold rights to an independent third party.





Use of
    Estimates





The Company
    has made a number of estimates relating to the reporting of assets and liabilities,
    revenues and expenses and the disclosure of contingent assets and liabilities
    to prepare these consolidated financial statements in conformity with accounting
    principles generally accepted in the United States of America. Some of the
    more significant estimates impact accounts receivable, longlived assets
    and loss reserves for selfinsurance programs. Actual results could differ
    significantly from those estimates. See note 4 Certain Significant
    Risks and Uncertainties.





|(2) | Reorganization
|--- | --------------




On June 22,
    2000 (the Petition Date), NeighborCare and certain of its direct
    and indirect subsidiaries filed for voluntary relief under Chapter 11 of the
    United States Code (the Bankruptcy Code) with the United States
    Bankruptcy Court for the District of Delaware (the Bankruptcy Court).
    On the same date, NeighborCares 43.6% owned affiliate, The Multicare
    Companies, Inc., and certain of its direct and indirect subsidiaries (Multicare)
    and certain of its affiliates also filed for relief under Chapter 11 of the
    Bankruptcy Code with the Bankruptcy Court (singularly and collectively referred
    to herein as the Chapter 11 cases or other general references
    to these cases unless the context otherwise requires).





NeighborCares
    and Multicares financial difficulties were attributed to a number of
    factors. First, the federal government made fundamental changes to the reimbursement
    for medical services provided to individuals. The changes had a significant
    adverse impact on the healthcare industry as a whole and on NeighborCares
    and Multicares cash flows. Second, the federal reimbursement changes
    exacerbated a longstanding problem of inadequate reimbursement by the
    states for medical services provided to indigent persons under the various
    states Medicaid programs. Third, numerous other factors adversely affected
    NeighborCares and Multicares cash flows, including increased labor
    costs, increased professional liability and other insurance costs, and increased
    interest rates. Finally, as a result of declining governmental reimbursement
    rates and in the face of rising inflationary costs, NeighborCare and Multicare
    were too highly leveraged to service our debt, including our longterm
    lease obligations.





On October
    2, 2001, (the effective date), NeighborCare and Multicare consummated
    a joint plan of reorganization (the Plan) under Chapter 11 of
    the Bankruptcy Code (the Reorganization) pursuant to a September
    20, 2001 order entered by the Bankruptcy Court approving the Plan proposed
    by NeighborCare and Multicare.  In general, the Plan provided for the
    resolution of all claims against the Company and Multicare as of the Petition
    Date in exchange for new indebtedness, preferred stock, warrants and/or common
    stock of NeighborCare.  In addition, Multicare became a wholly-owned
    subsidiary of the Company and a new board of directors was constituted.





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In accordance with SOP 907 (as defined in note 3 FreshStart  Reporting), the Company recorded all expenses incurred as a result of the  Bankruptcy filing separately as debt restructuring and reorganization costs. A  summary of the principal categories of debt restructuring and reorganization  costs and net (gain) on debt discharge from continuing operations follows (in  thousands):





|                                                                                    |  | Successor    Company |   |      | Predecessor    Company |      
|----------------------------------------------------------------------------------- |  | -------------------- | - | ---- | ---------------------- | -----
|                                                                                    |  |                      |   |      |                        |      
|                                                                                    |  | 2003                 |   | 2002 |                        |      
|                                                                                    |  |                      |   |      |                        |      
|Professional,    bank and other fees                                                |  | $                    |  |      | $                      | 2,570
|Employee    benefit related costs, including severance                              |  |                      |  |      |                        |     
|Exit    costs of terminated businesses                                              |  |                      |  |      |                        |     
|Fresh-start    valuation adjustments (1)                                            |  |                      |  |      |                        |     
|Gain    on debt discharge (2)                                                       |  |                      |  |      |                        |     
|Post    confirmation mortgage adjustment                                            |  |                      |  |      |                        | 1,700
|                                                                                    |  |                      |   |      |                        |      
|Total    debt restructuring and reorganization costs and net gain on debt discharge |  | $                    |  |      | $                      | 4,270
|                                                                                    |  |                      |   |      |                        |      




|(1) | The    fresh-start valuation adjustment represents the net write-down to fair value    of NeighborCares assets and liabilities from continuing operations at    September 30, 2001, and does not include $101.3 million of net write-downs    attributed to discontinued operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                      
|(2) | The    gain on debt discharge in
      2001 represents the relief of NeighborCares    obligations for liabilities
      subject to compromise from continuing operations, and does not include
      $63.9 million attributed to discontinued operations.                           




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As a  result of the consummation of the Plan, the Company recognized a gain on debt  discharge in 2001 as follows (in thousands):





|Liabilities subject to compromise:                               |  |   |           |  
|---------------------------------------------------------------- |  | - | --------- | -
|Revolving credit and term loans                                  |  | $ | 1,484,904 |  
|Senior subordinated notes                                        |  |   | 617,510   |  
|Other indebtedness                                               |  |   | 120,961   |  
|                                                                 |  |   |           |  
|Long-term debt subject to compromise                             |  |   | 2,223,375 |  
|                                                                 |  |   |           |  
|Accounts payable and accrued    liabilities                      |  |   | 64,621    |  
|Accrued interest (including a    $28,331 swap termination fee)   |  |   | 87,716    |  
|Accrued preferred stock    dividends on Series G Preferred Stock |  |   | 49,673    |  
|                                                                 |  |   |           |  
|Subtotal  liabilities subject to compromise                     |  |   | 2,425,385 |  
|                                                                 |  |   |           |  
|Redeemable preferred stock     Series H and Series I            |  |   | 468,722   |  
|                                                                 |  |   |           |  
|Total liabilities subject to compromise                          |  |   | 2,894,107 |  
|                                                                 |  |   |           |  
|Less:                                                            |  |   |           |  
|Cash payments                                                    |  |   | 25,000    |  
|Value of secured, priority and    other claims assumed           |  |   | 143,319   |  
|Value of new Senior Secured    Notes                             |  |   | 242,605   |  
|Value of Term Loan used to    repay synthetic lease facility     |  |   | 50,000    |  
|Carrying value of deferred    financing fees of discharged debts |  |   | 32,230    |  
|Value of Successor Companys    common stock                     |  |   | 833,530   |  
|Value of Successor Companys    redeemable preferred stock       |  |   | 42,600    |  
|                                                                 |  |   |           |  
|Gain on debt    discharge                                        |  | $ | 1,524,823 |  
|                                                                 |  |   |           |  
|Less: net gain on discontinued operations                        |  |   | (63,914   | )
|                                                                 |  |   |           |  
|Gain on debt    discharge as reported from continuing operations |  | $ | 1,460,909 |  
|                                                                 |  |   |           |  




|(3) | FreshStart Reporting
|--- | ---------------------




Upon emergence from our Chapter 11 proceedings, NeighborCare adopted  the principles of freshstart reporting in accordance with the American  Institute of Certified Public Accountants Statement of Position 907, Financial  Reporting By Entities in Reorganization Under the Bankruptcy Code  (SOP 907) / (freshstart reporting). For financial reporting purposes, NeighborCare  adopted the provisions of freshstart reporting effective September 30, 2001.  In connection with the adoption of freshstart reporting, a new entity was  deemed created for financial reporting purposes, the provisions of the Plan  were implemented, assets and liabilities were adjusted to their estimated fair  values and NeighborCares accumulated deficit was eliminated.





In adopting the requirements of freshstart reporting as of September  30, 2001, the Company was required to value its assets and liabilities at fair  value and eliminate its accumulated deficit at September 30, 2001. A $1,525  million reorganization value, before consideration of post filing current and  long term liabilities or minority interests was determined by the Company with the  assistance of financial advisors in reliance upon various valuation





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methods,  including discounted projected cash flow analysis, price / earnings ratios, and  other applicable ratios and economic industry information relevant to the  operations of the Company, and through negotiations with the various creditor  parties in interest.





The  following reconciliation of the Predecessor Companys consolidated balance  sheet as of September 30, 2001 to that of the Successor Company was prepared to  present the primary adjustments that give effect to the reorganization and  freshstart reporting.





The  adjustments entitled Reorganization reflect the consummation of the Plan, and  are the more significant adjustments summarized as follows:





| |  | Other    long-term assets  represents the write-off of unamortized financing fees    associated with debts that were discharged in connection with the Plan.                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Current    installments of long-term debt, accrued interest and long-term debt     represents the capitalization of the Companys newly issued senior debt    agreements in accordance with the Plan, as well as debts specifically held by    the Companys subsidiaries that were deemed unimpaired in accordance with the    Plan. Adjustments to accrued interest represent unpaid interest obligations    through September 30, 2001 that were deemed unimpaired in accordance with the    Plan.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Liabilities    subject to compromise  represents the write-off of liabilities that were    discharged under the Plan and the reclassification of debt obligations to    appropriate debt accounts for those debts specifically held by the Companys    subsidiaries that were deemed unimpaired in accordance with the Plan.                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Deferred    gain and other long-term liabilities  represents the reclassification of    liabilities subject to compromise that survived the bankruptcy in accordance    with the Plan. These liabilities principally consist of priority tax claims    made by a multitude of taxing authorities.                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Redeemable    preferred stock  represents the cancellation of the previously issued Series    H and Series I Preferred, as well as the issuance of the Series A Preferred    in accordance with the Plan.                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Series    G preferred stock, common
      stock, additional paid-in-capital and treasury stock  represents
      the cancellation of the Companys previously issued equity    securities,
      offset by 41 million newly issued shares of common stock of the successor
      company at $20.33 per share.                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Retained    earnings (accumulated deficit)  represents the net gain recognized for    relief of the Companys obligations for liabilities subject to compromise in    exchange for the newly issued debt and equity securities.                                                                                                                                                                                                                                                                      




The  adjustments entitled Fresh-Start Adjustments reflect the adoption of  fresh-start reporting, including managements estimates of the fair value of  its assets and liabilities by utilizing both independent appraisals and  commonly used discounted cash flow valuation methods. The fresh-start  adjustments are summarized as follows:





| |  | Property    and equipment, net  represents the net write-down of property and equipment    to its fair value.                                                                                                                                                                                                                                                                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Other    long-term assets  represents the write-down of cost report receivables due    principally from the Medicare program. In connection with the reorganization,    the Company entered into a global settlement with the federal government    regarding various unresolved reimbursement appeal issues. As a result of the    settlement, the Company agreed not to further pursue collection of certain of    its cost report receivable accounts due from Medicare.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Identifiable    intangible assets  represents the fair value of customer contracts,    trademarks and tradenames, and non-compete agreements.                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Goodwill,    net  represents the write-off of goodwill which was deemed unrecoverable.                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Deferred    gain and other long-term liabilities  represents the write-off of $40.1    million of deferred gains recorded on sale lease back transactions, offset by    the recognition of $28.6 million of net unfavorable lease liabilities recognized    in order to carry certain above market operating leases at fair value.                                                                                                                                         




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| |  | Deferred    income taxes  represents the revaluation of deferred tax assets and    liabilities.                                                                                      
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                       
| |  | Minority    interest  represents the elimination of NeighborCares right to purchase its    joint venture partners minority interest in Multicare for $2.0 million.                 
| |   |                                                                                                                                                                                       
| |  | Retained    earnings (accumulated deficit)  represents the offsetting net loss    recognized in fresh-start reporting related to the previously described    fresh-start adjustments.




Several  of the Companys subsidiaries did not file for Chapter 11 protection. The  non-filing subsidiaries were not subject to the fresh-start reporting  provisions under SOP 90-7 and, consequently, their balance sheets are reflected  in the consolidated balance sheet at historical carrying value.





|(in    thousands)                                  |  | Predecessor    Company |           | Reorganization |   | Fresh-Start    Adjustments |   | Reclassification |            | Successor    Company |  
|-------------------------------------------------- |  | ---------------------- | --------- | -------------- | - | -------------------------- | - | ---------------- | ---------- | -------------------- | -
|                                                   |  |                        |           |                |   |                            |   |                  |            |                      |  
|Assets:                                            |  |                        |           |                |   |                            |   |                  |            |                      |  
|Cash and equivalents                               |  | $                      | 30,552    |                | $ | 1,587                      |   | $                |           |                      | $
|Restricted investments in marketable securities    |  |                        | 12,932    |                |   |                           |   |                  |           |                      |  
|Accounts receivable, net                           |  |                        | 399,816   |                |   |                           |   |                  |           |                      |  
|Inventory                                          |  |                        | 65,222    |                |   |                           |   |                  |           |                      |  
|Prepaid expenses and other current assets          |  |                        | 35,753    |                |   |                           |   |                  |           |                      |  
|                                                   |  |                        |           |                |   |                            |   |                  |            |                      |  
|Total current assets                               |  |                        | 544,275   |                |   | 1,587                      |   |                  |           |                      |  
|                                                   |  |                        |           |                |   |                            |   |                  |            |                      |  
|Property,    plant and equipment                   |  |                        | 1,387,608 |                |   |                           |   |                  | (553,883   | )                    |  
|Accumulated    depreciation                        |  |                        | (306,797  | )              |   |                           |   |                  | 295,812    |                      |  
|                                                   |  |                        |           |                |   |                            |   |                  |            |                      |  
|Property,    plant and equipment, net              |  |                        | 1,080,811 |                |   |                           |   |                  | (258,071   | )                    |  
|Restricted    investments in marketable securities |  |                        | 38,693    |                |   |                           |   |                  |           |                      |  
|Notes    receivable and other investments          |  |                        | 18,001    |                |   |                           |   |                  | (3,462     | )                    |  
|Other    long-term assets                          |  |                        | 84,135    |                |   | (25,452                    | ) |                  | (12,985    | )                    |  
|Investments    in unconsolidated affiliates        |  |                        | 12,504    |                |   |                           |   |                  |           |                      |  
|Identifiable intangible assets                     |  |                        |          |                |   |                           |   |                  | 33,591     |                      |  
|Goodwill,    net                                   |  |                        | 1,155,956 |                |   |                           |   |                  | (830,363   | )                    |  
|                                                   |  |                        |           |                |   |                            |   |                  |            |                      |  
|Total    assets                                    |  | $                      | 2,934,375 |                | $ | (23,865                    | ) | $                | (1,071,290 | )                    | $
|                                                   |  |                        |           |                |   |                            |   |                  |            |                      |  




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|(in    thousands)                                       |  | Predecessor    Company |            | Reorganization |   | Fresh-Start    Adjustments |   | Reclassification |            | Successor    Company |  
|------------------------------------------------------- |  | ---------------------- | ---------- | -------------- | - | -------------------------- | - | ---------------- | ---------- | -------------------- | -
|                                                        |  |                        |            |                |   |                            |   |                  |            |                      |  
|Liabilities    and Shareholders Equity (Deficit)       |  |                        |            |                |   |                            |   |                  |            |                      |  
|Current    installments of long-term debt               |  | $                      | 196,000    |                | $ | (196,000                   | ) | $                |           |                      | $
|Accounts    payable                                     |  |                        | 46,429     |                |   |                           |   |                  |           |                      |  
|Accrued    expenses                                     |  |                        | 67,904     |                |   | (5,635                     | ) |                  | 2,423      |                      |  
|Current    portion of self-insurance liability reserves |  |                        | 12,932     |                |   |                           |   |                  |           |                      |  
|Accrued    compensation                                 |  |                        | 78,074     |                |   |                           |   |                  |           |                      |  
|Accrued    interest                                     |  |                        | 1,599      |                |   | 14,239                     |   |                  |           |                      |  
|Income    taxes payable                                 |  |                        | 4,640      |                |   |                           |   |                  |           |                      |  
|                                                        |  |                        |            |                |   |                            |   |                  |            |                      |  
|Total    current liabilities                            |  |                        | 407,578    |                |   | (187,396                   | ) |                  | 2,423      |                      |  
|                                                        |  |                        |            |                |   |                            |   |                  |            |                      |  
|Liabilities    subject to compromise                    |  |                        | 2,425,385  |                |   | (2,425,385                 | ) |                  |           |                      |  
|Long-term    debt                                       |  |                        | 14,104     |                |   | 626,921                    |   |                  | 3,484      |                      |  
|Deferred    income taxes                                |  |                        | 48,534     |                |   |                           |   |                  | (48,534    | )                    |  
|Self-insurance    liability reserves                    |  |                        | 26,834     |                |   |                           |   |                  |           |                      |  
|Deferred    gain and other long-term liabilities        |  |                        | 46,713     |                |   | 30,500                     |   |                  | (11,536    | )                    |  
|Minority    interests                                   |  |                        | 4,137      |                |   |                           |   |                  | (2,000     | )                    |  
|Redeemable    preferred stock                           |  |                        | 468,722    |                |   | (426,122                   | ) |                  |           |                      |  
|Shareholders    equity (deficit)                       |  |                        |            |                |   |                            |   |                  |            |                      |  
|Series    G preferred stock                             |  |                        | 6          |                |   | (6                         | ) |                  |           |                      |  
|Common    stock                                         |  |                        | 973        |                |   | (153                       | ) |                  |           |                      |  
|Additional    paid-in capital                           |  |                        | 803,202    |                |   | 832,710                    |   |                  |           |                      |  
|Retained    earnings (accumulated deficit)              |  |                        | (1,311,762 | )              |   | 1,524,823                  |   |                  | (1,015,127 | )                    |  
|Accumulated    other comprehensive income               |  |                        | 192        |                |   |                           |   |                  |           |                      |  
|Treasury    stock, at cost                              |  |                        | (243       | )              |   | 243                        |   |                  |           |                      |  
|                                                        |  |                        |            |                |   |                            |   |                  |            |                      |  
|Total    shareholders equity (deficit)                 |  |                        | (507,632   | )              |   | 2,357,617                  |   |                  | (1,015,127 | )                    |  
|                                                        |  |                        |            |                |   |                            |   |                  |            |                      |  
|Total    liabilities and shareholders equity (deficit) |  | $                      | 2,934,375  |                | $ | (23,865                    | ) | $                | (1,071,290 | )                    | $
|                                                        |  |                        |            |                |   |                            |   |                  |            |                      |  




Accounting Pronouncements Adopted in  Fresh-Start Reporting





As of September 30, 2001, and in accordance with the early adoption  provisions of SOP 90-7, the Company adopted the provisions of Statements of  Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141),  Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets  (SFAS No. 142), and Standards of Financial Accounting Standards No. 144, Accounting  for the Impairment or Disposal of Long-Lived Assets (SFAS No.  144).





|(4) | Certain Significant Risks and Uncertainties
|--- | -------------------------------------------




The Company receives revenues from Medicare, Medicaid, private  insurance, selfpay residents, other third party payors and longterm care  facilities which utilize our pharmacy and other specialty medical services. The  healthcare industry is experiencing the effects of the federal and state  governments trend toward cost containment, as government and other third party  payors seek to impose lower reimbursement and utilization rates and negotiate  reduced payment schedules with providers. These cost containment measures,  combined with the increasing influence of managed care payors and competition  for patients, have resulted in reduced rates of reimbursement for services  provided by the Company.





The Medicaid and Medicare programs are highly regulated. The failure of  the Company or its customers to comply with applicable reimbursement  regulations could adversely affect the Companys business. The Company monitors  its receivables from thirdparty payor programs and reports such revenues at  the net realizable value expected to be received.





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The Companys  pharmacy segment earned revenues from the following payor sources for the three  years ended September 30, 2003:





|                             |  | 2003 |     | 2002 |  | 2001 |  
|---------------------------- |  | ---- | --- | ---- |  | ---- | -
|                             |  |      |     |      |  |      |  
|Medicaid                     |  |      | 42  | %    |  | 40   | %
|Long term    care facilities |  |      | 30  |      |  | 34   |  
|Third-party    payor         |  |      | 16  |      |  | 14   |  
|Private                      |  |      | 10  |      |  | 10   |  
|Medicare    Part B           |  |      | 2   |      |  | 2    |  
|                             |  |      |     |      |  |      |  
|Total                        |  |      | 100 | %    |  | 100  | %
|                             |  |      |     |      |  |      |  




The Companys  former inpatient services segment earned revenues from the following payor  sources for the three years ended September 30, 2003:





|                         |  | 2003 |     | 2002 |  | 2001 |  
|------------------------ |  | ---- | --- | ---- |  | ---- | -
|                         |  |      |     |      |  |      |  
|                         |  |      |     |      |  |      |  
|Medicaid                 |  |      | 50  | %    |  | 48   | %
|Medicare                 |  |      | 28  |      |  | 29   |  
|Private pay    and other |  |      | 22  |      |  | 23   |  
|                         |  |      |     |      |  |      |  
|Total                    |  |      | 100 | %    |  | 100  | %
|                         |  |      |     |      |  |      |  




It is not  possible to quantify fully the effect of pending legislative or regulatory  changes, the administration of such legislation or any other governmental  initiatives on the Companys business. Accordingly, there can be no assurance  that the impact of these changes or any future healthcare legislation will not  further adversely affect the Companys business. There can be no assurance that  payments under governmental and private thirdparty payor programs will be  timely, will remain at levels comparable to present levels or will, in the  future, be sufficient to cover the costs allocable to patients eligible for  reimbursement pursuant to such programs. The Companys financial condition and  results of operations may be affected by the reimbursement process, which in  the healthcare industry is complex and can involve lengthy delays between the  time that revenue is recognized and the time that
reimbursement amounts are  settled.





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|(5) | Significant Transactions and Events
|--- | -----------------------------------




Strategic Planning,  Severance and Other Related Costs





The Company  has incurred costs that are directly attributable to the Companys long term  objective of transforming to a pharmacybased business, including the spin-off.  Details of these costs and the amounts incurred, but not paid at September 30,  2003 follow (in thousands):





Fiscal 2003:





|                               |  | Accrued at    Beginning
  of Year |       | Provision |   | Paid   |  | Non-cash    Charges |        | Accrued at    End of Year |  
|------------------------------ |  | --------------------------------- | ----- | --------- | - | ------ |  | ------------------- | ------ | ------------------------- | -
|                               |  |                                   |       |           |   |        |  |                     |        |                           |  
|Severance    and related costs |  | $                                 | 1,100 |           | $ | 14,247 |  | $                   | 5,916  |                           | $
|Strategic    consulting costs  |  |                                   | 621   |           |   | 14,039 |  |                     | 11,280 |                           |  
|                               |  |                                   |       |           |   |        |  |                     |        |                           |  
|Total                          |  | $                                 | 1,721 |           | $ | 28,286 |  | $                   | 17,196 |                           | $
|                               |  |                                   |       |           |   |        |  |                     |        |                           |  




Fiscal 2002:





|                               |  | Accrued at    Beginning    of Year |   | Provision |   | Paid   |  | Non-cash    Charges |        | Accrued at    End of Year |  
|------------------------------ |  | ---------------------------------- | - | --------- | - | ------ |  | ------------------- | ------ | ------------------------- | -
|                               |  |                                    |   |           |   |        |  |                     |        |                           |  
|Severance    and related costs |  | $                                  |  |           | $ | 16,410 |  | $                   | 10,599 |                           | $
|Strategic    consulting costs  |  |                                    |  |           |   | 4,730  |  |                     | 3,089  |                           |  
|Asset    impairments           |  |                                    |  |           |   | 358    |  |                     |       |                           |  
|                               |  |                                    |   |           |   |        |  |                     |        |                           |  
|Total                          |  | $                                  |  |           | $ | 21,498 |  | $                   | 13,688 |                           | $
|                               |  |                                    |   |           |   |        |  |                     |        |                           |  




Severance and Related Costs





In fiscal  2002, the Company announced an expense reduction program, which included the  termination of over 100 individuals resulting in $3.8 million of severance  related costs in that year. In fiscal 2003, in a continuation of that expense  reduction initiative, additional overhead terminations resulted in a charge of  severance and related costs of $2.2 million. At September 30, 2003, $1.0  million remained unpaid, which is expected to be paid in the first fiscal  quarter of 2004.





In fiscal  2002, Michael R. Walker resigned as the Companys chief executive officer. The  Companys board of directors appointed Robert H. Fish as its interim chief  executive officer. Also, in that period, David C. Barr resigned as vice  chairman. In fiscal 2002, the Company recognized $12.6 million in severance and  related costs relating to the transition agreements with Mr. Walker and Mr.  Barr.





In fiscal  2003, Richard R. Howard resigned as vice chairman. The Company recognized $4.8  million in severance and related costs in fiscal 2003 in  connection with Mr. Howards transition agreement. The final payment of this  agreement was made in January 2003.





On April 1,  2003, the Company extended an offer to its employees, including executive  officers except for its chief executive officer, to tender all options to  purchase shares of the Companys common stock, par value $.02 per share,  outstanding under its 2001 stock option plan, for the following consideration:  (a) for those holders of options who had received awards of more than 2,000  restricted shares of common stock under the Companys stock incentive plan, the  acceleration of vesting of all such restricted shares plus a cash payment of  $2.50 per share underlying the option for options that had an exercise price  below $20.00 per share, and (b) with respect to those holders of options who  had not received awards of more than 2,000 restricted shares, (i) for those  options that had an exercise price of at least $20.00 per share, a cash payment  of $2.00 per share underlying the option, and (ii) for those





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options that had an exercise  price below $20.00 per share, a cash payment of $2.50 per share subject to the  option. The offer expired on May 12, 2003. The Company accepted for exchange  and cancellation options to purchase 1,724,000 shares of its common stock,  which represented all of the eligible outstanding options properly tendered for  exchange by eligible option holders. All eligible options held by the Companys  employees were tendered in the offer, with the exception of options to purchase  35,000 shares. As a result of this offer and exchange, the Company expensed  $7.2 million in fiscal 2003, of which $1.4 million was disbursed in cash, with  the remainder distributed in common stock.





Strategic Consulting Costs





During fiscal
    year 2003 and 2002, the Company incurred strategic consulting costs of $14.0
    million and $4.7 million, respectively, in connection with several of its
    new strategic objectives. Initially, these strategic consulting firms were
    engaged to assist the Companys board of directors and management in
    the evaluation of its existing business model and the development of its
    strategic alternatives. Additional services were procured to assist in the
    evaluation of the Companys  pharmacy sales and marketing function,
    the bid selection process in connection with the potential sale or spin-off
    of the eldercare business and, more recently, the legal, accounting and other
    professional fees directly attributed to the spin-off transaction.
Strategic consulting costs in fiscal 2003 also include executive compensation
of $2.2 million which relates to certain incentive compensation to recruit John
J. Arlotta as the Company's new chief executive officer and incentive compensation
paid to Robert H. Fish for services rendered during his term as the interim chief
executive officer. During Mr. Fishs term as interim chief executive officer,
his primary objectives were focused on the Companys pharmacy transformation
initiatives.





We recognize the cost of such consulting fees as the services are  performed.





Asset Impairments





During fiscal  2002, we incurred $0.4 million of asset impairment charges consisting of the  write-down in carrying value of one idle eldercare real estate property.





ElderTrust  Transactions





On September 11, 2003, GHC entered into agreements with ElderTrust, a  real estate investment trust from who GHC currently or previously leased or  subleased 18 of its eldercare facilities and eight managed and jointly-owned  facilities. The principal terms of the agreements are as follows:





| |  | GHC will    purchase two skilled nursing facilities having 210 skilled nursing beds and    67 assisted living beds, and three assisted living facilities having 257    beds, for $24.8 million. GHC leases these properties from ElderTrust at an    annual cash basis and accrual basis lease cost of $2.4 million and $1.5    million, respectively.  On October 29,    2003, GHC purchased one of the aforementioned eldercare facilities having 183    beds for $10.3 million.  The remaining    four properties are expected to be purchased by January 2004;                        
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | GHC agreed to pay ElderTrust $32.3 million to reduce annual cash    basis and accrual basis lease cost associated with nine properties by $6.9    million and $1.2 million, respectively, and acquire options to purchase seven    properties currently subleased to GHC by ElderTrust.  On October 29, 2003, GHC paid ElderTrust    $2.3 million to reduce the rents of two of the nine aforementioned eldercare    facilities, and on November 7, 2003 paid ElderTrust the remaining $30.0    million to reduce the rents of the other seven aforementioned eldercare    facilities; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | NeighborCare paid ElderTrust $4.4 million upon consummation of the    spin-off in exchange for ElderTrusts consent to the assignment of all    remaining leases and guarantees from NeighborCare to GHC.                                                                                                                                                                                                                                                                                                                                                                                 




On August 13, 2003, GHC acquired the remaining ownership interest in an  unconsolidated joint-venture partnership that operates four skilled nursing  facilities with 600 skilled nursing and 125 assisted living beds. Each of the  four eldercare centers had been leased to the partnership from ElderTrust. GHC  purchased its joint venture partners interest in the unconsolidated  partnership for $3.1 million and will subsequently purchase one of the four  eldercare properties from ElderTrust for $2.6 million. Additionally, GHC paid  ElderTrust $2.5 million to reduce the annual cash basis and accrual basis lease  expense of one of the three remaining leased facilities by $0.4 million and  $0.2 million, respectively. The lease terms of the three facilities that will  continue to be leased from ElderTrust are expected to be extended from 2010 to  2015.





NCS
Transaction Termination Fee





On July 28,  2002, the Company and its wholly-owned subsidiary, Geneva Sub, Inc., entered  into an agreement and plan of merger (the Merger Agreement) with NCS  HealthCare, Inc. (NCS), pursuant to which NCS was to become a wholly-owned  subsidiary of the Company (the NCS Transaction).





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On December  11, 2002, the Court of Chancery of the State of Delaware, pursuant to an order  of the Delaware Supreme Court dated December 10, 2002 which reversed prior  determinations of the Court of Chancery, entered an order preliminary enjoining  the consummation of the NCS transaction pending further proceedings.





On December
    15, 2002, the Company entered into a termination and settlement agreement
    with Omnicare whereby it agreed to terminate the Merger Agreement and Omnicare
    agreed to pay to the Company $22 million. In addition, the Company and Omnicare
    each agreed to release the other from any claims arising from the Merger
    Agreement and not commence any action against one another in connection with
    the Merger Agreement. On December 16, 2002 the Company provided notice to
    NCS terminating the Merger Agreement. In fiscal 2003, the Company recognized
    a $10.2 million gain resulting from the $22 million break-up fee, net of
    $11.8 million of costs associated with the proposed NCS transaction.





Arbitration Award





On February  14, 2002, an arbitrator ruled in favor of NeighborCare on all claims and  counterclaims in the lawsuit involving HCR Manor Care, Inc. and certain of its  affiliates The arbitrator found that HCR Manor Care did not lawfully terminate  the Master Service Agreements with NeighborCare, so that those contracts remain  in full force and effect until the end of September 2004. The arbitrator  awarded NeighborCare $21.9 million in damages for respondents failure
    to allow NeighborCare to exercise its right under the Master Service Agreements
    to service facilities owned and operated by a subsidiary of respondent HCR
    Manor Care. The Company recognized the $21.9 million award as a gain which is included under the caption net gain from breakup fee and other settlements in the
    consolidated statements of operations. In addition, the arbitrator terminated
    his prior ruling that allowed respondents to withhold 10% of their payments
    to NeighborCare, and respondents paid NeighborCare $9.1 million in funds
    representing the amounts withheld during the course of the Arbitration pursuant
to the arbitrators prior ruling.





Amended Pharmacy  Service Agreements





On August 15,  2002, the Company announced that it and HCR Manor Care, Inc. agreed to withdraw  all outstanding legal actions against each other stemming from the acquisition  by the Company of HCR Manor Cares pharmacy subsidiary, Vitalink. The Company  and HCR Manor Care also agreed to withdraw the prior pharmacy service agreement  that was set to expire in 2004 and entered into a new pharmacy service  agreement. The new pharmacy service agreement runs through January 2006 and  covers approximately 200 of HCR Manor Cares facilities. The pricing in the new  pharmacy service agreement was reduced by approximately $12.8 million annually  based upon then current sales volumes.





In September  2002, the Company was awarded a contract to serve 6,892 beds owned by the State  of New Jersey under a three year agreement with the option for two one-year  extensions. NeighborCare was the predecessor pharmacy serving these beds under  a 1996 agreement of an initial term of three years which was extended through  September 30, 2002. The new contract was awarded through New Jerseys  competitive bidding process, and was bid by the Company at reimbursement rates  lower than the prior agreement. The revenue reduction associated with the new  pharmacy agreement was approximately $7.2 million annually based upon then  current sales volumes.





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|(6) | Restricted Investments in Marketable    Securities
|--- | --------------------------------------------------




Marketable  securities (classified as available for sale) are held by the Companys whollyowned  subsidiary, Liberty Health Corporation, LTD (LHC), incorporated under the  laws of Bermuda. LHC provides various insurance coverages to the Company and to  unrelated entities, most of which are managed by the Company.





The current  portion of restricted investments in marketable securities represents an  estimate of the level of outstanding losses the Company expects to pay in the  succeeding year.





Marketable
     securities at September 30, 2003 of the Company consist of the following
    (in thousands):





|                                                   |  | Amortized    cost |        | Unrealized    gains |   | Unrealized    losses |  | Fair    value |   
|-------------------------------------------------- |  | ----------------- | ------ | ------------------- | - | -------------------- |  | ------------- | --
|                                                   |  |                   |        |                     |   |                      |  |               |   
|Fixed    interest securities:                      |  |                   |        |                     |   |                      |  |               |   
|U.S. mortgage backed securities                    |  | $                 | 5,475  |                     | $ | 677                  |  | $             |  
|Corporate bonds                                    |  |                   | 9,771  |                     |   | 658                  |  |               |  
|Government bonds                                   |  |                   | 1,368  |                     |   | 21                   |  |               | 42
|Term    deposits                                   |  |                   | 1,028  |                     |   |                     |  |               |  
|Equity
      securities                            |  |                   | 1,102  |                     |   | 380                  |  |               |  
|Money market    funds                              |  |                   | 70,153 |                     |   |                     |  |               |  
|                                                   |  |                   |        |                     |   |                      |  |               |   
|                                                   |  | $                 | 88,897 |                     | $ | 1,736                |  | $             | 42
|                                                   |  |                   |        |                     |   |                      |  |               |   
|Less:    Current portion of restricted investments |  |                   |        |                     |   |                      |  |               |   
|                                                   |  |                   |        |                     |   |                      |  |               |   
|Long-term    restricted investments                |  |                   |        |                     |   |                      |  |               |   
|                                                   |  |                   |        |                     |   |                      |  |               |   




Marketable  securities at September 30, 2002 of the Company consisted of the following (in  thousands):





|                                                   |  | Amortized    cost |        | Unrealized    gains |   | Unrealized    losses |  | Fair    value |     
|-------------------------------------------------- |  | ----------------- | ------ | ------------------- | - | -------------------- |  | ------------- | ----
|                                                   |  |                   |        |                     |   |                      |  |               |     
|Fixed    interest securities:                      |  |                   |        |                     |   |                      |  |               |     
|U.S. mortgage backed securities                    |  | $                 | 5,464  |                     | $ | 774                  |  | $             |    
|Corporate bonds                                    |  |                   | 12,209 |                     |   | 633                  |  |               | (42 
|Government bonds                                   |  |                   | 1,413  |                     |   | 22                   |  |               | (95 
|Term    deposits                                   |  |                   | 2,495  |                     |   |                     |  |               |    
|Equity    securities                               |  |                   | 1,103  |                     |   |                     |  |               |    
|Money market    funds                              |  |                   | 62,171 |                     |   |                     |  |               |    
|                                                   |  |                   |        |                     |   |                      |  |               |     
|                                                   |  | $                 | 84,855 |                     | $ | 1,429                |  | $             | (137
|                                                   |  |                   |        |                     |   |                      |  |               |     
|Less:    Current portion of restricted investments |  |                   |        |                     |   |                      |  |               |     
|                                                   |  |                   |        |                     |   |                      |  |               |     
|Long-term    restricted investments                |  |                   |        |                     |   |                      |  |               |     
|                                                   |  |                   |        |                     |   |                      |  |               |     




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Fixed interest  securities held at September 30, 2003 mature as follows (in thousands):





|                                      |  | 2003              |       
|------------------------------------- |  | ----------------- | ------
|                                      |  |                   |       
|                                      |  | Amortized    cost |       
|                                      |  |                   |       
|Due in one    year or less            |  | $                 | 3,060 
|Due after 1    year through 5 years   |  |                   | 10,988
|Due after 5    years through 10 years |  |                   | 2,010 
|Over 10    years                      |  |                   | 556   
|                                      |  |                   |       
|                                      |  | $                 | 16,614
|                                      |  |                   |       




Actual  maturities may differ from stated maturities because borrowers have the right  to call or prepay certain obligations with or without prepayment penalties.





In the normal  course of business, LHCs bankers have issued letters of credit totaling $87.9  million in 2003 and $74.9 million in 2002 in favor of insurers. Cash and  equivalents in the sum of $4.1 million, and investments with an amortized cost  of $87.7 million and a market value of $89.4 million are pledged as security  for these letters of credit as of September 30, 2003.





|(7) | Property, Plant and Equipment
|--- | -----------------------------




Property,  plant and equipment at September 30, 2003 and 2002 consist of the following (in  thousands):





|                                      |  | 2003 |          | 2002 |  
|------------------------------------- |  | ---- | -------- | ---- | -
|                                      |  |      |          |      |  
|Land                                  |  | $    | 72,515   |      | $
|Buildings    and improvements         |  |      | 584,263  |      |  
|Equipment,    furniture and fixtures  |  |      | 203,619  |      |  
|Construction    in progress           |  |      | 6,372    |      |  
|                                      |  |      |          |      |  
|                                      |  |      | 866,769  |      |  
|Less    accumulated depreciation      |  |      | (114,773 | )    |  
|                                      |  |      |          |      |  
|Property,    plant and equipment, net |  | $    | 751,996  |      | $
|                                      |  |      |          |      |  




|(8) | Notes Receivable and Other Investments
|--- | --------------------------------------




Notes  receivable and other investments at September 30, 2003 and 2002 consist of the  following (in thousands):





|                                             |  | 2003 |        | 2002 |  
|-------------------------------------------- |  | ---- | ------ | ---- | -
|                                             |  |      |        |      |  
|Mortgage    notes and other notes receivable |  | $    | 19,252 |      | $
|Investments    in revenue bonds              |  |      |       |      |  
|                                             |  |      |        |      |  
|Notes    receivable and other investments    |  | $    | 19,252 |      | $
|                                             |  |      |        |      |  




Mortgage notes  and other notes receivable at September 30, 2003 and 2002 bear interest at  rates ranging from 7.25% to 10.00% and mature at various times ranging from  2004 to 2029. The majority of the mortgage notes and





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other notes are secured by  first or second mortgage liens on underlying facilities and personal property,  accounts receivable, inventory and / or gross facility receipts, as defined.





The Company  has agreed to provide third parties, including facilities under management  contract, with $7.4 million of working capital lines of credit. The unused  portion of working capital lines of credit was $4.6 million at September 30,  2003.





Investments in  revenue bonds at September 30, 2002 bore interest at rates ranging from 10.00%  to 10.45% and mature at various times between 2011 and 2021. The revenue bonds  held were issued by a skilled nursing facility owned by an independent third  party.





|(9) | Other LongTerm Assets
|--- | ----------------------




Other longterm  assets at September 30, 2003 and 2002 consist of the following (in thousands):





|                                              |  | 2003 |        | 2002 |  
|--------------------------------------------- |  | ---- | ------ | ---- | -
|                                              |  |      |        |      |  
|Deferred    financing fees, net               |  | $    | 7,575  |      | $
|Cost report    receivables, net               |  |      | 2,123  |      |  
|Property    deposits and funds held in escrow |  |      | 22,783 |      |  
|Employee    deferred compensation             |  |      | 7,501  |      |  
|Other, net                                    |  |      | 2,624  |      |  
|                                              |  |      |        |      |  
|Other    long-term assets                     |  | $    | 42,606 |      | $
|                                              |  |      |        |      |  




|(10) | Goodwill and Identifiable Intangible Assets
|---- | -------------------------------------------




The change in the carrying  amount of goodwill for the years ended September 30, 2003 and 2002 is as  follows (in thousands):





|                                       |  | 2003 |         | 2002 |  
|-------------------------------------- |  | ---- | ------- | ---- | -
|                                       |  |      |         |      |  
|Balance
      at beginning of period   |  | $    | 336,701 |      | $
|Goodwill    acquired during the year   |  |      | 3,040   |      |  
|Impairment    losses                   |  |      |        |      |  
|Utilization    of net operating losses |  |      | (2,046  | )    |  
|Fresh-start    valuation adjustments   |  |      |        |      |  
|                                       |  |      |         |      |  
|Balance
      at end of period         |  | $    | 337,695 |      | $
|                                       |  |      |         |      |  




In fiscal 2002,
    the Company recorded $12.2 million of fresh-start valuation adjustments representing
    miscellaneous changes to its initial application of fresh-start reporting.
    Also in fiscal 2003 and 2002, in accordance with SOP 90-7, the Company utilized
    $5.0 million and $8.0 million of net operating loss carry forwards which
    resulted in a $2.0 million and $3.1 million
    reduction in goodwill, respectively.





The consolidated statement  of operation for the year ended September 30, 2001 includes $32.4 million of  goodwill amortization. Following the adoption of SFAS No. 142, no goodwill  amortization expense was recognized for the years ended September 30, 2003 and  2002. The following table adjusts the reported income from continuing  operations and the corresponding income per share amounts for the year ended  September 30, 2001 for the predecessor company on a pro forma basis assuming  the provisions of SFAS No. 142 were adopted effective October 1, 2000 (in  thousands, except per share amounts):





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|                                                                                 |  | 2001 |        
|-------------------------------------------------------------------------------- |  | ---- | -------
|                                                                                 |  |      |        
|Income from    continuing operations  as reported                               |  | $    | 270,862
|Income from    continuing operations  as adjusted                               |  |      | 303,275
|Income per    share from continuing operations  basic and diluted  as reported |  | $    | 5.57   
|Income per    share from continuing operations  basic and diluted  as adjusted |  |      | 6.23   




In adopting  the requirements of fresh-start reporting, the Company recognized certain  identifiable intangible assets which were established at September 30, 2001 at  their estimated fair value and, in accordance with SFAS 142, are being  amortized on a straight-line basis over their estimated useful lives.  Identifiable intangible assets at September  30, 2003 and 2002 consist of the following (in thousands, except years):





|Classification                      |  | 2003 |         | 2002 |   | Estimated    Life (Years) |  
|----------------------------------- |  | ---- | ------- | ---- | - | ------------------------- | -
|                                    |  |      |         |      |   |                           |  
|Customer    Contracts               |  | $    | 28,164  |      | $ | 26,391                    |  
|Trademarks    and trade names       |  |      | 5,000   |      |   | 5,000                     |  
|Non-competition    agreements       |  |      | 4,081   |      |   | 2,200                     |  
|                                    |  |      |         |      |   |                           |  
|Identifiable intangible assets      |  |      | 37,245  |      |   | 33,591                    |  
|                                    |  |      |         |      |   |                           |  
|Accumulated    amortization         |  |      | (16,379 | )    |   | (7,796                    | )
|                                    |  |      |         |      |   |                           |  
|Identifiable intangible assets, net |  | $    | 20,866  |      | $ | 25,795                    |  
|                                    |  |      |         |      |   |                           |  




Aggregate amortization
    expense for amortizing identifiable intangible assets for the years ended
    September 30, 2003 and 2002 was $8.6 million and $7.8 million, respectively.
    Following the spin-off, estimated amortization expense for the next four
    fiscal years is $3.6 million in fiscal 2004, $3.0 million in fiscal 2005,
    $2.8 million
in fiscal 2006 and $2.8 million in fiscal 2007. The identifiable intangible assets
    attributed to NeighborCare will be fully amortized by the end of fiscal 2007.





|(11) | LongTerm Debt
|---- | --------------




Longterm debt  at September 30, 2003 and 2002 consists of the following (in thousands):





|                                     |  | 2003 |         | 2002 |  
|------------------------------------ |  | ---- | ------- | ---- | -
|                                     |  |      |         |      |  
|Secured debt                         |  |      |         |      |  
|Senior    Credit Facility            |  |      |         |      |  
|Term Loan                            |  | $    | 246,875 |      | $
|Delayed Draw Term Loan               |  |      | 68,162  |      |  
|                                     |  |      |         |      |  
|Total Senior    Credit Facility      |  |      | 315,037 |      |  
|Senior    Secured Notes              |  |      | 240,176 |      |  
|Mortgages    and other secured debt  |  |      | 56,406  |      |  
|                                     |  |      |         |      |  
|Total debt                           |  |      | 611,619 |      |  
|Less:                                |  |      |         |      |  
|Current    portion of long-term debt |  |      | (20,135 | )    |  
|                                     |  |      |         |      |  
|Long-term    debt                    |  | $    | 591,484 |      | $
|                                     |  |      |         |      |  




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There was no  capitalization of interest in 2003 or 2002. However, $2.5 million in interest  was capitalized in 2001, relating to facility construction, systems development  and renovations.





The Senior Credit Facility and the Senior Secured Notes that are described below were repaid subsequent to September 30, 2003 in connection with the spinoff of GHC and the recapitalization of both organizations. See  New Financing Arrangements below.





Senior  Credit Facility





On October
    2, 2001, and in connection with the consummation of the Plan, the Company
    entered into a Senior Credit Facility consisting of the following: (1) a
    $150 million revolving line of credit (the Revolving Credit Facility);
    (2) a $285 million term loan (the Term Loan) and (3) an $80 million
    delayed draw term loan (the  Delayed Draw Term Loan) (collectively
    the Senior Credit Facility). The  outstanding amounts under the
    Term Loan and the Delayed Draw Term Loan bore interest at the London Interbank
    Offered Rate (LIBOR) plus 3.50%, or 4.66%,  at September 30,
    2003. The Revolving Credit Facility bore interest based upon a performance
    related
    grid, or 4.16%, at September 30, 2003. The Revolving Credit Facility was
    not drawn upon during fiscal 2003 or 2002.





Pursuant to  the Senior Credit Facility, the Company and each of its subsidiaries named as  guarantors  granted the lenders first priority liens and security interests  in all unencumbered property, including but not limited to: fee owned property,  bank accounts, investment property, accounts receivable, inventory, equipment  and general intangible assets.





The Senior  Credit Facility contained an annual excess cash flow payment requirement. At the  end of each fiscal year, the Company was required to prepare an excess cash flow  calculation as defined in the senior credit agreement. Of the amount,  determined as excess cash flow, 75% was to be paid to the Companys senior  lenders in the form of a mandatory payment by December 31 of each year. The  Company paid $24.8 million on or near December 31, 2002 pursuant to the excess  cash flow recapture provision, and as a result, this estimated level of payment  is classified in the Companys consolidated balance sheet under the current  installments of longterm debt at September 30, 2002. Because the Company  refinanced the Senior Credit Facility in connection with the spin-off, there  will not be an annual excess cash flow payment requirement on December 31,  2003.





The Revolving  Credit Facility was available for general working capital requirements. The  Revolving Credit Facility was to mature on October 2, 2006. Usage under the Revolving  Credit Facility was subject to a Borrowing Base (as defined) calculation based  upon real property collateral value and a percentage of eligible accounts  receivable (as defined). Excluding a $0.9 million posted letter of credit, no  borrowings were made under the Revolving Credit Facility at September 30,  2003.





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In the year  ended September 30, 2002, the Company borrowed $42 million from the Delayed  Draw Term Loan to finance the repayment of all trade balances due to  NeighborCares primary supplier of pharmacy products. In addition, the Company  utilized $10 million from the Delayed Draw Term Loan to fund the exercise of  the purchase option on three eldercare centers, previously described, and the  Company utilized $28 million from the Delayed Draw Term Loan to satisfy certain  mortgages as previously described. The Delayed Draw Term Loan was fully drawn  at September 30, 2003 and is being repaid with no additional borrowings  available under the Delayed Draw Term Loan.





Senior  Secured Notes





On October
    2, 2001, and in connection with the consummation of the Plan, the Company
    entered an indenture agreement in the principal amount of $242.6 million
    (the Senior  Secured Notes). The Senior Secured Notes bore interest
    at LIBOR plus 5.0% (6.16% at September 30, 2003), and amortize one percent
    each year and were scheduled to mature on April 2, 2007. The Senior Secured
    Notes were secured by a junior lien on real property and related fixtures
    of substantially
    all
    of the Companys  subsidiaries, subject to liens granted to the lenders interests
    subject to the Senior Credit Facility.





Other  Secured Indebtedness





At September  30, 2003, the Company had $56.4 million of other secured debt consisting  principally of revenue bonds, capital lease obligations and secured bank loans,  including loans insured by the Department of Housing and Urban Development.  These loans are secured by the underlying real and personal property of  individual eldercare centers. All of the other secured loans have fixed rates  of interest ranging from 3% to 11%, with a weighted average rate of 8.88% at  September 30, 2003.





Sinking fund  requirements, installments of longterm debt and capital leases are as follows  (in thousands):





|                           |  | Principal    Amount |        
|-------------------------- |  | ------------------- | -------
|                           |  |                     |        
|Years Ending September 30, |  | Loans               |        
|                           |  |                     |        
|2004                       |  | $                   | 15,872 
|2005                       |  |                     | 8,161  
|2006                       |  |                     | 8,237  
|2007                       |  |                     | 531,616
|2008                       |  |                     | 2,023  
|Thereafter                 |  |                     | 35,837 




New  Financing Arrangements





In connection  with the spin-off of GHC, the Company restructured and refinanced nearly all of  its indebtedness. Prior to the spin-off both NeighborCare and GHC entered into  new financing arrangements in an effort to extinguish all senior secured joint  and several debt and to provide adequate capital to both separate  organizations. As such, NeighborCare and GHC entered into the following new  financing arrangements:





NeighborCare:





| |  | $250.0    million, 6.875% senior subordinated notes due 2013; and                                           
| | - | ------------------------------------------------------------------------------------------------------------
| |   |                                                                                                             
| |  | $100.0    million, undrawn revolving credit facility due 2008. Interest at LIBOR plus    2.00% on borrowings




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| |  | and a    commitment fee of 0.50% on any unused commitment.
| |  | ----------------------------------------------------------




GHC:





| |  | $225.0    million, 8% senior subordinated notes due 2013;                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                  
| |  | $185.0    million, fully drawn term loan due 2010. Interest at LIBOR plus 2.75%; and                                                                             
| |   |                                                                                                                                                                  
| |  | $75 million,    undrawn revolving credit facility due 2008. Interest at LIBOR plus 3.00% on    borrowings and a commitment fee of 0.50% on any unused borrowings.




The $660.0  million of proceeds from the new financing arrangements were used to repay the  Companys previously held senior credit facility of $315.1 million ($246.9  million term loan and $68.2 million delayed drawn term loan) and the Companys  previously held $240.2 million senior secured notes.





The remaining  proceeds of approximately $104.8 million were used to pay for approximately  $21.0 million of financing fees related to the new financing arrangements, with  the remaining $83.8 million used to provide additional liquidity to both  organizations to fund both working capital and other requirements.





The agreements  and instruments governing our new financing arrangements contain various  restrictive covenants that, among other things, require the Company to comply  with or maintain certain financial tests and ratios and restrict our ability  to:





| |  | incur more    debt;                                        
| | - | -----------------------------------------------------------
| |   |                                                            
| |  | pay    dividends, redeem stock or make other distributions;
| |   |                                                            
| |  | make certain    investments;                               
| |   |                                                            
| |  | create    liens;                                           
| |   |                                                            
| |  | enter into    transactions with affiliates;                
| |   |                                                            
| |  | make    acquisitions;                                      
| |   |                                                            
| |  | merge or    consolidate; and                               
| |   |                                                            
| |  | transfer or    sell assets.                                




The new financing
    arrangements require
us to maintain compliance with certain financial and nonfinancial covenants,
including minimum EBITDA (earnings before interest, taxes, depreciation and amortization);
limitations on capital expenditures, maximum leverage ratios, minimum fixed charge
coverage ratios and minimum net worth.





Under the terms
    of NeighborCares and GHCs senior subordinated notes, the notes
    are not redeemable until on or after November 15, 2008 and  October 28, 2008,
    respectively. NeighborCare and GHC may, however, use the net proceeds from
    one or more equity
  offerings to redeem up to 35% of the aggregate principal amount of the notes
    issued on or before November 15, 2006 and October 15, 2006, respectively at 106.875% and 108.000%, respectively, of the principal amount thereof,
    plus accrued  and unpaid interest to the redemption date, subject to the
    terms of the notes.





|(12) | Leases and Lease Commitments
|---- | ----------------------------




The Company  leases certain facilities under operating leases. Future minimum payments for  the next five years under noncancellable operating leases at September 30,  2003 are as follows (in thousands):





|Year ending September 30, |  | Minimum    Payment |       
|------------------------- |  | ------------------ | ------
|                          |  |                    |       
|2004                      |  | $                  | 29,109
|2005                      |  |                    | 27,149
|2006                      |  |                    | 23,764
|2007                      |  |                    | 21,188
|2008                      |  |                    | 19,315
|Thereafter                |  |                    | 17,326




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For the year  ended September 30, 2003, the Company incurred $40.3 million of lease  obligation costs. The Company classifies operating lease costs associated with  its eldercare centers and corporate office sites as lease expense in the  consolidated statements of operations, while the operating lease costs of  pharmacy and other health service sites are included within other operating  expenses.





In connection
    with the adoption of freshstart reporting, the Company recorded an
    unfavorable lease credit associated with 40 leased properties which is amortized
    using the straightline method over the remaining lives of the leases.
    The unfavorable component of these lease contracts was estimated using market
    comparable lease coverage ratios for similar assets. The unfavorable lease
    liability at September 30, 2003 of $11.3 million, included in other longterm
    liabilities in the consolidated balance sheet, will be amortized as reduction
    to lease expense over the remaining lease terms, which have a weighted average
    term of 3.4 years.





|(13) | Income Taxes
|---- | ------------




Income tax  expense (benefit) for the years ended September 30, 2003, 2002 and 2001 was as  follows (in thousands):





|                                     |  | Successor    Company |         |      | Predecessor    Company |       
|------------------------------------ |  | -------------------- | ------- | ---- | ---------------------- | ------
|                                     |  |                      |         |      |                        |       
|                                     |  | 2003                 |         | 2002 |                        |       
|                                     |  |                      |         |      |                        |       
|Income from    continuing operations |  | $                    | 28,674  |      | $                      | 35,103
|Loss from    discontinued operations |  |                      | (13,822 | )    |                        | (4,959
|                                     |  |                      |         |      |                        |       
|Total                                |  | $                    | 14,852  |      | $                      | 30,144
|                                     |  |                      |         |      |                        |       




The components  of the provision (benefit) for income taxes on income from continuing  operations for the years ended September 30, 2003, 2002 and 2001 was as follows  (in thousands):





|          |  | Successor    Company |        |      | Predecessor    Company |        
|--------- |  | -------------------- | ------ | ---- | ---------------------- | -------
|          |  |                      |        |      |                        |        
|          |  | 2003                 |        | 2002 |                        |        
|          |  |                      |        |      |                        |        
|Current:  |  |                      |        |      |                        |        
|Federal   |  | $                    | 13,602 |      | $                      | (10,285
|State     |  |                      | 3,859  |      |                        | 2,736  
|          |  |                      |        |      |                        |        
|          |  |                      | 17,461 |      |                        | (7,549 
|          |  |                      |        |      |                        |        
|Deferred: |  |                      |        |      |                        |        
|Federal   |  |                      | 9,294  |      |                        | 37,846 
|State     |  |                      | 1,919  |      |                        | 4,806  
|          |  |                      |        |      |                        |        
|          |  |                      | 11,213 |      |                        | 42,652 
|          |  |                      |        |      |                        |        
|Total     |  | $                    | 28,674 |      | $                      | 35,103 
|          |  |                      |        |      |                        |        




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Total income  tax expense differed from the amounts computed by applying the U.S. federal  income tax rate of 35% to income from continuing operations before income  taxes, equity in net income (loss) of unconsolidated affiliates and minority  interests (in thousands):





|                                                                                    |  | Successor    Company |        |      | Predecessor    Company |        
|----------------------------------------------------------------------------------- |  | -------------------- | ------ | ---- | ---------------------- | -------
|                                                                                    |  |                      |        |      |                        |        
|                                                                                    |  | 2003                 |        | 2002 |                        |        
|                                                                                    |  |                      |        |      |                        |        
|Computed    expected tax                                                          |  | $                    | 30,274 |      | $                      | 40,909 
|Increase    (reduction) in income taxes resulting from:                             |  |                      |        |      |                        |        
|State and local income taxes, net of federal tax benefits                           |  |                      | 3,936  |      |                        | 4,960  
|Amortization of goodwill                                                            |  |                      |       |      |                        |       
|Targeted jobs tax credits                                                           |  |                      | (1,102 | )    |                        | (857   
|Carryback of losses allowed under Job Creation and Worker Assistance    Act of 2002 |  |                      | (4,443 | )    |                        | (10,285
|Write-off of non-deductible goodwill                                                |  |                      | 1,571  |      |                        |       
|Cancellation of debt income                                                         |  |                      |       |      |                        |       
|Adequate protection payments                                                        |  |                      |       |      |                        |       
|Change in valuation allowance                                                       |  |                      |       |      |                        |       
|Other, net                                                                          |  |                      | (1,562 | )    |                        | 376    
|                                                                                    |  |                      |        |      |                        |        
|Total income    tax expense                                                         |  | $                    | 28,674 |      | $                      | 35,103 
|                                                                                    |  |                      |        |      |                        |        




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The tax  effects of temporary differences that give rise to significant portions of the  deferred tax assets and deferred tax liabilities at September 30, 2003 and 2002  are presented below (in thousands):





|                                                |  | 2003 |          | 2002 |  
|----------------------------------------------- |  | ---- | -------- | ---- | -
|                                                |  |      |          |      |  
|Deferred Tax    Assets:                         |  |      |          |      |  
|Accrued liabilities and reserves                |  | $    | 66,056   |      | $
|Net operating loss carry-forwards (Predecessor) |  |      | 98,835   |      |  
|Net operating loss carry-forwards (Successor)   |  |      | 12,289   |      |  
|Derivatives financial instruments               |  |      | 2,389    |      |  
|Net unfavorable leases                          |  |      | 7,345    |      |  
|Other                                           |  |      | 11,900   |      |  
|                                                |  |      |          |      |  
|Deferred tax    assets                          |  |      | 198,814  |      |  
|                                                |  |      |          |      |  
|Valuation    allowance                          |  |      | (98,835  | )    |  
|                                                |  |      |          |      |  
|Net deferred    tax assets                      |  |      | 99,979   |      |  
|                                                |  |      |          |      |  
|Deferred Tax    Liabilities:                    |  |      |          |      |  
|Accounts receivable                             |  |      | (22,622  | )    |  
|Goodwill and other intangibles                  |  |      | (65,150  | )    |  
|Depreciation                                    |  |      | (50,434  | )    |  
|Deferred gain                                   |  |      | (4,047   | )    |  
|Other                                           |  |      | (7,748   | )    |  
|                                                |  |      |          |      |  
|Total    deferred tax liability                 |  |      | (150,001 | )    |  
|                                                |  |      |          |      |  
|Net deferred    tax liability                   |  | $    | (50,022  | )    | $
|                                                |  |      |          |      |  




Pursuant to  the Job Creation and Worker Assistance Act of 2002, which extended the net  operating loss carryback period to five years, the Company was able to  carryback certain net operating loss (NOL) carry-forwards originating in the  year ended September 30, 2001. This enabled the Company to record $4.4 million  and $10.3 million in federal tax refunds during the years ended September 30,  2003 and 2002, respectively.





Following
    consummation of the Plan, and after reduction for (1) the aforementioned
    NOL carrybacks and (2) cancellation of prepetition indebtedness as provided
    under Section 108 of the Internal Revenue Code, the Company had Predecessor
    Company NOL carry-forwards of $278.0 million, which expire between September
    30, 2020 and September 30, 2021. Under applicable limitations imposed by
    Section 382 of the Internal Revenue Code, the Companys ability to utilize
    these loss carry-forwards became subject to an annual limitation of $43.3
    million, inclusive of a separate limitation for Multicare. During the years
    ended September 30, 2003 and 2002, the Company utilized $5.0 million and
    $8.0 million, respectively, of Predecessor loss carry-forwards. Pursuant
    to SOP
    907, the  income tax benefit of any Predecessor NOL utilization ultimately
    serves to reduce goodwill and, thereafter, to increase paid-in-capital. The
    Company has  Predecessor NOL carry-forwards of $265.0 million remaining at
    September 30, 2003. There can be no assurances that the Company will be able
    to utilize these NOLs  and, consequently, a 100% valuation allowance
    against these NOLs has been  provided. During the year ended September
    30, 2003, the Successor Company generated an additional NOL of $27.2 million
    not subject to annual limitation which is available for carry-forward through
    the year
    ended September 30, 2023. Other deferred tax assets include $3.3





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million for builtin losses  recognized by Multicare during the fiscal year ended September 30, 2002 in  excess of its separate limitation under Section 382.





|(14) | Redeemable Preferred Stock
|---- | --------------------------




In connection  with the consummation of the Plan, the Company issued 425,946 shares of Series  A Convertible Preferred Stock (the Series A Preferred). The Series A  Preferred has a liquidation preference of $46.8 million and accrue dividends at  the annual rate of 6% payable in additional shares of Series A Preferred. The  Series A Preferred is convertible at any time, at the option of the holders.  Following the spin-off, each share of Series A Preferred is convertible into  the number of shares of the Companys common stock which results from dividing  (x) the liquidation preference of $100 per each such share plus all accrued and  unpaid dividends by (y) the conversion price per share of $12.60. In fiscal  2002, 4,338 shares of Series A Preferred were converted to 21,336 shares of  common stock. In fiscal 2003, 6,351 shares of Series A Preferred were converted  into 31,231 shares of common stock.





The Company  has the right to convert all of the shares of Series A Preferred to shares of  common stock at any time after the first anniversary date of the effective  date, or October 2, 2002, when the average trading price of the Companys  common stock over the immediately preceding 30 days is $18.60 (following the  spin-off) or more per share. The Company has the right to redeem the Series A  Preferred at any time by giving 30 days notice to the holders (subject to  certain restrictions imposed by the Companys Senior Credit Facility). The  Series A Preferred are subject to mandatory redemption on October 2, 2010. The  conversion rate is $12.60 of liquidation preference for each share common  stock.





Effective December 16, 2003, the Companys board of directors exercised its option to require the mandatory
conversion of the Series A Preferred, at a per share conversion price of $12.60 (as adjusted from $20.33 in connection with the spin-off), into 3,464,255 shares of NeighborCare common stock
pursuant to the terms of the Companys amended and restated articles of incorporation, as amended.





The Series A  Preferred is reflected in the consolidated balance sheet under redeemable  preferred stock.





|(15) | Shareholders Equity
|---- | --------------------




Common  Stock





The authorized
    common stock consists of 200,000,000 shares, $0.02 par value, of which 41,813,603
    shares were issued and 39,514,351 were outstanding at September 30, 2003.
    The provisions of the Plan call for the issuance of 41,000,000 shares, of
    which 260,493 are to be issued when all outstanding claim objections and
    other disputed claim matters of the bankruptcy proceedings are resolved.





Treasury stock





In fiscal 2003,
    the Companys board of directors authorized the repurchase of up to
    $50.0 million of NeighborCare common stock through privately negotiated third
    party transactions or in the open market. As of September 30, 2003, the Company
    had repurchased 2,299,252 common shares at a cost of $36.2 million, representing
    5.8% of the common stock outstanding.





Restricted  Stock Grants





On October 2,  2001, the Board of Directors authorized the Company to issue 750,000 restricted  shares of common stock to certain of its senior officers. These shares were  scheduled to vest quarterly over a five year period ending on October 1, 2006.





The Company  recorded compensation expense ratably over each vesting period at $20.33 per  vesting share. In fiscal 2002, the Company recognized $2.5 million of  compensation cost for the scheduled vesting of restricted stock grants, which  is included in salaries, wages and benefit costs in the consolidated statements  of operations. Also in fiscal 2002, the Company recognized $4.7 million of  compensation cost for the accelerated vesting of restricted stock grants held  by certain key executives whose employment was terminated during the fiscal  year. See note 5 Significant Transactions and Events  Strategic
    Planning, Severance and Other Related Costs. The
    compensation cost for the accelerated vesting of these restricted stock grants
    is included in strategic planning, severance and other related costs in the
consolidated statements of operations.





On April 1,  2003, the Company extended an offer to its employees, including executive  officers except for its chief executive officer, to tender all options to  purchase shares of its common stock, par value $.02 per share, outstanding  under its 2001 stock option plan, for the following consideration: (a) for  those holders of options who had received awards of more than 2,000 restricted  shares of common stock under the stock incentive plan, the acceleration of  vesting of all such restricted shares plus a cash payment of $2.50 per share  underlying the option for





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options that had an exercise  price below $20.00 per share, and (b) with respect to those holders of options  who had  not received awards of more than 2,000 restricted shares, (i) for  those options that had an exercise price of at least $20.00 per share, a cash  payment of $2.00 per share underlying the option, and (ii) for those options  that had an exercise price below $20.00 per share, a cash payment of $2.50 per  share subject to the option. The offer expired on May 12, 2003. The Company  accepted for exchange and cancellation options to purchase 1,724,000 shares of  its common stock, which represented all of the eligible outstanding options  properly tendered for exchange by eligible option holders. All eligible options  held by the Companys employees were tendered in the offer, with the exception  of options to purchase 35,000 shares. As a result of this offer and exchange,  the Company expensed $7.2 million in fiscal 2003, of which $1.4 million
was  disbursed in cash, with the remainder distributed in common stock. This expense  is classified as a component of strategic planning, severance and other related  costs in the Companys consolidated statements of operations.





|(16) | Stock Option Plans
|---- | ------------------




In fiscal  2002, the Company adopted the 2001 Stock Option Plan (the 2001 Plan). The  aggregate number of shares of common stock that may be issued under the 2001  Plan is 3,480,000, of which 3,305,000 may be issued to nondirectors and  175,000 may be issued solely to directors.





|                                 |  | Option    Price    Per Share |                      | Outstanding |  | Exercisable |   | Available    for    Grant |         
|-------------------------------- |  | ---------------------------- | -------------------- | ----------- |  | ----------- | - | ------------------------- | --------
|                                 |  |                              |                      |             |  |             |   |                           |         
|Balance at September 30,    2001 |  |                              |                     |             |  |            |   |                           |        
|                                 |  |                              |                      |             |  |             |   |                           |         
|Authorized                       |  |                              |                     |             |  |            |   |                           |        
|Granted                          |  |                              | $ 18.75    - $ 20.33 |             |  | 2,751,000   |   |                           |        
|Exercisable                      |  |                              |                     |             |  |            |   |                           | 619,779 
|Canceled / Forfeited             |  |                              |                     |             |  | (392,000    | ) |                           |        
|                                 |  |                              |                      |             |  |             |   |                           |         
|Balance at September 30,    2002 |  |                              | $ 18.75    - $ 20.33 |             |  | 2,359,000   |   |                           | 619,779 
|                                 |  |                              |                      |             |  |             |   |                           |         
|Authorized                       |  |                              |                     |             |  |            |   |                           |        
|Granted                          |  |                              | $ 15.06    - $ 20.33 |             |  | 652,500     |   |                           |        
|Exercisable                      |  |                              |                     |             |  |            |   |                           | (299,459
|Canceled / Forfeited             |  |                              |                     |             |  | (2,271,500  | ) |                           |        
|                                 |  |                              |                      |             |  |             |   |                           |         
|Balance at September 30,    2003 |  |                              | $ 16.80    - $ 20.33 |             |  | 740,000     |   |                           | 320,320 
|                                 |  |                              |                      |             |  |             |   |                           |         




|(17) | Loss on Impairment of Assets and Other    Charges
|---- | -------------------------------------------------




Fiscal  2003





During the  year ended September 30, 2003, the Company did not incur any impairment charges  from continuing operations.





Fiscal  2002





In connection
    with the Companys change in strategic direction and objectives, the
    Company incurred $0.4 million of asset impairment charges from continuing
    operations consisting of the writedown in carrying value of an idle
    eldercare real estate property. See note 5 Significant Transactions
    and Events  Strategic
    planning, severance and other related costs.





During the  year ended September 30, 2002, the Company recorded $4.3 million of debt  restructuring and reorganization costs, of which $2.6 million related to post  confirmation liabilities payable to the United States Trustee related to  Chapter 11 cases that remained open. With the exception of three open cases,  all other Chapter 11 cases were closed in July 2002. The remaining $1.7 million  represents a post confirmation charge resulting from a settlement reached with  the lender of a prepetition mortgage obligation for an amount that exceeded the  estimated loan value established in the September 30, 2001 freshstart balance  sheet.





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Fiscal  2001





During the year ended September  30,
    2001, the Company recorded costs in connection with certain uncollectible
    receivables, insurance related costs and other charges, and debt restructuring
    and reorganization costs. The Company also recognized a gain on the discharge
    of debt in connection with the consummation of the Plan. The following table
    and discussion provides additional information on these charges and gain
    in continuing operations (in thousands):





|                                                                                                                                       |  | 2001 |           
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------
|                                                                                                                                       |  |      |           
|Notes    receivable, advances, and trade receivables, due from affiliated businesses    formerly owned or managed deemed uncollectible |  | $    | 30,048    
|Uncollectible    trade receivables                                                                                                     |  |      | 38,883    
|Self-insured    and related program costs                                                                                              |  |      | 15,110    
|Other    charges                                                                                                                       |  |      | 22,390    
|                                                                                                                                       |  |      |           
|Total    uncollectible receivable, insurance related and other charges (included in    other operating expenses)                       |  | $    | 106,431   
|                                                                                                                                       |  |      |           
|Debt restructuring    and reorganization costs and net (gain) on debt discharge:                                                       |  |      |           
|Professional, bank and other fees                                                                                                      |  | $    | 59,393    
|Employee benefit related costs, including severance                                                                                    |  |      | 16,786    
|Exit costs of terminated businesses                                                                                                    |  |      | 5,877     
|Fresh start valuation adjustments                                                                                                      |  |      | 932,435   
|Gain on debt discharge                                                                                                                 |  |      | (1,460,909
|                                                                                                                                       |  |      |           
|Total debt    restructuring and reorganization costs and net (gain) on debt discharge                                                  |  | $    | (446,418  
|                                                                                                                                       |  |      |           




Uncollectible receivable, insurance related  costs and other charges included in other operating expenses





In fiscal  2001, the Company performed periodic assessments of the collectibility of  amounts due from certain affiliated businesses in light of the adverse impact  of PPS on their liquidity and profitability. As a result of our assessment, the  carrying value of notes receivable, advances and trade receivables due from  affiliates was written down by $30 million.





In fiscal  2001, the Company performed a reevaluation of its allowance for doubtful  accounts triggered by deterioration in the agings of certain categories of  receivables. Management believed that such deterioration in the agings were due  to several prolonged negative factors related to the operational effects of the  bankruptcy filings such as personnel shortages and the time demands required in  normalizing relations with vendors and addressing a multitude of bankruptcy  issues. As a result of this reevaluation, the Company determined that an  increase in the allowance for doubtful accounts of $38.9 million was necessary.





In fiscal  2001, as a result of adverse claims development we reevaluated the levels of  reserves established for certain selfinsured health and workers compensation  benefits and other insurance related programs. These charges were $15.1  million.





In addition,  the Company incurred charges of $22.4 million during fiscal 2001, principally  related to contract and litigation matters and settlements, and certain other  charges.





Debt restructuring and reorganization costs  and net gain on debt discharge





During the twelve  months ended September 30, 2001, the Company incurred $1,014.5 million of  legal, bank, accounting, freshstart valuation adjustments and other costs in  connection with its debt restructuring and the Chapter 11 cases. Of these  charges, $59.4 million is attributed to professional, bank and other fees and  $16.8 million pertains to certain salary and benefit related costs, principally  for a court approved special recognition program. In





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addition, the Company incurred  $5.9 million of costs associated with exiting certain terminated businesses.  Freshstart valuation adjustments of $932.4 million were recorded pursuant to  the provisions of SOP 907, which require entities to record their assets and  liabilities at fair value. The freshstart valuation adjustments are  principally the result of the elimination of predecessor company goodwill and  the revaluation of property, plant and equipment to estimated fair values. The  gain on debt discharge represents the relief of liabilities subject to  compromise in accordance with the plan of reorganization.





|(18) | Commitments and Contingencies
|---- | -----------------------------




Financial  Commitments





Requests for  providing commitments to extend financial guarantees and extend credit are  reviewed and approved by senior management. Management regularly reviews all  outstanding commitments, letters of credit and financial guarantees, and the  results of these reviews are considered in assessing the need for any reserves  for possible credit and guarantee losses.





The Company
    has an agreement with a vendor, which supplies approximately 98% of the Companys
    pharmaceutical products, pursuant to which the Company is required to maintain
    a deposit to secure purchase terms. The deposit of $37.9 million and $32.7
    million at September 30, 2003 and 2002, respectively, is refundable upon
    the Companys
election of alternative purchase terms and accordingly, is classified among current
assets.





The Company  has posted $0.9 million of outstanding letters of credit. The letters of credit  guarantee performance to third parties of various trade activities. The letters  of credit are not recorded as liabilities on the Companys balance sheet unless  they are probable of being utilized by the third party. The financial risk  approximates the amount of outstanding letters of credit.





The Company  has extended $7.4 million in working capital lines of credit to certain jointly  owned and managed companies, of which $4.6 million were unused at September 30,  2003. Credit risk represents the accounting loss that would be recognized at  the reporting date if the affiliate companies were unable to repay any amounts  utilized under the working capital lines of credit. Commitments to extend  credit to third parties are conditional agreements generally having fixed  expiration or termination dates and specific interest rates and purposes.





The Company is  a party to joint venture partnerships whereby its ownership interests are 50%  or less of the total capital of the partnerships. The Company accounts for  these partnerships using the equity method of accounting and, therefore, the  assets, liabilities and operating results of these partnerships are not  consolidated with the Companys. The carrying value of the Companys investment  in joint ventures is $8.8 million and $14.1 million at September 30, 2003 and  2002, respectively. The Companys share of the income (loss) of the  partnerships for the years ended September 30, 2003, 2002 and 2001 was $1.2  million, $2.2 million and $(10.2) million, respectively. Although the Company  is not contractually obligated to fund operating losses of these partnerships,  in certain cases, it has extended credit to such joint venture partnerships in  the past and may decide to do so in the future in order to realize
economic  benefits from our joint venture relationship. Management assesses the  creditworthiness of such partnerships in the same manner it does other thirdparties.  The Company has provided $10.8 million of financial guarantees related to loan  commitments of four jointly owned and managed companies of GHC. As of September  30, 2003, the Company has also provided $12.4 million of financial guarantees  related to lease obligations of one jointlyowned and managed company that  operates four eldercare centers. This obligation was subsequently relieved in  October 2003 upon the sale of the jointly-owned partnerships leasehold rights  to an independent third party. The guarantees are not recorded as liabilities  on the Companys balance sheet unless it is required to perform under the  guarantee. Credit risk represents the accounting loss that would be recognized  at the reporting date if counterparties failed to perform completely as  contracted. The credit risk amounts are
equal to the contractual amounts,  assuming that the amounts are fully advanced and that no amounts could be  recovered from other parties.





Legal  Proceedings





The Company is  a party to litigation arising in the ordinary course of business. With  exception to the discussion which follows, the Company does not believe the  results of such litigation, even if the outcome is unfavorable, would have a  material adverse effect on the Companys financial position.





U.S. ex rel Scherfel v. Genesis Health  Ventures et al.





In this  action, brought in United States District Court for the District of New Jersey  on March 16, 2000, the plaintiff alleges that a pharmacy purchased by  NeighborCare failed to process Medicaid credits for returned medications. The  allegations are vaguely alleged for other jurisdictions. While the action was  under seal in United





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States District Court, the  Company fully cooperated with the Department of Justices evaluation of the  allegations. On or about March 2001, the Department of Justice declined to  intervene in the suit and prosecute the allegations. The U.S. District court  action is no longer under seal but remains administratively stayed pending  resolution of the bankruptcy issues.





The plaintiff  filed a proof of claim in the Companys bankruptcy proceedings initially for  approximately $650 million and subsequently submitted an amended claim in the  amount of approximately $325 million. The Company believes the allegations have  no merit and objected to the proof of claim. In connection with an estimation  of the proof of claim in the bankruptcy proceeding, the Company filed a motion  for summary judgment urging that the claim be estimated at zero. On or about  January 24, 2002, the U.S. Bankruptcy Court for the district granted Debtors  motion and estimated the claim at zero.





On or about  February 11, 2002, the plaintiff appealed the bankruptcy courts granting of  summary judgment to the U.S. District Court in Delaware and sought an injunction  preventing the distribution of assets according to the plan of reorganization.  The injunction was subsequently denied by the U.S. District Court for several  reasons, including that the plaintiff was unlikely to succeed on the merits.  When the injunction was denied by the U.S. District Court, the assets  previously reserved for the plaintiffs claim were distributed in accordance  with the plan of reorganization. On March 27, 2003, the U.S. District Court  denied the plaintiffs appeal and upheld the summary judgment decision rendered  by the United States Bankruptcy Court. On or about April 25, 2003, the  plaintiff filed an appeal to the Third Circuit Court of Appeals. The appeal is  currently pending with the Third Circuit and it is most likely to
be heard by  the Court of Appeals in 2004.





The Company
    believes that the settlement of this matter will not be significant to the
results of operations or financial condition of the Company.





Pending DEA Investigation





In August 2001, and March 2002, the Companys pharmacy located in  Colorado reported missing inventory and potential diversion to the Drug  Enforcement Administration (DEA), the local police and the Colorado Board of  Pharmacy. As a result of the pharmacy reporting these incidents, the DEA  commenced an audit of the pharmacys operations. Under the Controlled Substance  Act the government may seek the potential value of the inventory diverted as well  as other damages. The Civil Division of the U.S. Attorneys
    Office for the District of Colorado has advised the Company that there is
    potential civil liability relating to the violations of the Controlled Substance
    Act. The Company has cooperated with all requests for information, including
    making its personnel and documents available to the government. The government
and the Company are currently in discussions regarding the allegations.





The Company
    believes that the settlement of this matter will not be significant to the
    results of operations or financial condition of the Company.





Spin-off Contingencies





The separation and distribution agreement generally provides for a full  and complete release and discharge as of the date of the consummation of the  spin-off of all liabilities existing or arising from all acts and events  occurring or failing to occur or alleged to have occurred or to have failed to  occur and all conditions existing or alleged to have existed on or before the  date of the consummation of the spin-off between or among NeighborCare and its  affiliates, on the one hand, and GHC and its affiliates, on the other hand,  including any contractual agreements or arrangements existing or alleged to  exist between or among those parties on or before that date.





GHC has agreed to indemnify, defend and hold harmless NeighborCare and  its affiliates, and each of its directors, officers and employees, from and  against all liabilities relating to, arising out of or resulting from:





| |  | the failure of GHC, or its affiliates, or any other person to pay,    perform or otherwise promptly discharge any of the liabilities of the    eldercare businesses;                                
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                     
| |  | any liabilities of the eldercare businesses and the operation of the    eldercare businesses at any time before or after the spin-off;                                                              
| |   |                                                                                                                                                                                                     
| |  | any breach by GHC or its affiliates of the separation and    distribution agreement or any of the ancillary agreements entered into in    connection with the separation and distribution agreement;




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| |  | one-half of any liabilities arising out of our 2001 joint plan of    reorganization (other than certain liabilities specifically allocated in the    separation and distribution agreement); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                 
| |  | specified disclosure liabilities.                                                                                                                                                               




NeighborCare has agreed to indemnify, defend and hold harmless GHC and  its affiliates, and each of its directors, officers and employees, from and  against all liabilities relating to, arising out of or resulting from:





| |  | the failure of NeighborCare, or its affiliates, or any other person    to pay, perform or otherwise promptly discharge any of our liabilities, other    than liabilities of the eldercare businesses;        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                              
| |  | any of NeighborCare liabilities, other than liabilities of the    eldercare businesses, and the operation of its business other than the    eldercare businesses at any time before or after the spin-off;   
| |   |                                                                                                                                                                                                              
| |  | any breach by NeighborCare or its affiliates of the separation and    distribution agreement or any of the ancillary agreements entered into in    connection with the separation and distribution agreement;
| |   |                                                                                                                                                                                                              
| |  | one-half of any liabilities arising out of our 2001 joint plan of    reorganization (other than certain liabilities specifically allocated in the    separation and distribution agreement); and             
| |   |                                                                                                                                                                                                              
| |  | specified disclosure liabilities.                                                                                                                                                                            




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|(19) | Fair Value of Financial Instruments
|---- | -----------------------------------




The carrying  amount and fair value of financial instruments at September 30, 2003 and 2002  consist of the following (in thousands):





|                                                   |  | 2003               |         | 2002       |  
|-------------------------------------------------- |  | ------------------ | ------- | ---------- | -
|                                                   |  |                    |         |            |  
|                                                   |  | Carrying    Amount |         | Fair Value |  
|                                                   |  |                    |         |            |  
|Cash and    equivalents                            |  | $                  | 132,726 |            | $
|Restricted    investments in marketable securities |  |                    | 90,591  |            |  
|Accounts    receivable, net                        |  |                    | 366,886 |            |  
|Accounts    payable                                |  |                    | 58,435  |            |  
|Debt,    excluding capital leases                  |  |                    | 601,746 |            |  
|Pay fixed /    receive variable interest rate swap |  |                    | (7,219  | )          |  
|Interest    rate cap                               |  |                    | 2       |            |  




The carrying  value of cash and equivalents, net accounts receivable and accounts payable is  equal to its fair value due to their short maturity. The Companys restricted  investments in marketable securities are carried at fair value.





The fair value  of debt, excluding capital leases, is computed using discounted cash flow  analysis, based on the Companys estimated incremental borrowing rate at the  end of each fiscal period presented.





The fair  values of interest rate swap and cap agreements were determined using  confirmations from thirdparty financial institutions.





|(20) | Assets Held for Sale and Discontinued    Operations
|---- | ---------------------------------------------------




In the normal  course of business, the Company continually evaluates the performance of its  operating units, with an emphasis on selling or closing under-performing or  non-strategic assets. On September 30, 2001, the Company adopted the provisions  of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of  Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS  144). Under SFAS 144, discontinued businesses, including assets held for sale,  are removed from the results of continuing operations. The results of  operations in the current and prior year periods, along with any costs to exit  such businesses in the year of discontinuation, are classified as discontinued  operations in the consolidated statements of operations. Businesses sold or closed  prior to the Companys adoption of SFAS 144 continue to be reported in the  results of continuing
operations.





Since the  Companys adoption of SFAS 144, it has classified several businesses as held  for sale or closed. An increasing trend in malpractice litigation claims,  rising costs of eldercare malpractice litigation, losses associated with these  malpractice lawsuits and a constriction of insurers have caused many insurance  carriers to raise the cost of insurance premiums or refuse to write insurance policies  for nursing homes. These problems are particularly acute in the state of  Florida where, because of higher claim amounts, general liability and  professional liability costs have become increasingly expensive. This increase  in insurance costs prompted the Company to sell its otherwise profitable  operations in the state of Florida during fiscal 2003. Since the Companys  inception, it has continued to develop its eldercare network in concentrated  geographic markets in the eastern United States. The geographic location of
the  Companys eldercare centers in the states of Illinois and Wisconsin relative to  its strategic geographic markets, combined with the operating performance of  those centers, prompted the Company to identify those assets as held for sale during  fiscal 2002. In addition to these assets, the Company identified 13 eldercare  centers in other states, one rehabilitation services clinic, two physician  services practices and its ambulance business as held for sale or closed due to  under-performance.





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Consolidated  interest expense has been allocated to discontinued operations for all periods  presented based on allocated debt expected to be repaid in connection with the  sale of the assets. The amount of after-tax interest expense allocated to  discontinued operations for the fiscal 2003, fiscal 2002 and fiscal 2001 was  $2.3 million, $3.8 million, and $8.6 million, respectively.





The Company  has separately classified $18.3 million and $46.1 million of carrying value  associated with assets held for sale in the consolidated balance sheets at  September 30, 2003 and 2002, respectively.





The following  table sets forth net revenues and the components of loss from discontinued  operations for the years ended September 30, 2003, 2002, and 2001 (in  thousands):





|                                                   |  | Successor
Company                 |         |      | Predecessor
Company                   |        
|-------------------------------------------------- |  | --------------------------------- | ------- | ---- | ------------------------------------- | -------
|                                                   |  |                                   |         |      |                                       |        
|                                                   |  | Years
        Ended September 30, |         |      | Year
        Ended
September 30,
2001 |        
|                                                   |  | 2003                              |         | 2002 |                                       |        
|                                                   |  |                                   |         |      |                                       |        
|Net revenues                                       |  | $                                 | 144,279 |      | $                                     | 261,879
|                                                   |  |                                   |         |      |                                       |        
|Net    operating loss of discontinued businesses   |  | $                                 | (20,779 | )    | $                                     | (2,296 
|Loss on    discontinuation of businesses           |  |                                   | (14,168 | )    |                                       | (11,004
|Income tax    benefit                              |  |                                   | 13,822  |      |                                       | 4,959  
|                                                   |  |                                   |         |      |                                       |        
|Loss from    discontinued operations, net of taxes |  | $                                 | (21,125 | )    | $                                     | (8,341 
|                                                   |  |                                   |         |      |                                       |        




The loss on discontinuation of  businesses includes the write-down of assets to estimated net realizable  value.The operations of GHC spun-off on December 1, 2003 will be reported as  discontinued operations beginning in fiscal 2004.





|(21) | Segment Information
|---- | -------------------




The Companys  principal operating segments are identified by the types of products and  services from which revenues are derived and are consistent with the reporting  structure of the Companys internal organization. The Company has two  reportable segments: (1) pharmacy services and (2) inpatient services.





Included in  the Companys pharmacy service revenues are institutional pharmacy revenues,  which include the provision of infusion therapy, medical supplies and equipment  provided to eldercare centers it operates, as well as to independent healthcare  providers by contract. The Company provides these services through 62  institutional pharmacies and 16 medical supply and home medical equipment distribution  centers located in its various market areas. In addition, the Company operates  32 communitybased pharmacies which are located in or near medical centers,  hospitals and physician office complexes. 86% of the sales attributable to all  pharmacy operations are generated through external contracts with independent  healthcare providers with the balance attributable to centers owned or leased  by the Company.





The Company  includes in inpatient services revenues all room and board charges and  ancillary service revenue for its eldercare customers at the 160 eldercare  centers which the Company owns or leases.





The accounting  policies of the segments are the same as those of the consolidated  organization. All intersegment sales prices are market based.





The Companys  capital costs in the following segment information (depreciation and  amortization, lease expense, and interest), as well as preferred dividends for  the years ended September 30, 2003 and 2002, reflect the provisions of the Plan  and the impact of freshstart reporting. These costs for periods prior to the  Companys emergence from bankruptcy generally were recorded based on historical  costs or contractual agreements and do not reflect the provisions of the Plan.  Accordingly, capital costs of the Successor Company for the years ended  September 30, 2003 and 2002 are not comparable to those of the Predecessor  Company in 2001.





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Summarized  financial information concerning the Companys reportable segments is shown in  the following table. The All other services category of revenues and  operating income represents operating information of business units below the  prescribed quantitative thresholds. These business units derive revenues from  the following services: rehabilitation therapy, management services, consulting  services, homecare services, physician services, diagnostic services,  hospitality services, group purchasing fees, respiratory health services,  staffing services and other healthcare related services. The Corporate  category consists of the Companys general and administrative function, for  which there is generally no revenue generated. The Other adjustments category  consists of charges that have not been allocated to our reportable segments or  the All other services or
Corporate categories. This approach to segment  reporting is consistent with the Companys internal financial reporting and the  information used by the chief operating decision maker regarding the  performance of our reportable and nonreportable segments.





|                                                            |  | Successor    Company |           |          | Predecessor    Company |          
|----------------------------------------------------------- |  | -------------------- | --------- | -------- | ---------------------- | ---------
|                                                            |  |                      |           |          |                        |          
|(in    thousands)                                           |  | 2003                 |           | 2002 (1) |                        |          
|                                                            |  |                      |           |          |                        |          
|Revenues:                                                   |  |                      |           |          |                        |          
|Inpatient services  external                               |  | $                    | 1,229,239 |          | $                      | 1,201,071
|Pharmacy    services:                                       |  |                      |           |          |                        |          
|External                                                    |  |                      | 1,235,398 |          |                        | 1,121,917
|Intersegment                                                |  |                      | 78,019    |          |                        | 100,502  
|All    other services:                                      |  |                      |           |          |                        |          
|External                                                    |  |                      | 184,342   |          |                        | 162,800  
|Intersegment                                                |  |                      | 146,159   |          |                        | 172,160  
|Elimination    of intersegment revenues                     |  |                      | (224,178  | )        |                        | (272,662 
|                                                            |  |                      |           |          |                        |          
|Total net revenues                                          |  |                      | 2,648,979 |          |                        | 2,485,788
|                                                            |  |                      |           |          |                        |          
|EBITDA (2):                                                 |  |                      |           |          |                        |          
|Inpatient services                                          |  |                      | 120,763   |          |                        | 140,884  
|Pharmacy    services                                        |  |                      | 126,663   |          |                        | 112,328  
|All    other services                                       |  |                      | 38,456    |          |                        | 46,735   
|Corporate                                                   |  |                      | (75,135   | )        |                        | (80,432  
|Other    adjustments (3)                                    |  |                      | (16,949   | )        |                        | (2,000   
|Net    loss on sale of eldercare centers                    |  |                      |          |          |                        |         
|                                                            |  |                      |           |          |                        |          
|Total    EBITDA                                             |  |                      | 193,798   |          |                        | 217,515  
|                                                            |  |                      |           |          |                        |          
|Capital and other:                                          |  |                      |           |          |                        |          
|Consolidated:                                               |  |                      |           |          |                        |          
|Depreciation    and amortization                            |  |                      | (66,384   | )        |                        | (59,449  
|Interest    expense                                         |  |                      | (40,917   | )        |                        | (41,183  
|Income    tax expense                                       |  |                      | (28,674   | )        |                        | (35,103  
|Equity    in net income (loss) of unconsolidated affiliates |  |                      | 1,184     |          |                        | 2,165    
|Minority    interests                                       |  |                      | (5,194    | )        |                        | (2,838   
|Preferred    stock dividends                                |  |                      | (2,701    | )        |                        | (2,599   
|                                                            |  |                      |           |          |                        |          
|Income from continuing    operations                        |  |                      | 51,112    |          |                        | 78,508   
|Loss from discontinued    operations, net of taxes          |  |                      | (21,125   | )        |                        | (8,341   
|                                                            |  |                      |           |          |                        |          
|Net income attributed to    common shareholders             |  | $                    | 29,987    |          | $                      | 70,167   
|                                                            |  |                      |           |          |                        |          




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|                       |  | Successor Company        |           | PredecessorCompany           |  
|---------------------- |  | ------------------------ | --------- | ---------------------------- | -
|                       |  |                          |           |                              |  
|(in thousands)         |  | September    30,    2003 |           | September    30,    2002 (4) |  
|                       |  |                          |           |                              |  
|Assets:                |  |                          |           |                              |  
|Inpatient services (5) |  | $                        | 846,361   |                              | $
|Pharmacy    services   |  |                          | 729,586   |                              |  
|All    other           |  |                          | 362,782   |                              |  
|                       |  |                          |           |                              |  
|                       |  | $                        | 1,938,729 |                              | $
|                       |  |                          |           |                              |  




|(1) | Segment revenue and EBITDA    data previously reported was adjusted to remove discontinued businesses from    the results of continuing operations for the September 30, 2002 and 2001    periods.                                                                                                                                                                                                                                                                                                                                                                
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | EBITDA is defined as    earnings before interest, taxes, depreciation and amortization of the    Companys continuing operations. EBITDA is calculated by adding back    interest, income tax expense, depreciation and amortization, equity in net    income (loss) of unconsolidated affiliates, minority interests, preferred    stock dividends, and loss from discontinued operations, net of taxes to net    income attributed to common shareholders. EBITDA of the operating segments    include the direct overhead costs attributable to those segments.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | Other adjustments includes    strategic planning, severance and other related costs, net gain from breakup    fee and other settlements and debt restructuring and reorganization costs and    net (gain) on debt discharge from the Companys consolidated statements of    operations.                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(4) | Certain prior year amounts    have been reclassified to conform with the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(5) | Assets of the inpatient    services segment at September 30, 2003 and September 30, 2002 include $18.3    million and $46.1 million, respectively, of assets held for sale. See note 20     Assets Held for Sale and Discontinued Operations.                                                                                                                                                                                                                                                                                                                  




|(22) | Comprehensive Income
|---- | --------------------




The following  table sets forth the computation of comprehensive income for the years ended  September 30, 2003, 2002 and 2001 (in thousands):





|                                                                                                                                       |  | Successor    Company |        |      | Predecessor    Company |       
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | ---- | ---------------------- | ------
|                                                                                                                                       |  |                      |        |      |                        |       
|                                                                                                                                       |  | 2003                 |        | 2002 |                        |       
|                                                                                                                                       |  |                      |        |      |                        |       
|Net income    attributed to common shareholders                                                                                        |  | $                    | 29,987 |      | $                      | 70,167
|Unrealized    gain on marketable securities (net of income taxes of $141, $349 and $1,067, respectively)                               |  |                      | 262    |      |                        | 647   
|Net change    in fair value of interest rate swap and cap agreements (net of income tax    benefit of $1,233 and $1,582, respectively) |  |                      | (1,928 | )    |                        | (2,474
|                                                                                                                                       |  |                      |        |      |                        |       
|Total    comprehensive income                                                                                                          |  | $                    | 28,321 |      | $                      | 68,340
|                                                                                                                                       |  |                      |        |      |                        |       




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|(23) | Derivative Financial Instruments
|---- | --------------------------------




The Company  follows the provisions of SFAS No. 133, Accounting for Derivative Instruments  and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative  Instruments and Certain Hedging Activities  an Amendment of FASB Statement No.  133. The Company utilizes derivative financial instruments, such as interest  rate swaps and caps, to manage changes in market conditions related to debt  obligations. As of September 30, 2003 and 2002, the Company has a $75 million  swap maturing on September 13, 2005, to receive fixed (3.1%) / pay variable  (one month LIBOR) and a $125 million swap maturing on September 13, 2007, to  receive fixed (3.77%) / pay variable (one month LIBOR). In addition, the  Company has a $75 million cap maturing on September 13, 2004. The interest rate  cap pays interest to the Company when LIBOR exceeds 3%. The amount paid to the  Company is equal to the notional principal
balance of $75 million multiplied by  (LIBOR minus 3%) in those periods in which LIBOR exceeds 3%. We purchased the  interest rate cap in September 2002 for $0.7 million which is being amortized  to interest expense over the two year term of the agreement.





Based upon
     confirmations from third party financial institutions, the fair value of
    the interest rate swap agreements and the cap are ($7.2) million and $2 thousand
    dollars, respectively, at September 30, 2003.





The Company  recognizes all derivatives on the balance sheet at fair value. Changes in the  fair value of a derivative that is designated as and meets all the required  criteria for a cash flow hedge are recorded in accumulated other comprehensive  income (loss) and reclassified to earnings as the underlying hedged item  affects earnings. Amounts reclassified into earnings related to interest rate  swap and cap agreements are included in interest expense. During fiscal 2003  and 2002, $1.9 million and $2.5 million, respectively, of after tax net  unrealized losses related to interest rate swap and caps were recorded in other  comprehensive income. As of September 30, 2003 and 2002, $7.2 million and $4.0  million, respectively, have been classified in other long term liabilities in  the consolidated balance sheet related to cash flow hedges. The counterparties  to the above derivative agreements are major international
banks.





In connection
    with the spin-off and the repayment of senior indebtedness, the Company terminated
    the two variable to fixed rate swaps described above with an aggregate notional
    amount of $200 million. As a consequence the Company paid the contracting
    parties approximately $3.5 million which will be accounted for as a spin-off
    related charge in the first fiscal quarter of 2004.





|(24) | Subsequent Event
|---- | ----------------




Preferred  Share Purchase Rights





On November
    13, 2003, the Board of Directors of the Company declared a dividend of one
    preferred share purchase right (a Right) for each outstanding
    share of common stock, par value $0.02 per share, payable on December 1,
    2003 to the stockholders of record on that date.   The Board of Directors
    declared these rights to protect stockholders  from coercive or otherwise
    unfair takeover tactics. The Rights should not interfere with any merger
    or other business combination approved by the Board of Directors.





Each Right  will allow its holder to purchase from the Company one one-hundredth of a share  of Series B Junior Participating Preferred Stock (a Preferred Share) for  $100.00, once the Rights become exercisable. This portion of a Preferred Share  will give the stockholder approximately the same dividend and liquidation  rights as would one share of common stock. Prior to exercise, the Right does  not give its holder any dividend, voting, or liquidation rights.





The Rights  will not be exercisable until ten days after the public announcement of the  acquisition by any person or group of beneficial ownership of 20% or more of  NeighborCares outstanding common stock (or ten days after a person or group  begins a tender or exchange offer that, if consummated, would bestow upon them  beneficial ownership of 20% or more of NeighborCares outstanding common  stock).  The Rights expire December 1,  2013.





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|(25) | Quarterly Financial Data (Unaudited)
|---- | ------------------------------------




The Companys
    unaudited quarterly financial information is as follows (in thousands, except
    per share data):


|                      |  | Total Net Revenues |         | Income    (Loss) from Continuing Operations |   | Net Income    (Loss)    Attributed to Common    Shareholders |  | Diluted    Income (Loss)    Per Common Share     from Continuing    Operations |        | Diluted    Net Income    (Loss) Per Common    Share |  
|--------------------- |  | ------------------ | ------- | ------------------------------------------- | - | ------------------------------------------------------------ |  | ------------------------------------------------------------------------------ | ------ | --------------------------------------------------- | -
|                      |  |                    |         |                                             |   |                                                              |  |                                                                                |        |                                                     |  
|Quarter ended:        |  |                    |         |                                             |   |                                                              |  |                                                                                |        |                                                     |  
|December 31,    2002  |  | $                  | 638,582 |                                             | $ | 17,010                                                       |  | $                                                                              | 11,934 |                                                     | $
|March 31,    2003     |  |                    | 645,076 |                                             |   | 9,619                                                        |  |                                                                                | 4,670  |                                                     |  
|June 30,    2003      |  |                    | 666,320 |                                             |   | 12,518                                                       |  |                                                                                | 6,471  |                                                     |  
|September    30, 2003 |  |                    | 699,001 |                                             |   | 11,965                                                       |  |                                                                                | 6,912  |                                                     |  
|                      |  |                    |         |                                             |   |                                                              |  |                                                                                |        |                                                     |  
|Quarter ended:        |  |                    |         |                                             |   |                                                              |  |                                                                                |        |                                                     |  
|December 31,    2001  |  | $                  | 606,869 |                                             | $ | 16,711                                                       |  | $                                                                              | 15,599 |                                                     | $
|March 31,    2002     |  |                    | 617,821 |                                             |   | 27,559                                                       |  |                                                                                | 24,943 |                                                     |  
|June 30,    2002      |  |                    | 625,540 |                                             |   | 18,518                                                       |  |                                                                                | 17,453 |                                                     |  
|September 30, 2002    |  |                    | 635,558 |                                             |   | 15,720                                                       |  |                                                                                | 12,172 |                                                     |  
|                      |  |                    |         |                                             |   |                                                              |  |                                                                                |        |                                                     |  




Earnings per  share was calculated for each threemonth and the twelvemonth period on a  standalone basis. As a result, the sum of the diluted earnings per share for  the four quarters may not equal the earnings per share for the year.





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|ITEM 9: | CHANGES IN AND DISAGREEMENTS WITH    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ---------------------------------------------------------------------------------------




None





|ITEM 9A: | CONTROLS AND PROCEDURES
|-------- | -----------------------




As required by Exchange Act  Rule 13a-15(b), NeighborCares management, including its chief executive  officer and chief financial officer, conducted an evaluation as of the end of  the period covered by this report of the effectiveness of NeighborCares  disclosure controls and procedures as defined in Exchange Act Rule  13a-15(e).  Based on that evaluation,  NeighborCares chief executive officer and chief financial officer concluded  that NeighborCares disclosure controls and procedures were effective in  reaching a reasonable level of assurance that management is timely alerted to  material information relating to NeighborCare during the period when  NeighborCares reports are being prepared.





As required
    by Exchange Act Rule 13a-15(d), NeighborCares management, including
    its chief executive officer and chief financial officer, also conducted an
    evaluation of NeighborCares
    internal control over financial reporting to determine whether any changes
    occurred during the period covered by this report that have materially affected,
or are reasonable likely to materially affect, NeighborCares internal control
over financial reporting.  Based on that evaluation, there has been no
such change during the period presented by this report.





There have not been any  significant changes to our internal controls over financial reporting or in  other factors that could significantly affect these controls, including any  corrective actions with regard to significant deficiencies and material  weaknesses.





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PART III





|ITEM 10: | DIRECTORS AND EXECUTIVE OFFICERS OF THE    REGISTRANT
|-------- | -----------------------------------------------------




BOARD OF DIRECTORS OF THE REGISTRANT





The following  table sets forth information with respect to our directors following the  spin-off:


|Name                     |  | Age |  | Committees    of the board of directors                                         
|------------------------ |  | --- |  | --------------------------------------------------------------------------------
|                         |  |     |  |                                                                                 
|John J.    Arlotta       |  | 54  |  | Chairman,    Executive Committee                                                
|James H.    Bloem        |  | 53  |  | Chairman,    Audit and Compliance Committee; Compensation Committee             
|James E.    Dalton, Jr.  |  | 61  |  | Nominating    and Governance Committee; Compensation Committee                  
|James D. Dondero         |  | 41  |  | Chairman,    Compensation Committee; Executive Committee                        
|Robert H.    Fish        |  | 53  |  | Executive    Committee                                                          
|Dr. Philip    P. Gerbino |  | 56  |  | Audit and    Compliance Committee; Chairman, Nominating and Governance Committee
|Arthur J.    Reimers     |  | 48  |  | Audit and    Compliance Committee; Executive Committee                          
|Phyllis R. Yale          |  | 46  |  | Nominating    and Governance Committee                                          




John J. Arlotta
    has served as our vice chairman with primary responsibility for the NeighborCare
    business since July 2003.  Following the spin-off,  Mr. Arlotta has
    become our chairman, president and chief executive officer.  Prior to
    joining us, Mr. Arlotta served as a consultant to Caremark Pharmaceutical
    Services.  Mr. Arlotta was president and chief  operating officer of
    Caremark Pharmaceutical Services from May 1998 to February 2002 and chief
    operating officer of Caremark Pharmaceutical Services from September 1997
    to May 1998.





James H. Bloem has served as  our director since October 2, 2001. Mr. Bloem is senior vice president and  chief financial officer of Humana, Inc. and is responsible for developing  business growth strategies and supervising all accounting, actuarial,  financial, tax, risk management, treasury, and investor relations activities.  Previously, Mr. Bloem has served as executive vice president, then as  president of the personal care division of Perrigo Company, the nations  largest manufacturer of overthecounter pharmaceuticals, personal care, and  nutritional products for the store brand market. Mr. Bloems experience also includes  independent financial and business consulting and a law partnership with a  specialization in taxation and corporate. He is also a certified public  accountant and serves as director of several corporate and educational boards.  Mr. Bloem is a member of the board of directors of the
following companies:  Bissell, Inc., Nutramax Products, Inc., Van Eerden Company, and Imperial  Graphics, Inc.





James E. Dalton has served  as our director since October 2, 2001. Mr. Daltons extensive management  experience includes senior management positions with several national  healthcare organizations including Quorum Health Group, Inc., HealthTrust Inc.  and Humana and with hospitals in Virginia and West Virginia. He serves on the  board of directors of a number of health care organizations and serves on the  board of trustees of Universal Health Realty Income Trust, and the American  Hospital Association. He is a Fellow of the American College of Healthcare  Executives and past chairman of the Federation of American Hospitals. Mr.  Dalton is a member of the board of directors of the following companies: Triad  Hospitals, Inc., AmSouth Bancorporation, U.S. Oncology, Inc., Select Medical,  Inc., and Universal Health Realty Income Trust.





James D. Dondero has served  as our director since October 2, 2001. Mr. Dondero is president of Highland  Capital Management, LP where he has facilitated growth through the creation of  19 separate portfolios holding in excess of $8 billion. Formerly, Mr. Dondero  served as chief investment officer of Protective Life Insurance Companys GIC  subsidiary from 1989 to 1993. His portfolio management experience includes  mortgagebacked securities, investment grade corporates, leveraged bank loans,  emerging markets, derivatives, preferred stocks and





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common stocks. Mr. Dondero is a certified  public accountant, chartered financial analyst, a certified management  accountant and a member of the NYSSA. Mr Donero is a member of the board of  directors of Motient Corporation.





Robert H. Fish
    has served as our director since October 2001. Mr. Fish also served as chief
    executive officer from June 2002 and chairman from November 2002 until his
    resignation from these positions on December 1, 2003. He is a managing
    partner
    of SonomaSeacrest,
    LLC, a Californiabased healthcare practice specializing in strategic
    planning, performance improvement, and merger and acquisition issues. Prior
    to joining Sonoma, Mr. Fish served as president and chief executive officer
    of St. Joseph Health System and president and chief executive officer of
    ValleyCare Health System.





Dr. Philip P. Gerbino has  served as our director since March 16, 2000. Dr. Gerbino is president of the  University of the Sciences in Philadelphia, which includes the Philadelphia  College of Pharmacy, and has been part of the faculty and administration of that  institution for over 25 years. In addition, he is a national leader in the  pharmacy field and has served as president of the American Pharmaceutical  Association, president of the APhA Academy of Pharmacy Practice, member of the  U.S. Pharmacopeial Advisory Panel on Geriatrics and as chair of the Commission  for Certification in Geriatric Pharmacy. Dr. Gerbino is a member of the board  of directors of Arrow Prescription Centers and Health ATOZ.





Arthur J. Reimers,
    48, joined Goldman, Sachs & Co. as an investment banker in 1981 and in
    1990 became a partner of the firm.  Upon  Goldman, Sachs & Co.s
    initial public offering in 1998, Mr. Reimers became a managing director and
    served
in that capacity until his retirement in 2001.  From 1991 through 1996,
Mr. Reimers served as co-head of Goldman, Sachs & Co.s Financial Advisory
Group in its London office.  Returning to New York in 1996,  Mr. Reimers
founded and served as co-head of Goldman, Sachs & Co.s  Healthcare
Investment Banking Division.   Mr. Reimers serves on the boards of Rotech
Health, Inc., and Surgis, Inc.





Phyllis R.
    Yale, 46, is a managing director of Bain and Company, a global business consulting
    firm with 2,000 consultants in 29 offices in 19 countries.  Ms. Yale
     joined Bain and Company in 1982, was elected to partnership in 1987 and
    currently
manages its Boston office.  Ms. Yale has worked extensively in the healthcare
and financial services industries.





See the information set  forth in Part I, Item 4A, Executive Officers of the Registrant, of this Form  10-K.





Election  of Directors





The Board of Directors is  responsible for the overall affairs of NeighborCare. In connection with our  emergence from bankruptcy on October 2, 2001, we amended and restated our  Articles of Incorporation and established a classified Board of Directors  pursuant to which the directors of NeighborCare are to be divided into three  classes consisting of Class I, Class II and Class III, respectively, commencing  with our first annual meeting after October 2, 2002, which occurred during the  annual shareholders meeting on April 9, 2003. At subsequent annual meetings,  only directors for the class whose term is expiring will be elected at that  annual meeting.





The number of directors in  each class is determined by the board of directors and consists of as nearly  equal a number of directors as possible. Following the spin-off, there are  eight directors, and accordingly, each of Class I and II will include three  directors and Class III will include two directors, which may be adjusted from  time to time, should the board of directors increase or decrease the number of  directors representing a class. The term of the Class I Directors initially  expires after the 2004 Annual Meeting of Shareholders; the term of the Class II  Directors initially expires after the 2005 Annual Meeting of Shareholders, and  the term of the Class III Directors initially expires after the 2006 Annual  Meeting of Shareholders. At each annual meeting of shareholders, directors of  the respective class whose term expired will be up for reelection, and the  directors chosen to succeed those whose terms have
expired will be elected to  hold office for a three year term.





The three Class I Directors,  whose terms expire at the 2004 Annual Meeting of Shareholders, are John J.  Arlotta, Robert H. Fish and Arthur J. Reimers. The three Class II Directors,  whose terms expire at the 2005 Annual Meeting of Shareholders, are James D.  Dondero, James H. Bloem and Phyllis R. Yale. The two Class III Directors, whose  terms would expire at the 2006 Annual Meeting of Shareholders, are James E.  Dalton, Jr. and Dr. Philip P. Gerbino.





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Each director serves until  his or her successor is elected and qualified or until his or her death,  retirement, resignation, or removal. Should a vacancy occur or be created,  whether arising through death, resignation, retirement or removal of a  director, the vacancy will be filled by a majority vote of the remaining  directors. A director so elected to fill a vacancy will serve for the remainder  of the present term of office of the class to which he or she was elected.





Reorganization





On October 2, 2001, the  effective date, we and The Multicare Companies, Inc., our 43.6% owned  affiliate, consummated a joint plan of reorganization under Chapter 11 of the  Bankruptcy Code pursuant to a September 20, 2001 order entered by the U.S.  Bankruptcy Court for the District of Delaware approving our joint plan of  reorganization. We have been operating out of bankruptcy since October 2, 2001.





See Part II, Item 7,  Managements Discussion and Analysis of Financial Condition and Results of  Operations  Certain Transactions and Events, of this Form 10-K for a further  description of the nature and results of our reorganization and a description  of other recent matters impacting our business and results of operations.





See Risk Factors.





Audit  Committee and Financial Experts





We have a separately  designated standing audit committee established in accordance with Section  3(a)(58)(A) of the Act comprised of Messrs. Bloem, Reimers and Gerbino, each of  whom is independent as defined under Item 7(d)(3)(iv) of Schedule 14A of the  Act.  Our Board of Directors has  determined that Mr. Bloem is an audit committee financial expert as defined  under Item 401 of Regulation S-K.





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Section  16 (A) Beneficial Ownership Reporting Compliance





Section 16 (a) of the  Exchange Act requires our directors and executive officers and persons who own  more than 10% of a registered class of our equity securities, to file with the  SEC initial reports of ownership and reports of changes in ownership of our  common stock and other equity securities. Officers, directors and greater than  10% shareholders are required by the SEC regulation to furnish us with copies  of all Section 16 (a) forms they file.





To our knowledge,
    based solely on review of the copies of such reports submitted to us with
    respect to the fiscal year ended September 30, 2003, all Section 16 (a) filing
    requirements applicable to our executive officers, directors and greater
    than 10% beneficial owners were complied with, except that each of Robert
    H. Fish, James H. Bloem, James E. Dalton, Jr., James D. Dondero and Dr. Philip
    P. Gerbino filed a late report on Form 4.





Code of  Ethics





We have adopted
    a code of ethics that applies to our senior management, including our chief
	executive officer, and chief financial officer.  Copies
    of our code of ethics are available without charge upon written request directed
    to Investor Relations, NeighborCare, Inc., 7 East Lee Street, Baltimore,
    Maryland 21202, (410) 752-2600.





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|ITEM 11: | EXECUTIVE COMPENSATION
|-------- | ----------------------




Summary  Compensation Table





|                                                                                         |      | Annual    Compensation |         | Long-term    Compensation | 
|---------------------------------------------------------------------------------------- | ---- | ---------------------- | ------- | ------------------------- | 
|                                                                                         |      |                        |         |                           | 
|Name and    Position                                                                     |      | Fiscal
    Year        |         | Salary    ($)(1)          | 
|                                                                                         |      |                        |         |                           | 
|Robert    H. Fish, Chief Executive Officer                                               |      | 2003                   |         | 850,000                   | 
|                                                                                         | 2002 |                        | 274,615 |                           | 
|John    J. Arlotta, Vice Chairman                                                        |      |                        |         |                           | 
|                                                                                         | 2003 |                        | 163,462 |                           | 
|George    V. Hager, Jr., Chief Financial Officer                                         |      | 2003                   |         | 400,001                   | 
|                                                                                         | 2002 |                        | 398,078 |                           | 
|                                                                                         | 2001 |                        | 350,000 |                           | 
|Robert    A. Smith, President, NeighborCare                                              |      | 2003                   |         | 360,768                   | 
|                                                                                         | 2002 |                        | 310,003 |                           | 
|                                                                                         | 2001 |                        | 232,281 |                           | 
|Richard    Pell, Jr., Senior Vice President, Administration and Chief Compliance Officer |      | 2003                   |         | 271,827                   | 
|                                                                                         | 2002 |                        | 260,382 |                           | 
|                                                                                         | 2001 |                        | 224,039 |                           | 
|Richard    Howard, Former Vice Chairman                                                  |      | 2003                   |         | 59,615                    | 
|                                                                                         | 2002 |                        | 500,000 |                           | 
|                                                                                         | 2001 |                        | 500,000 |                           | 




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|(1) | Includes    compensation deferred under the 401(k) Retirement Plan, Non Qualified    Deferred Compensation Plan and other arrangements with us. Other payments    made by us under the 401(k) Retirement Plan, Non Qualified Deferred    Compensation Plan and other arrangements with us are not included.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|(2) | Mr. Fish received a performance
      bonus of $500,000 and a bonus of $721,410 upon his appointment  to chief executive officer.
      Mr. Arlotta received a performance bonus of $550,000 and a sign-on bonus
      of $300,000. Mr. Pell received an employment contract payout of $661,400
      and a performance
  bonus of $54,475. All other amounts in 2003 reflect performance bonuses.                                                                                                                                                                                                                                                                                                                                                                                       | 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|(3) | Mr. Fish received compensation
         of approximately $62,206 for housing expenses and approximately $15,200
         for the use of a Company owned automobile. All other amounts reflect the receipt of
         relocation benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|(4) | Restricted stock grants were authorized
      by the board of directors on October 2, 2001 and vest quarterly over a
      five year period  beginning January 1, 2002. Our common stock market value
      as of October 2, 2001 was $20.33 per share. As of September 30, 2003, the
      restricted stock grants issued to Mr. Smith and Mr. Pell each had an aggregate
      market value of $363,150. As of September 30, 2003, the restricted stock
      grants issued to Mr. Hager and Mr. Howard each had an aggregate market
      value of $1,815,750. The restricted stock grants of each of the previously
      mentioned
      individuals are fully vested at September 30, 2003. The market value of
      our common stock at September 30, 2003 was $24.21 per share.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|(5) | Includes severance pay, company-sponsored
         life insurance coverage, note forgiveness as well as our matching contribution
         under the 401(k) Retirement Plan and Non Qualified Deferred Compensation
         Plan. Mr. Arlotta received $29,005 in relation to his company-sponsored
         life insurance plan. Mr. Hager received $1,021,315 of note forgiveness
         and $2,000 of 401(k) matching compensation. Mr. Smith and Mr. Pell each
         received $2,000 of 401(k) matching compensation. Mr. Howard received
         note forgiveness in the amount of $1,238,298 and severance pay in the
         amount of $2,796,750.                                                                                                                        | 




Options  Granted





The following
    table sets forth certain information concerning stock options granted under
    the 2001 Stock Option Plan during fiscal 2003 to our chief executive officer
    and each of our most highly compensated executive officers:





Option/SAR  Grants in Last Fiscal Year





|               |  |                                                                 |         | Individual    Grants                                                             |  | Potential    Realized Value at    Assumed Annual Rates of Stock    Price Appreciation for Option Terms |  
|-------------- |  | --------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | -
|               |  |                                                                 |         |                                                                                  |  |                                                                                                        |  
|Name           |  | Number    of    Securities Underlying    Options/SARs
  Granted |         | Percent    of    Total Options/    SARs Granted
  to Employees    in Fiscal Year |  | Exercise    Price
    ($/share)                                                                        |  
|               |  |                                                                 |         |                                                                                  |  |                                                                                                        |  
|Robert H. Fish |  |                                                                 | 2,500   |                                                                                  |  | 0.4                                                                                                    | %
|               |  |                                                                 | 275,000 |                                                                                  |  | 43.14                                                                                                  | %
|               |  |                                                                 | 225,000 | (1)                                                                              |  | 35.29                                                                                                  | %

|    |                                                                                                                                   | 
|--- | --------------------------------------------------------------------------------------------------------------------------------- | 
|    |                                                                                                                                   | 
|(1) | Includes 100,000 options
          that were forfieted in fiscal 2003 as a result of failure to satisfy
      vesting conditions. | 




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Aggregate  Option/SAR Exercises in Last Fiscal Year and Fiscal YearEnd Option/SAR Values





|Name           |  | Shares    Acquired on    Exercise (#) |  | Value    Realized ($)    (1) |  | Number of    Unexercised     Securities Underlying    Options/SARs    Fiscal Year-End (#)    Exercisable/Unexercisable |  | Value of    Unexercised In-the-    Money Options/SARs at Fiscal    Year-End ($) Exercisable/    Unexercisable | 
|-------------- |  | ------------------------------------- |  | ---------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- | 
|               |  |                                       |  |                              |  |                                                                                                                        |  |                                                                                                               | 
|Robert H. Fish |  |                                      |  |                             |  | 177,500/352,500                                                                                                        |  | 1,197,025/1,774,250                                                                                           | 




|(1) | Stock price at close of    business on September 30, 2003 was $24.21.
|--- | ---------------------------------------------------------------------




Directors  Compensation





Each of our directors who is  not our employee receives an annual fee of $25,000 for serving as a director  and cash compensation of $1,500 for each in-person meeting of the board of  directors attended and $1,000 for each telephonic meeting of the board of  directors attended. Each such director also receives $1,500 for each in-person  meeting of a committee of our board of directors attended and $1,000 for each  telephonic meeting of a committee of our board of directors attended. The  chairman of the audit and compliance committee receives an additional annual  fee of $7,500. Upon shareholder approval of a restricted stock plan, each  director will also receive an annual award of restricted stock having a fair  market value at the time of grant of $95,000.





In October
    2002, each of Messrs. Fish, Bloem, Dalton, Dondero, Gerbino and LaNasa received
    options to purchase 2,500 shares of our common stock at an exercise price
    per share of $16.80 in exchange for services rendered as a director.





Employment  Agreements





Effective May 28, 2002,  we entered into an employment agreement with Robert H. Fish, our interim chief  executive officer, which originally expired on November 30, 2002, but which was  extended beyond November 30, 2002, on a month to month basis. The base salary  of Mr. Fish was $850,000 on an annual basis and Mr. Fish received a $70,833 signon  bonus. This agreement was terminated on February 28, 2003.





Effective February 28, 2003,  we entered into a two (2) year employment agreement with Robert H. Fish as our  Chief Executive Officer at an annual base salary of $850,000. In addition, the  agreement provides for an annual bonus of up to 100% of the base salary, and  stock options of up to 600,000 shares, upon the occurrence of certain  performance based benchmarks. The base salary is reviewable by the board of  directors at least annually. The agreement may be terminated by NeighborCare at  anytime for Cause (as defined in the employment agreement). Mr. Fish may  terminate his employment upon notice to NeighborCare of the occurrence of  certain events, including a change in control of NeighborCare. In the event  that NeighborCare terminates the agreement without Cause, or if Mr. Fish  terminates his employment agreement as described in the preceding sentence, Mr.  Fish is entitled to severance compensation consisting of accrued and
unpaid  bonuses (including a pro rata bonus for the portion of the year prior to the  date of termination), a continuation of health and insurance benefits for  himself, his spouse and eligible dependents for a period of one (1) year  following the date of termination. Moreover, all restricted stock awards made  to Mr. Fish shall fully vest, and all vested stock options shall remain  exercisable through the original terms with all rights. The agreement also  contains provisions which restrict Mr. Fish from competing with NeighborCare during  the term of the agreement and for a one (1) year period thereafter.





On December 9,  2003, we entered into an option cancellation agreement with Mr. Fish relating  to options which vested upon the completion of the spin-off and Mr. Fishs  termination of employment in connection with the spin-off.  After the board of directors adjustment to  the aggregate number and exercise price of all outstanding options to purchase  our common stock in connection with the spin-off and as of the date of the  agreement, Mr. Fish held options to purchase 430,470 shares of our common stock  at an exercise price per share of $10.86 and 352,203 shares at an exercise  price of $12.99, each of which expire on February 28, 2006.  Under the option cancellation agreement, Mr.  Fish surrendered to us options to purchase 282,673 shares of common stock at  the exercise price of $10.86 for the aggregate cash payment of $2,580,108 less  any applicable withholding taxes.





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Effective July  7, 2003, we entered into an employment agreement with John J. Arlotta, our  chairman, president and chief executive officer, as amended on December 9,  2003. The agreement currently expires on July 7, 2005, with automatic one-year  renewals beginning on July 7, 2004 and each successive anniversary  thereafter.  The automatic extension of  the agreement may be terminated with notice by either the affirmative vote of  two-thirds of the non-management members of the board of directors or by Mr.  Arlotta.  Mr. Arlotta will receive an  annual base salary of $850,000, subject to annual reviews by the compensation  committee of the board of directors commencing February 4, 2004.  The agreement provides for an incentive  bonus of not less than $550,000, with a target bonus of 80% of his base salary,  for fiscal year 2003.  Annually  thereafter, Mr. Arlotta will receive an incentive bonus equal to at least
100%  of his base salary but only upon the compensation committees certification  that the applicable performance goals have been achieved.  Mr. Arlotta received a signing bonus of  $300,000 in fiscal year 2003 pursuant to the agreement.





The agreement  provides for options to purchase 1,000,000 shares of our common stock to be  granted to Mr. Arlotta in increments of 250,000 shares on each of December 9,  2003, December 16, 2003, December 24, 2003 and January 5, 2004, of which 25%  vests immediately upon the date of grant and the remainder vests in quarterly  installments of 6.25% thereafter.  The  agreement also provides for a restricted stock award on January 15, 2004 with  an aggregate value of $4,000,000, rounded to the nearest whole share and based  on the average closing price of our common stock for the thirty trading days  immediately preceding the award, subject to shareholder approval of the  restricted stock plan.  On the date of  the restricted stock award, 25% of the shares vest immediately, with vesting in  equal quarterly installments thereafter such that the shares vest in full by  July 7, 2006.  In addition, Mr. Arlotta  will be entitled
to participate in each employee benefit plan or perquisite  applicable generally to our executive officers.





We may  terminate the employment agreement with or without cause, as defined in the  agreement, by the affirmative vote of two-thirds of the non-management members  of the board of directors.  Mr. Arlotta  may terminate his employment with us upon notice of the occurrence of certain  events, including a change in control of us.   Upon termination of the employment agreement for any reason, Mr. Arlotta  will be entitled to his accrued and unpaid base salary through the date of  termination, any earned but unpaid bonus for any fiscal year ending prior to  the date of termination, any benefits accrued and vested under the terms of our  employee benefit plans and programs through the date of termination, all  deferred compensation of any kind and the option to have assigned to him any  assignable insurance policy relating to him.   In addition upon death, we will pay Mr. Arlottas estate a lump sum in  cash equal to his
base salary for the period from the date of death through the  end of the term of the agreement, benefits as if his employment had terminated  on the last day of the month and a pro rata bonus for the portion of the year  of termination preceding the date of his death based upon an annual amount  equal to 100% of his base salary.  Also,  all restricted stock, stock options and performance share awards will  automatically vest as of the date of death.





If Mr.  Arlottas employment agreement is terminated by us without cause or due to his  disability, each as defined in the agreement, or by Mr. Arlotta for good reason  or a change of control, each as defined in the agreement, or as a result of  non-extension of the agreement, in addition to the foregoing, we will:





| |  | pay him a    pro rata bonus for the portion of the year in which the date of termination    occurs preceding the date of termination based upon an annual amount equal to    100% of his base salary and a lump-sum cash payment equal to two times his    highest base salary in the three years preceding termination plus two times    his target bonus for the year of termination less any disability insurance    benefits if applicable for the two-year period beginning with the date of    termination;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | continue to    provide the health and life insurance benefits provided to him and his spouse    and eligible dependents immediately prior to his date of termination for a    period of two years following the date of termination; and                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | all    restricted stock, stock option and performance share awards will fully vest.                                                                                                                                                                                                                                                                                                                                                                                                                              




In addition,  Mr. Arlotta is entitled to the above consideration in the event that he  terminates the agreement because we have engaged or have required that he  engage in any activity which would cause him to violate covenants of his  contained in a consulting agreement between him and his former employer.  If Mr. Arlotta is prevented from fulfilling  his obligations under the employment agreement with us as a result of  enforcement or





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threatened enforcement of the  consulting agreement with his former employer, we will continue to provide him  with the compensation and benefits described above, unless we decide to  terminate his employment, in which case, as more fully described in the  employment agreement, the compensation paid and benefits provided by us to him  will depend on whether Mr. Arlottas former employer continues to provide him  with the cash payments and benefits described in the consulting agreement  and/or whether we terminate him prior to or on or after January 1, 2004.





Mr. Arlottas  employment agreement contains confidentiality provisions that apply during and  after the term of employment and non-competition provisions that limit him from  competing with us for the term of employment and for a period of two years  after, regardless of the reason for the termination of employment.





On each of  July 28, 2003, September 10, 2003, November 24, 2003 and November 26, 2003, we  entered into employment agreements with John L. Kordash, our executive vice  president and assistant to the chief executive officer, John F. Gaither, Jr.,  our senior vice president, general counsel and secretary, Richard W.  Sunderland, Jr., our chief financial officer, and Robert A. Smith, our chief  operating officer, respectively.   Effective December 9, 2003, each of these agreements was amended and  restated.  The agreements with Messrs.  Kordash and Gaither expire on October 1, 2005.   The agreements with Messrs. Sunderland and Smith expire on December 1,  2005.  The annual base salaries received  by Messrs. Kordash, Gaither, Sunderland and Smith are $250,000, $280,000,  $250,000 and $350,000, respectively.   The agreements with Messrs. Kordash and Gaither provide for an option  grant on December 9, 2003 to
purchase 250,000 and 150,000 shares, respectively,  of our common stock at an exercise price of $21.50, of which 25% vests  immediately upon the date of grant and the remainder vests in quarterly  installments of 6.25% thereafter.  The  agreements with Messrs. Sunderland and Smith provide for option grants by  incorporation of prior letter agreements with us, as described below, at the  same exercise price and vesting schedule described above.





The agreements  with Messrs. Kordash, Gaither, Sunderland and Smith contain provisions that are  substantially similar to those provisions contained in Mr. Arlottas employment  agreement, discussed above, including an automatic one-year extension,  eligibility to participate in stock option, incentive compensation and other  incentive plans, receipt of perquisites generally provided to our officers,  termination of the agreement by us with or without cause and by the executive  upon the occurrence of certain events and confidentiality and non-competition  provisions.  Each agreement also provides  for severance compensation consisting of a pro rata bonus for the portion of  the year in which the date of termination occurs, a lump-sum payment equal to  the sum of the executives average base salary and the average annual bonus  earned under our incentive plans for the most recent two years, continuation of  health and
life insurance benefits for up to two years and vesting of  previously granted stock options and restricted stock.





In November  2003, in contemplation of the spin-off of GHC, we entered into letter  agreements with Messrs. Smith and Sunderland which were incorporated by  reference into each executives amended and restated employment agreement  described above.  Under the letter  agreements, each executive agreed to waive his right to a lump-sum payment and  other benefits that the spin-off would likely have triggered under their  employment agreements in exchange for continued employment until the  spin-off.  In addition, upon completion  of the spin-off, we agreed to:





| |  | make a    lump-sum payment to Messrs. Smith and Sunderland of $405,900 and $294,300,    respectively;                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                    
| |  | continue    each executives employment with the terms and conditions of the employment    agreements described above;                                                                                                             
| |   |                                                                                                                                                                                                                                    
| |  | grant a    stock option to Messrs. Smith and Sunderland to purchase 87,500 and 75,000,    respectively, shares of our common stock; and                                                                                            
| |   |                                                                                                                                                                                                                                    
| |  | on the    six-month anniversary of the option grant, either grant an additional option    to purchase the same amount of our common stock or grant shares of restricted    stock having a value equivalent to the replaced options.




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Transition  Agreements





Effective October 28, 2002,  we entered into a voluntary separation agreement with Richard R. Howard, our  Vice Chairman. Under the agreement, Mr. Howard received $2.8 million of  severance, incentive compensation of $0.3 million and life insurance and other  related benefits of $0.3 million. In addition, we expensed $1.3 million related  to Mr. Howards unvested restricted shares of common stock under the 2001 Stock  Incentive Plan, which vested upon his resignation. The separation agreement  contains customary noncompete clauses in effect from the date of separation.





Benefit  Plans





2001 Stock Incentive Plan





On October
    2, 2001, our board of directors authorized the issuance of 750,000 shares
    of restricted common stock to certain of our senior officers. These shares
    vest and are issued quarterly over a fiveyear period, which commenced
    on February 28, 2002 and will end on October 1, 2006. Upon the resignation
    of Messrs. Walker and Barr, 202,500 shares of restricted common stock vested
    immediately. Upon the resignation of Mr. Howard, 60,000 shares of restricted
    common stock vested immediately. In May 2003, the Company made an offer to
    employees who held shares of restricted common stock to accelerate the vesting
    of all such restricted shares in exchange for the tendering of any options
    to purchase common stock. At September 30, 2003, 625 shares of restricted
    common stock remain unvested and issuable
    through
    October
    1,
    2006.
    See   Options
Repurhased and Restricted Stock Vested In Connection with the Spin-off.





2001 Stock Option Plan





The purpose of our 2001  Stock Option Plan is to provide additional incentive to officers, other key  employees, and directors of, and important consultants to us and each present  or future parent or subsidiary corporation, by encouraging them to invest in  shares of our common stock, par value $0.02 and thereby acquire a proprietary interest  in us and an increased personal interest in our continued success and progress.





The aggregate number of  shares of our common stock that may be issued under our 2001 Stock Option Plan  is 3,480,000. Notwithstanding the foregoing, in the event of any change in the  outstanding shares of our common stock by reason of a stock dividend, stock  split, combination of shares, recapitalization, merger, consolidation, transfer  of assets, reorganization, conversion or what our compensation committee of the  board of directors deems in its sole discretion to be similar circumstances,  the aggregate number and kind of shares which may be issued under our 2001  Stock Option Plan shall be appropriately adjusted in a manner determined in the  sole discretion of the compensation committee. Reacquired shares of our common  stock, as well as unissued shares, may be used for the purpose of our 2001  Stock Option Plan. Our common stock subject to options which have terminated  unexercised, either in whole or in part, shall be
available for future options  granted under our 2001 Stock Option Plan. As of September 30, 2003, 2,813,500 stock  options have been awarded of which 2,636,000 stock options were awarded to  employees, 162,500 stock options were awarded to nonemployee directors and 15,000 stock  options were awarded to nonemployee consultants. See   Options Repurchased and Restricted Stock  Vested in Preparation for the Spin-off.





All of our officers and key  employees and officers and key employees of any present or future parent or  subsidiary corporation are eligible to receive an option or options under our  2001 Stock Option Plan. All directors of, and important consultants to us and  of any of our present or future parent or subsidiary corporation are also  eligible to receive an option or options under this 2001 Stock Option Plan. The  individuals who receive an option or options shall be selected by the  compensation committee, in its sole discretion unless otherwise stipulated in  our 2001 Stock Option Plan. No individual may receive options under our 2001  Stock Option Plan for more than 80% of the total number of shares of our common  stock authorized for issuance under our 2001 Stock Option Plan.





NonQualified Deferred  Compensation Plan





Effective April 1, 2001 we  adopted the Genesis Health Ventures, Inc. Deferred Compensation Plan for a  select group of management and/or highly compensated employees, as such term is  defined in the Internal Revenue Code which allows these individuals to defer  receipt of compensation and supplement retirement savings under the Genesis  Health Ventures, Inc. Retirement Plan. In October of 2001, the NonQualified  Deferred Compensation Plan was amended and made available to all highly  compensated employees as defined by the IRS (in calendar 2003, employees whose  base salary meets or exceeds $90,000).





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Beginning January 1, 2002,  eligible employees were permitted to defer up to 50% of their base salary and  up to 100% of their incentive compensation bonus each year on a pretax basis.  Participants are able to select from several fund choices and their Plan  account will raise or decline in value in accordance with the performance of  the funds they have selected.





Retirement Plan





On January 1, 1989, we  adopted an employee Retirement Plan that consists of a 401(k) component and a  profit sharing component. Our retirement plan is a cash deferred profitsharing  plan covering all of our employees (other than certain employees covered by a  collective bargaining agreement) who have completed at least 500 hours of  service and six months of employment. Under the 401(k) component, each employee  may elect to contribute a portion of his or her current compensation up to the  maximum permitted by the Internal Revenue Code or 50% (or for more highly  compensated employees a maximum of 4%, in accordance with our policy) of such  employees annual compensation. We may make a matching contribution each year  as determined by the board of directors. The board of directors may establish  this contribution at any level each year, or may omit such contribution  entirely.





Under the profit sharing  provisions of the Retirement Plan, we may make an additional employer  contribution as determined by the board of directors each year. The board of  directors may establish this contribution at any level each year, or may omit  such contribution entirely. It is our intent that employer contributions under  the profit sharing provisions of the Retirement Plan are to be made only if  there are sufficient profits to do so. Profit sharing contributions are  allocated among the accounts of participants in the proportion that their  annual compensation bears to the aggregate annual compensation of all  participants. All employee contributions to the Retirement Plan are 100%  vested. Our contributions are vested in accordance with a schedule that  generally provides for vesting after six years of service with us (any  nonvested amounts that are forfeited by participants are used to reduce the  following
years contribution by us).





Options  Repurchased and Restricted Stock Vested in Connection with the Spin-off





On April 1, 2003, the  Company extended an offer to its employees, including executive officers except  for its chief executive officer, to tender all options to purchase shares of  its common stock, par value $.02 per share, outstanding under its 2001 Stock  Option Plan, for the following consideration: (a) for those holders of options  who had received awards of more than 2,000 restricted shares of common stock  under the 2001 Stock Incentive Plan, the acceleration of vesting of all such  restricted shares plus a cash payment of $2.50 per share underlying the option  for options that had an exercise price below $20.00 per share, and (b) with  respect to those holders of options who had not received awards of more than  2,000 restricted shares, (i) for those options that had an exercise price of at  least $20.00 per share, a cash payment of $2.00 per share underlying the  option, and (ii) for those options that had an exercise price
below $20.00 per  share, a cash payment of $2.50 per share subject to the option. The offer  expired on May 12, 2003.  NeighborCare accepted for exchange and  cancellation options to purchase 1,724,000 shares of its common stock, which  represented all of the eligible outstanding options properly tendered for  exchange by eligible option holders, on May 13, 2003.  All eligible  options held by the Companys employees were tendered in the offer, with the  exception of options to purchase 35,000 shares.





See   Employment
    Agreements.





Senior  Executive Stock Ownership Program and Executive Loans





In December, 1997 the board  of directors approved a Senior Executive Stock Ownership Program. Under the  terms of the program, certain of our senior executive employees were required  to own shares of our common stock having a market value based upon a multiple  of the executives salary. Each executive was required to own the shares within  three years of the date of the adoption of the program. Subject to applicable  laws, we were authorized to lend funds to one or more of the senior executive  employees for his or her purchase of our common stock. As of September 30,  2001, we had outstanding loan and accrued interest balances of $3,200,000 from  the senior executives, including Mr. Hager. The note agreements were amended in  fiscal 2000 to adjust the interest rate to 8% simple interest. Previously, the  loans accrued interest based on the market rate at the date of the loan  initiation.





On February 23, 2001, the  U.S. Bankruptcy Court ordered that the remaining loans be forgiven on the  earlier of the termination of the executives employment (for reasons other  than for cause or for the voluntary resignation of





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the executive without Good Reason as  defined in the employment agreement) or the first anniversary of our emergence  from bankruptcy. Therefore, on or before October 2, 2002, all of these loans  were forgiven and the executives were held harmless for all and any of the tax  consequences resulting from the forgiveness of the loans.





Compensation  Committee Interlocks and Insider Participation





Until his resignation
    on December 1, 2003, Joseph A. LaNasa III was a member of our Compensation
    Committee. Mr. LaNasa is employed by Goldman Sachs and Co. as a managing
    director. We engaged Goldman Sachs and Co. to act as joint lead financial
    advisor together with UBS Warburg in connection with a strategic transaction
    with respect to our eldercare businesses, including our inpatient services,
    rehabilitation therapy,
    diagnostic,
    respiratory,
    hospitality and healthcare consulting businesses and the issuance of our
    6.875% senior subordinated notes due 2013. As compensation for services provided,
    we agreed to pay Goldman Sachs and Co. a transaction fee based on the value
    of the consummated transactions.





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|ITEM 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND    OTHER STOCKHOLDER RELATED MATTERS
|-------- | -------------------------------------------------------------------------------------------------------




The following
    table sets forth information with respect to the beneficial ownership of
    our common stock as of December 17, 2003 for: each person who we know owns
    beneficially more than 5% of our common stock; each of our most highly compensated
    executive officers; each of our directors; and all of our executive officers
    and directors as a group. On December 17, 2003 there were 43,093,682 shares
    of our common stock outstanding, including 260,493 shares to be issued in
    connection with our joint plan of reorganization confirmed by the Bankruptcy
    Court on September 20, 2001.





Unless otherwise noted below,  and subject to applicable community property laws, to our knowledge, each  person has sole voting and investment power over the shares shown as  beneficially owned, except to the extent authority is shared by spouses under  applicable law and except as set forth in the footnotes to the table.





The number of shares  beneficially owned by each shareholder is determined under rules promulgated by  the SEC. The information does not necessarily indicate beneficial ownership for  any other purpose. Beneficial ownership, as set forth in the regulations of the  SEC, includes securities owned by or for the spouse, children or certain other  relatives of such person as well as other securities as to which the person has  or shares voting or investment power or has the right to acquire within 60 days  of December 17, 2002. The same shares may be beneficially owned by more than  one person. Beneficial ownership may be disclaimed as to certain of the  securities. Shares of common stock issuable upon the exercise of securities currently  exercisable or exercisable within 60 days of December 17, 2003 are deemed  outstanding for computing the share ownership and percentage ownership of the  person holding such securities, but are not deemed
outstanding for computing  the percentage of any other person.





All addresses for the  executive officers and directors are c/o NeighborCare, Inc., 7 East Lee Street,  Baltimore, Maryland  21202.





|                                                                                                                                 |  | Shares    of Common StockBeneficially    Owned (1) |           | Percent of    Common Stock    Owned (1) | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------- | --------------------------------------- | 
|                                                                                                                                 |  |                                                    |           |                                         | 
|Highland Capital Management,
         L.P.
      Two Galleria Tower
      13455 Noel Road, Suite 1300
      Dallas, TX 75240 (2) |  |                                                    | 4,358,972 |                                         | 
|Goldman, Sachs Group     85 Broad Street
  New York, NY 10004 (3)                                                                |  |                                                    | 4,306,146 |                                         | 
|John J. Arlotta (4)                                                                                                              |  |                                                    | 125,000   |                                         | 
|James    H. Bloem (5)                                                                                                            |  |                                                    | 46,960    |                                         | 
|James    D. Dondero (2)                                                                                                          |  |                                                    | 4,358,972 |                                         | 
|Robert H. Fish (6)                                                                                                               |  |                                                    | 546,960   |                                         | 
|Dr. Philip P. Gerbino (7)                                                                                                        |  |                                                    | 46,960    |                                         | 
|James E. Dalton, Jr. (8)                                                                                                         |  |                                                    | 46,960    |                                         | 
|Arthur J. Reimers                                                                                                                |  |                                                    |          |                                         | 
|Phyllis R. Yale                                                                                                                  |  |                                                    |          |                                         | 
|George V. Hager, Jr.                                                                                                             |  |                                                    |          |                                         | 
|Robert A. Smith                                                                                                                  |  |                                                    |          |                                         | 
|Richard Pell, Jr.                                                                                                                |  |                                                    |          |                                         | 
|Richard Howard                                                                                                                   |  |                                                    |          |                                         | 
|All executive officers and directors
      as a group (15 persons) (9)                                                           |  |                                                    | 5,312,437 |                                         | 




|* | Less than one percent
|- | ---------------------




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|(1) | Includes an aggregate of    3,464,255
      shares of common stock issued on December 16, 2003 as a result of the board
      of directors election to exercise its option to require the mandatory
      conversion of the Series A convertible preferred stock, pursuant to the
      Companys
      amended and restated articles of incorporation, as amended, excludes
      2,299,252 shares held by the Company in treasury, and gives effect to
      the adjustment of stock option amounts and exercise prices as a result
      of the
      spin-off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | Includes 2,429,471  shares
      of our common stock beneficially and directly owned by Highland Capital
      Management, L.P (Highland Capital); 46,960 stock options to
      purchase our common stock, which are exercisable within sixty days of December
      17, 2003, granted under our 2001 Stock Option Plan to Mr. Dondero (Mr.
      Dondero has an understanding with Highland Capital pursuant to which he
      holds the options for the benefit of Highland Capital); 1,404,120 shares
      of common stock beneficially and directly owned by Highland Crusader Offshore
      Partners, L.P. (Crusader), of which 251,272 shares were issued
      upon conversion of the Series A convertible preferred stock; 263,577 shares
      of common stock beneficially and directly owned by Prospect Street High
      Income Portfolio, Inc. (Prospect), of which 123,803 shares
      were issued upon conversion of the Series A convertible preferred stock;
      41,100 shares of common stock owned by PCMG Trading Partners XXIII L.P.
      (PCMG); 173,745 shares of common stock beneficially and directly
      owned by KZH-Pamco LLC (KZH), of which 16,484 shares were
      issued upon conversion of the Series A convertible preferred stock. Mr.
      Dondero disclaims beneficial ownership of 3,295,654 shares of our common
      stock. Based partially upon a Schedule 13D/A filed with the SEC on April
      8, 2002 and a Form 4 filed with the SEC on October 24, 2003, on behalf
      of a group consisting of Highland Capital, Crusader, Prospect, PCMG, KZH
      and Mr. Dondero. The general partner of Crusader is Highland Capital. Highland
      Capital, as a registered investment advisor, is the investment advisor
      for Prospect. The general partner of Highland Capital is Strand Advisors,
      Inc., a Delaware corporation (Strand). The general partner
      of PCMG is Strand Advisors III, Inc., a Delaware corporation (Strand
      III). Mr. Dondero is the president of Highland, Prospect, Strand,
      and Strand III, and our director.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(3) | Goldman, Sachs & Co. is a whollyowned
      subsidiary of Goldman, Sachs Group. Goldman, Sachs & Co.s direct
      beneficial ownership consists of 4,263,099 shares of common stock, of which
      632,135 shares were issued upon conversion of the Series A convertible
      preferred stock.  Joseph A. LaNasa III, a managing director of Goldman,
      Sachs & Co., was a member of our board of directors in fiscal 2003
      and was granted 43,047 options to purchase our common stock, which are exercisable
      within 60 days of December 17, 2003, granted under our 2001 Stock Option
      Plan. Mr. LaNasa has an understanding with Goldman, Sachs Group pursuant
      to which he holds the options for the benefit of the Goldman, Sachs Group.
      Based in part upon a Schedule 13D/A filed with the SEC on December 2, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) | Includes 125,000 shares of common
      stock issuable upon the exercise of stock options that are exercisable
      within 60 days of December 17, 2003 granted under our 2001 Stock Option
      Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(5) | Includes 46,960 shares of    common
      stock issuable upon the exercise of stock options that are exercisable
      within 60 days of December 17, 2003 granted under our 2001 Stock Option
      Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(6) | Includes 546,960 shares of    common
      stock issuable upon the exercise of stock options that are exercisable
      within 60 days of December 17, 2003 granted under our 2001 Stock Option
      Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(7) | Includes 46,960 shares of    common
      stock issuable upon the exercise of stock options that are exercisable
      within
      60 days of December 17, 2003  granted under our 2001 Stock Option
      Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(8) | Includes 46,960 shares of    common
      stock issuable upon the exercise of stock options that are exercisable
      within
      60 days of December 17, 2003 granted under our 2001 Stock Option
      Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           




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|    | that are immediately    exercisable.                                                                                      
|--- | --------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                           
|(9) | Includes officers with no    beneficial ownership and those with ownership less than five percent    beneficial ownership.




Equity  Compensation Plans





The following table details  information regarding our existing equity compensation plans as of September  30, 2003:





|                                                              |  | A                                                                                                 |         | B                                                                              |   | C                                                                                                                                               | 
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | - | ----------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                              |  |                                                                                                   |         |                                                                                |   |                                                                                                                                                 | 
|                                                              |  | Number of    securities to be issued upon exercise of outstanding options, warrants and    rights |         | Weighted-average    exercise price of outstanding options, warrants and rights |   | Number of    securities remaining available for future issuance under equity compensation    plans (excluding securities reflected in column A) | 
|                                                              |  |                                                                                                   |         |                                                                                |   |                                                                                                                                                 | 
|Equity compensation plans    approved by security holders     |  |                                                                                                   |        |                                                                                |   |                                                                                                                                                | 
|Equity compensation plans    not approved by security holders |  |                                                                                                   | 740,000 |                                                                                | $ | 19.70                                                                                                                                           | 




The above table represents  securities to be issued upon exercise of outstanding options under our 2001  Stock Option Plan, which was approved by the Bankruptcy Court. We have not  included in the above table the shares granted pursuant to our 2001 Stock  Incentive Plan, which was approved by the Bankruptcy Court.





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|ITEM 13: | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------




Pursuant to the Senior  Executive Officer Stock Ownership Plan at September 30, 2001, we had loans outstanding  to Messrs. Howard, Hager and Rubinger in the principal amounts of $646,889,  $624,244 and $492,812, respectively. On February 23, 2001, the U.S. Bankruptcy  Court ordered that the remaining loans be forgiven on the first anniversary of  our emergence from bankruptcy. Therefore, effective October 2, 2002, these  loans were forgiven and the executives held harmless for all and any of the tax  consequences resulting from the forgiveness of the loans.





Mr. Joseph
    A. LaNasa III was an elected member of our board of directors in fiscal 2003.
    In this capacity, he participated and had the opportunity to vote on matters
    that were presented to our board of directors. Mr. LaNasa is employed by
    Goldman Sachs & Co. as  a managing director. Mr. LaNasa has acquired
    stock options that were granted under our 2001 Stock Option Plan. He has
    an understanding with the Goldman Sachs Group pursuant to which he holds
    the options for the benefit of the Goldman Sachs Group. As of December 17,
    2003, the Goldman Sachs Group beneficially owns 9.98% of our common stock.





Mr. Arthur Reimers was  elected to our board of directors on December 1, 2003 and was employed by  Goldman, Sachs & Co. as a managing director until 2001.





We engaged
    Goldman Sachs to act as joint lead financial advisor, together with UBS Warburg,
    in connection with the potential sale or spinoff
    of a significant portion of our capital stock or assets. In December 2003,
    we paid Goldman Sachs transaction fees in connection with strategic transactions
    and placement fees
for the sale of securities.





Mr. James Dondero
    is an elected member of our board of directors. Mr. Dondero has acquired
    stock options that were granted under our 2001 Stock Option Plan. In addition
    to stock held directly by Mr. Dondero, he may be deemed to beneficially own
    stock held by Highland Capital Management, L.P, Highland Crusader Offshore
    Partners, L.P., Prospect Street High Income Portfolio Inc., and PCMG Trading
    Partners XXIII LP. In total, Mr. Dondero beneficially owns 10.10% of our
    common stock.





PART IV





|ITEM 14: | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------




Consistent
     with the Audit and Compliance Committees responsibility for engaging
     the Companys
    independent auditors, beginning with 2003 all audit and permitted non-audit
    services require preapproval by the Audit and Compliance Committee. The full
    Committee approves proposed services and fee estimates for these services.
     The Committee Chairman has been designated by the Committee to approve any
     services arising
    during the year that were not preapproved by the Committee and services that
    were preapproved.  Services approved by the Chairman
    are communicated to the full Committee at its next regular quarterly meeting
    and the Committee reviews services and fees for the
    fiscal year at each such meeting. During 2003 all services  performed by
    the auditors were preapproved.





During fiscal
    years 2003 and 2002, the Company retained KPMG to provide services in the
    following categories and amounts:





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|                      | 2003 |           | 2002 |  
|--------------------- | ---- | --------- | ---- | -
|                      |      |           |      |  
|Audit fees            | $    | 2,249,000 |      | $
|Audit    related fees |      | 78,000    |      |  
|Tax fees              |      |          |      |  
|All other    fees     |      | 244,000   |      |  
|                      |      |           |      |  
|Total                 | $    | 2,571,000 |      | $
|                      |      |           |      |  




Audit fees
    are those fees for professional services rendered in connection with the
    audit of the Companys consolidated financial statements for the year
    ended September 30, 2003 and 2002 and the review of the Companys quarterly consolidated
    financial statements on Form 10-Qs that are customary under auditing
    standards generally accepted in the United States.  Audit  fees also
    include the separate audits of certain eldercare centers as required under
    debt agreements.  Fiscal 2003  audit fees include Genesis HealthCare
    Corporations Form 10 filling and  combined financial statement of Genesis
    HealthCare Corporation in connection with of the spin-off from the Company.





Audit-related  fees consisted primarily of services rendered in connection with employee  benefit plan audits.





Tax fees are  for 2002 related primarily to assistance and preparation of tax returns.





All other fees
    for fiscal 2003 consist primarily of services rendered in connection with
    Sarbanes Oxley Section 404.  Aggregate
    fees billed for all other services amounted to $581,000 for fiscal 2002.
    This amount primarily related to post bankruptcy assistance to the Company.
    KPMG LLP did not perform any financial information system design and implementation
services during the fiscal year ended September 30, 2002.





|ITEM 15: | EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND    REPORTS ON FORM 8K
|-------- | -----------------------------------------------------------------




|(a)(1) | The    following financial statements of NeighborCare, Inc. and Subsidiaries are    filed as part of this Form 10-K in Item 8:                                                                                                                                                                                                                    
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                                                                                   
|       | Independent    Auditors Report                                                                                                                                                                                                                                                                                                                   
|       | Consolidated    Balance Sheets as of September 30, 2003 and 2002 (Successor)                                                                                                                                                                                                                                                                      
|       | Consolidated    Statements of Operations for the years ended September 30, 2003, 2002 (Successor),    and 2001 (Predecessor)                                                                                                                                                                                                                      
|       | Consolidated    Statements of Shareholders Equity (Deficit) for the years ended September    30, 2003, 2002 (Successor), and 2001 (Predecessor)                                                                                                                                                                                                  
|       | Consolidated    Statements of Cash Flows for the years ended September 30, 2003, 2002 (Successor),    and 2001 (Predecessor)                                                                                                                                                                                                                      
|       | Notes to    Consolidated Financial Statements                                                                                                                                                                                                                                                                                                     
|       |                                                                                                                                                                                                                                                                                                                                                   
|(a)(2) | Schedule                                                                                                                                                                                                                                                                                                                                          
|       |                                                                                                                                                                                                                                                                                                                                                   
|       | Schedule II    - Valuation and Qualifying Accounts for the years ended September 30, 2003,    2002 and 2001. Schedule II is included herein. All other schedules not listed    have been omitted since the required information is included in the    consolidated financial statements or the notes thereto, or is not applicable    or required.
|       |                                                                                                                                                                                                                                                                                                                                                   
|2.1(1) | Debtors    Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated    July 6, 2001.                                                                                                                                                                                                                                           
|       |                                                                                                                                                                                                                                                                                                                                                   
|2.2(2) | Technical    Amendments to Debtors Joint Plan of Reorganization under Chapter 11 of the    Bankruptcy Code dated August 27, 2001.                                                                                                                                                                                                                
|       |                                                                                                                                                                                                                                                                                                                                                   
|2.3(2) | Amendments    to Debtors Joint Plan of Reorganization under Chapter 11 of the Bankruptcy    Code dated to                                                                                                                                                                                                                                        




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|         | comply with    opinion on confirmation dated September 13, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2.4(3)   | Separation    and Distribution Agreement by and between the Company and Genesis HealthCare    Corporation, dated as of October 27, 2003 (Schedules and exhibits are omitted    pursuant to Regulation S-K, Item 601(b)(2); the Company agrees to furnish    supplementally a copy of such schedules and/or exhibits to the Securities and    Exchange Commission upon request).                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3.1(4)   | Amended and Restated    Articles of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3.2(4)   | Articles of Amendment to    the Companys Amended and Restated Articles of Incorporation, effective as of    December 2, 2003, changing the name to NeighborCare, Inc.                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3.3(4)   | Statement with Respect to    Shares, effective as of December 5, 2003, designating the Companys Series B    Junior Participating Preferred Stock, par value $0.01 per share.                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3.4(4)   | Amended and Restated    Bylaws of the Company, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.1(5)   | Specimen of    Common Stock Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.2(6)   | Certificate    of Designation of the Series A Convertible Preferred Stock (included in    Exhibit 3.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.3      | Specimen of the Companys
       6.785% Senior Subordinated Notes due 2013 (included in Exhibit 4.4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.4      | Indenture, dated as    of November 4, 2003, among the Company, the Guarantors and The Bank of New    York, as trustee, relating to the Company 6.875% Senior Subordinated Notes    due 2013.                                                                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.5(7)   | Rights    Agreement, dated as of November 18, 2003, by and between the Company and    StockTrans, Inc., as rights agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.6(4)   | Statement with Respect to    Shares, effective as of December 5, 2003, designating the Companys Series B    Junior Participating Preferred Stock, par value $0.01 per share (included in    Exhibit 3.3).                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|+10.1(8) | The Companys    Employee Retirement Plan, adopted January 1, 1989, as amended and related    Retirement Plan Trust Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|+10.2(6) | 2001 Stock    Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.3(6)  | Registration    Rights Agreement between the Company, Goldman Sachs & Co., and Highland    Capital Management L.P., dated as of October 2, 2001, regarding the Companys    Common Stock.                                                                                                                                                                                                                                                                                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.4(6)  | Registration    Rights Agreement between the Company, Goldman Sachs & Co., and Highland    Capital Management L.P., dated as of October 2, 2001, regarding the Companys    Second Priority Secured Notes due 2007.                                                                                                                                                                                                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.5(6)  | Credit,    Security, Guaranty and Pledge Agreement, dated as of October 2, 2001, among    the Company, the Guarantors, the Lenders, First Union Securities, Inc., as CoLead    Arranger, Goldman Sachs Credit Partners L.P., as CoLead Arranger and    Syndication Agent, First Union National Bank, as Administrative Agent and    Collateral Agent, General Electric Capital Corporation, as Collateral    Monitoring Agent and CoDocumentation Agent and CitiCorp USA, Inc., as CoDocumentation    Agent (the Credit, Security, Guaranty and Pledge Agreement).
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.6(9)  | Amendment    No. 1, dated as of December 31, 2001, to the Credit, Security, Guaranty and    Pledge Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.7(10) | Amendment    No. 2, dated as of June 28, 2002, to the Credit, Security, Guaranty and    Pledge Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                               




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|10.8(11)   | Employment    Agreement between the Company and Robert H. Fish dated as of May 28, 2002 and    the addendum thereto dated November 30, 2002.                                                                       
|---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                                                                                                                                                                                                                    
|+10.9(12)  | The Companys    Deferred Compensation Plan.                                                                                                                                                                       
|           |                                                                                                                                                                                                                    
|+10.10(13) | Transition    Agreement by and between the Company and Michael R. Walker, dated as of May    28, 2002.                                                                                                             
|           |                                                                                                                                                                                                                    
|+10.11(13) | Transition    Agreement by and between the Company and David C. Barr, dated as of June 18,    2002.                                                                                                                
|           |                                                                                                                                                                                                                    
|+10.12(11) | Voluntary    Separation Agreement between the Company and Richard R. Howard dated as of    October 28, 2002.                                                                                                       
|           |                                                                                                                                                                                                                    
|+10.13(14) | 2001 Stock    Incentive Plan.                                                                                                                                                                                      
|           |                                                                                                                                                                                                                    
|+10.14(15) | Employment Agreement,    dated as of February 28, 2003, by and between the Company and Robert H. Fish.                                                                                                             
|           |                                                                                                                                                                                                                    
|+10.15     | Employment Agreement,    dated as of July 7, 2003, by and between the Company and John J. Arlotta.                                                                                                                 
|           |                                                                                                                                                                                                                    
|+10.16     | Employment Agreement,    dated as of July 28, 2003 and amended and restated as of December 9, 2003, by    and between the Company and  John L.    Kordash.                                                         
|           |                                                                                                                                                                                                                    
|+10.17     | Employment Agreement,    dated as of September 10, 2003 and amended and restated as of December 9,    2003, by and between the Company and John F. Gaither, Jr.                                                    
|           |                                                                                                                                                                                                                    
|10.18      | Registration Rights    Agreement, dated as of November 4, 2003, by and among the Company, the    Guarantors, Goldman, Sachs & Co., Lehman Brothers Inc., UBS    Securities LLC and J.P. Morgan Securities Inc.     
|           |                                                                                                                                                                                                                    
|+10.19     | Letter    Agreement, dated as of November 7, 2003, by and between the Company and    Richard W. Sunderland.                                                                                                        
|           |                                                                                                                                                                                                                    
|+10.20     | Letter    Agreement, dated as of November 20, 2003, by and between the Company and    Robert A. Smith.                                                                                                             
|           |                                                                                                                                                                                                                    
|+10.21     | Employment    Agreement, dated as of November 24, 2003 and amended and restated as of    December 9, 2003, by and between the Company and Richard W. Sunderland.                                                   
|           |                                                                                                                                                                                                                    
|+10.22     | Employment    Agreement, dated as of November 26, 2003 and amended and restated as of December    9, 2003, by and between the Company and Robert A. Smith.                                                         
|           |                                                                                                                                                                                                                    
|10.23(4)   | Tax Sharing Agreement,    dated as of December 1, 2003, by and between the Company and Genesis    HealthCare Corporation.                                                                                          
|           |                                                                                                                                                                                                                    
|10.24(4)   | Transition Services    Agreement, dated as of December 1, 2003, by and between the Company and    Genesis HealthCare Corporation.                                                                                  
|           |                                                                                                                                                                                                                    
|10.25(4)   | Employee Benefits    Agreement, dated as of December 1, 2003, by and between the Company and    Genesis HealthCare Corporation.                                                                                    
|           |                                                                                                                                                                                                                    
|10.26(4)   | Master Agreement for    Pharmacy, Pharmacy Consulting and Related Products and Services, dated as of    December 1, 2003, by and between NeighborCare Pharmacy Services, Inc. and    Genesis HealthCare Corporation
|           |                                                                                                                                                                                                                    
|10.27(4)   | Credit Agreement by and    among the Company, the domestic subsidiaries of the Company from time to                                                                                                                




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|       | time party thereto, the    lenders party thereto, Wachovia Bank, National Association, as administrative    agent, and General Electric Capital Corporation and ING Capital LLC, as    syndication agents, and LaSalle Bank National Association and U.S. Bank,    National Association, as documentation agents (Schedules and exhibits are    omitted; the Company agrees to furnish supplementally a copy of such    schedules and/or exhibits to the Securities and Exchange Commission upon    request).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|+10.28 | Amendment,    dated as of December 9, 2003, to Employment Agreement by and between the    Company and John J. Arlotta.                                                                                                                                                                                                                                                                                                                                                                                       
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|+10.29 | Option    Cancellation Agreement, dated as of December 9, 2003, by and between the Company    and Robert H. Fish.                                                                                                                                                                                                                                                                                                                                                                                            
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|21     | Subsidiaries    of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|23     | Consent of    KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|31.1   | Certificate    of John J. Arlotta, Chief Executive Officer of the Company, pursuant to    Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Sections 302 and    404 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                           
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|31.2   | Certificate    of Richard W. Sunderland, Chief Financial Officer of the Company, pursuant to    Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Sections 302    and 404 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                     
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|32.1   | Certificate    of John J. Arlotta, Chief Executive Officer of the Company pursuant to 18    U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley    Act of 2002.                                                                                                                                                                                                                                                                                                                    
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|32.2   | Certificate    of Richard W. Sunderland, Chief Financial Officer of the Company pursuant to    18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                              




---

|+   | Management contract or    compensatory plan or arrangement required to be filed as an exhibit to this    Form 10-K pursuant to Item 14(c) of Form 10-K.         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|1)  | Incorporated by reference    to the Companys Current Report on Form 8K filed on June 19, 2001.                                                                
|2)  | Incorporated by reference    to the Companys Form T3 filed on September 18, 2001.                                                                             
|3)  | Incorporated by reference    to Genesis HealthCare Corporations Registration Statement on Form 10 dated    November 14, 2003 (as amended) (File No. 000-50351).
|4)  | Incorporated by reference    to an exhibit to the Companys Current Report on Form 8-K filed on December    9, 2003.                                            
|5)  | Incorporated by reference    to the Companys Form 8A filed on October 2, 2001.                                                                                
|6)  | Incorporated by reference    to the Companys Annual Report on Form 10K for the fiscal year ended    September 30, 2001.                                       
|7)  | Incorporated by reference    to an exhibit to the Companys Form 8-A filed on November 18, 2003.                                                                
|8)  | Incorporated by reference    to the Companys Registration Statement on Form S1, dated June 19, 1991    (Registration No. 3340007).                           
|9)  | Incorporated by reference    to the Companys Quarterly Report for the quarter ended December 31, 2001.                                                         
|10) | Incorporated by reference    to the Companys Quarterly Report on Form 10Q for the quarter ended June 30,    2002.                                             
|11) | Incorporated by reference    to the Companys Annual Report on Form 10-K for the fiscal year ended    September 30, 2002.                                       
|12) | Incorporated by reference    to the Companys Registration Statement on Form S8 (File No. 3382208) filed    on February 5, 2002.                              
|13) | Incorporated by reference    to the Companys Current Report on Form 8K filed on July 1, 2002.                                                                 
|14) | Incorporated by reference    to
      the Companys Registration Statement on Form S8 (File No. 3383430)
      filed on February 26, 2002.                    
|15) | Incorporated by reference to
         the Companys Quarterly Report on Form 10-Q for the quarter ended
         March 31, 2003.                                




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|(b) | Reports on Form 8-K                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                              
|    | On August 5, 2003, the    Company filed a Current Report on Form 8-K under Items 9 and 12 reporting its    financial results for the quarter and year to date periods ended June 30,    2003.
|    |                                                                                                                                                                                              




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Independent Auditors Report





The Board of Directors and  Shareholders  NeighborCare, Inc.





Under date of December 1, 2003, except
    as to note 14, which is as of December 16, 2003, we reported on the consolidated
    balance sheets of NeighborCare, Inc. and subsidiaries (the Company)
    as of September 30, 2003 and 2002, and the related consolidated statements
    of operations, shareholders equity (deficit) and cash  flows for each
    of the years in the three year period ended September 30, 2003, as contained
    in the NeighborCare, Inc. annual report on Form 10K for the year  ended
    September 30, 2003. In connection with our audits of the aforementioned consolidated
    financial statements, we also audited the related financial statement schedule
    in the Form 10K. This financial statement schedule is the  responsibility
    of the Companys management. Our responsibility is to express an  opinion
    on this financial statement schedule based on our audits.





In our opinion, such financial  statement schedule, when considered in relation to the basic consolidated  financial statements taken as a whole, presents fairly, in all material  respects, the information set forth therein.





As disclosed in note 1 to the  consolidated financial statements, the Company adopted the provisions of  Statement of Financial Accounting Standards No. 145 with regard to accounting  for extinguishment of debt effective October 1, 2002.





As described in note 3 to the  consolidated financial statements, on October 2, 2001 the Company consummated a  Joint Plan of Reorganization (the Plan) which had been confirmed by the  United States Bankruptcy Court. The Plan resulted in a change in ownership of  the Company and, accordingly, effective September 30, 2001 the Company  accounted for the change in ownership through freshstart reporting. As a  result, the consolidated information prior to September 30, 2001 is presented  on a different cost basis than that as of and subsequent to September 30, 2001  and, therefore, is not comparable.





|                                                                                      | /s/ KPMG LLP
|------------------------------------------------------------------------------------- | ------------
|Philadelphia, Pennsylvania                                                            |             
|December
         1, 2003, except as
  to note 14, which is as
  of December 16, 2003 |             







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Schedule II





NeighborCare, Inc.  Valuation and Qualifying Accounts  Years Ended September 30, 2003, 2002 and 2001  (in thousands)





|Description                        |  | Balance at    Beginning of    Period |        | Charged to    Operations |  | Charged to    Other    Accounts (1) |  | Deductions    (2) |        | Balance at    End of    Period | 
|---------------------------------- |  | ------------------------------------ | ------ | ------------------------ |  | ----------------------------------- |  | ----------------- | ------ | ------------------------------ | 
|                                   |  |                                      |        |                          |  |                                     |  |                   |        |                                | 
|Year Ended September 30, 2003      |  |                                      |        |                          |  |                                     |  |                   |        |                                | 
|Allowance    for Doubtful Accounts |  | $                                    | 55,791 |                          |  | 37,085                              |  |                   |       |                                | 
|Year Ended September 30, 2002      |  |                                      |        |                          |  |                                     |  |                   |        |                                | 
|Allowance    for Doubtful Accounts |  | $                                    | 83,125 |                          |  | 44,712                              |  |                   |       |                                | 
|Year Ended September 30, 2001      |  |                                      |        |                          |  |                                     |  |                   |        |                                | 
|Allowance    for Doubtful Accounts |  | $                                    | 78,020 |                          |  | 49,901                              |  |                   | 12,509 |                                | 




|(1) | In fiscal 2001, represents    a reclassification of amounts previously reported as a direct reduction to    trade receivables, rather than an allowance for doubtful accounts.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                               
|(2) | Represents amounts written    off as uncollectible.                                                                                                                           




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SIGNATURES





Pursuant to the requirements of  Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant  has duly caused this Report to be signed on its behalf on December 23, 2003 by  the undersigned thereunto duly authorized.





| | NeighborCare,    Inc.
| | ---------------------
| |                      
| |                      
| | By:                  
| |                      




Pursuant to the requirements of  the Securities Act of 1934, this Report has been signed below by the following  persons on behalf of the Registrant and in the capacities indicated on December  23, 2003.





|Signature                    |  | Capacity                                                
|---------------------------- |  | --------------------------------------------------------
|                             |  |                                                         
|/s/    JOHN J. ARLOTTA       |  |                                                         
|John J.    Arlotta           |  | Chairman, President and    Chief
      Executive Officer
|                             |  |                                                         
|/s/    JAMES H. BLOEM        |  |                                                         
|James H.    Bloem            |  | Director                                                
|                             |  |                                                         
|/s/    JAMES E. DALTON, JR.  |  |                                                         
|James E.    Dalton, Jr.      |  | Director                                                
|                             |  |                                                         
|/s/    JAMES D. DONDERO      |  |                                                         
|James D. Dondero             |  | Director                                                
|                             |  |                                                         
|/s/    ROBERT H. FISH        |  |                                                         
|Robert H.    Fish            |  | Director                                                
|                             |  |                                                         
|/s/    DR. PHILIP P. GERBINO |  |                                                         
|Dr. Philip    P. Gerbino     |  | Director                                                
|                             |  |                                                         
|/s/    ARTHUR J. REIMERS     |  |                                                         
|Arthur J.    Reimers         |  | Director                                                
|                             |  |                                                         
|/s/    PHYLLIS R. YALE       |  |                                                         
|Phyllis R. Yale              |  | Director                                                




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|/s/    RICHARD W. SUNDERLAND, JR. |  |                           
|--------------------------------- |  | --------------------------
|Richard W.    Sunderland, Jr.     |  | Chief    Financial Officer




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Exhibit  21 Subsidiaries of the Company





|Entity Name                                                                                |  | State of    Organization
|------------------------------------------------------------------------------------------ |  | ------------------------
|                                                                                           |  |                         
|Accumed, Inc.                                                                              |  | New Hampshire           
|ASCO Healthcare of New    England, Inc.                                                    |  | Maryland                
|ASCO Healthcare of New    England, Limited Partnership                                     |  | Maryland                
|ASCO Healthcare, Inc.                                                                      |  | Maryland                
|Care4, L.P.                                                                                |  | Delaware                
|CareCard, Inc.                                                                             |  | Maryland                
|Concord Pharmacy Services,    Inc.                                                         |  | Pennsylvania            
|Delco Apothecary, Inc.                                                                     |  | Pennsylvania            
|Eastern Medical Supplies,    Inc.                                                          |  | Maryland                
|Encare of Massachusetts,    Inc.                                                           |  | Delaware                
|Genesis Health Ventures,    Inc.                                                           |  | Pennsylvania            
|Genesis Holdings, Inc.                                                                     |  | Delaware                
|Geneva Sub, Inc.                                                                           |  | Delaware                
|H.O. Subsidiary, Inc.    f/k/a HealthObjects, Inc.                                         |  | Maryland                
|Health Concepts and    Services, Inc.                                                      |  | Maryland                
|HealthObjects Corporation    f/k/a Neighborware Health Systems, Inc.                       |  | Maryland                
|Horizon Medical Equipment    and Supply, Inc.                                              |  | West Virginia           
|Institutional Health Care    Services, Inc.                                                |  | New Jersey              
|Medical Services Group,    Inc.                                                            |  | Maryland                
|Neighborcare Home Medical    Equipment of Maryland, L. L. C.                               |  | Maryland                
|NeighborCare Home Medical    Equipment, Inc. f/k/a United Health Care Services, Inc.       |  | Pennsylvania            
|NeighborCare Infusion    Services, Inc. f/k/a Vitalink Infusion Services, Inc.             |  | Delaware                
|NeighborCare of Indiana,    Inc. f/k/a TeamCare of Indiana, Inc.                           |  | Indiana                 
|NeighborCare of New    Hampshire L. L. C.                                                  |  | New Hampshire           
|NeighborCare of Northern    California, Inc. f/k/a CompuPharm of Northern California, Inc. |  | California              
|NeighborCare of Oklahoma,    Inc. f/k/a Vitalink Subsidiary, Inc.                          |  | Oklahoma                
|NeighborCare of Virginia,    Inc. f/k/a TeamCare of Virginia, Inc.                         |  | Virginia                
|NeighborCare of Wisconsin,    Inc. f/k/a GCI Innovative Pharmacy, Inc.                     |  | Wisconsin               
|NeighborCare Pharmacies,    Inc.                                                           |  | Maryland                
|NeighborCare Pharmacy of    Oklahoma LLC                                                   |  | Oklahoma                
|NeighborCare Pharmacy of    Virginia LLC                                                   |  | Virginia                
|NeighborCare Pharmacy    Services, Inc. f/k/a Vitalink Pharmacy Services, Inc.             |  | Delaware                
|NeighborCare-Medisco, Inc.    f/k/a Medisco Pharmacies, Inc.                               |  | California              
|NeighborCare-ORCA, Inc.    f/k/a White, Mack & Wart, Inc. d/b/a Propac Pharmacy            |  | Oregon                  
|NeighborCare-TCI, Inc.                                                                     |  | Delaware                




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|Entity Name                                                                       |  | State of    Organization
|--------------------------------------------------------------------------------- |  | ------------------------
|                                                                                  |  |                         
|Professional Pharmacy    Services, Inc.                                           |  | Maryland                
|SNALF, Inc.                                                                       |  | Delaware                
|Tidewater Healthcare    Shared Services Group, Inc. The f/k/a TW Acquisition Corp |  | Pennsylvania            




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Exhibit 23  Consent of Independent Auditors





The Board of Directors   NeighborCare, Inc.:





We consent to the incorporation  by
    reference in the registration statement on Form S3 (No. 333101004),
and the registration statement on Form S8 (No. 333111068)  of NeighborCare,
Inc. of our reports dated December 1, 2003, except as to note 14, which is as
of December 16, 2003,
with respect to the consolidated balance sheets of NeighborCare, Inc. and subsidiaries
(the  Company) as of September 30, 2003 and 2002, and the related
consolidated statements of operations, shareholders equity (deficit), and
cash flows for each of the years in the threeyear period ended September
30, 2003, and the related financial statement schedule, which reports appear
in the September 30, 2003 annual report on Form 10K of NeighborCare, Inc.





Our reports contain an  explanatory paragraph that refers to the Companys adoption of the provisions  of Statement of Financial Accounting Standards No. 145 with regard to  accounting for extinguishment of debt effective October 1, 2002.





In addition, our reports  contain an explanatory paragraph that states, on October 2, 2001 the Company  consummated a Joint Plan of Reorganization (the Plan) which had been  confirmed by the United States Bankruptcy Court. The Plan resulted in a change  in ownership of the Company and, accordingly, effective September 30, 2001 the  Company accounted for the change in ownership through freshstart reporting.  As a result, the consolidated information prior to September 30, 2001 is  presented on a different cost basis than that as of and subsequent to September  30, 2001 and, therefore, is not comparable.





| | /s/ KPMG LLP
| | ------------




Philadelphia, Pennsylvania  December 23, 2003





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Exhibit 31.1  CERTIFICATIONS PURSUANT TO  SECTION 302 OF THE SARBANESOXLEY ACT OF 2002





I, John J. Arlotta, Chief  Executive Officer of NeighborCare, Inc., certify that:





|1. | I have    reviewed this annual report on Form 10-K of NeighborCare, Inc. and subsidiaries;                                                                                                                                                                                                                                             
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                        
|2. | Based on my    knowledge, this annual report does not contain any untrue statement of a    material fact or omit to state a material fact necessary to make the    statements made, in light of the circumstances under which such statements    were made, not misleading with respect to the period covered by this annual    report;
|   |                                                                                                                                                                                                                                                                                                                                        
|3. | Based on my    knowledge, the financial statements, and other financial information included    in this annual report, fairly present in all material respects the financial    condition, results of operations and cash flows of the registrant as of, and    for, the periods presented in this annual report;                      
|   |                                                                                                                                                                                                                                                                                                                                        
|4. | The    registrants other certifying officer and I are responsible for establishing    and maintaining disclosure controls and procedures (as defined in Exchange    Act Rules 13a-15e and 15d-15(e)) for the registrant and have:                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | a)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | c)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | d)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|5. | The    registrants other certifying officer and I have disclosed, based on our most    recent evaluation of internal control over financial reporting, to the    registrants auditors and the audit committee of registrants board of    directors (or persons performing the equivalent functions):                                
|   |                                                                                                                                                                                                                                                                                                                                        
|   | a)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     




Date: December 24, 2003





|               
|---------------
|John J. Arlotta




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Exhibit 31.2  CERTIFICATIONS PURSUANT TO  SECTION 302 OF THE SARBANESOXLEY ACT OF 2002





I, Richard W. Sunderland, Jr.,  Chief Financial Officer of NeighborCare, Inc., certify that:





|1. | I have    reviewed this annual report on Form 10-K of NeighborCare, Inc. and    subsidiaries;                                                                                                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                        
|2. | Based on my    knowledge, this annual report does not contain any untrue statement of a    material fact or omit to state a material fact necessary to make the    statements made, in light of the circumstances under which such statements    were made, not misleading with respect to the period covered by this annual    report;
|   |                                                                                                                                                                                                                                                                                                                                        
|3. | Based on my    knowledge, the financial statements, and other financial information included    in this annual report, fairly present in all material respects the financial    condition, results of operations and cash flows of the registrant as of, and    for, the periods presented in this annual report;                      
|   |                                                                                                                                                                                                                                                                                                                                        
|4. | The    registrants other certifying officer and I are responsible for establishing    and maintaining disclosure controls and procedures (as defined in Exchange    Act Rules 13a-15e and 15d-15(e)) for the registrant and have:                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | a)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | c)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | d)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|5. | The    registrants other certifying officer and I have disclosed, based on our most    recent evaluation of internal control over financial reporting, to the    registrants auditors and the audit committee of registrants board of    directors (or persons performing the equivalent functions):                                
|   |                                                                                                                                                                                                                                                                                                                                        
|   | a)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     




Date: December 24, 2003





|/s/ |                           
|--- | --------------------------
|    |                           
|    | Richard W. Sunderland, Jr.




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Exhibit 32.1  CERTIFICATIONS PURSUANT TO 18  U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANESOXLEY  ACT OF 2002





In connection with the filing  of the NeighborCares Annual Report on Form 10K for the period ended September  30, 2003 with the Securities and Exchange Commission on the date hereof (the  Report), I, John J. Arlotta, the Chief Executive Officer of NeighborCare,  Inc, certify, pursuant to 18 U.S.C. Section. 1350 as adopted pursuant to  Section 906 of the SarbanesOxley Act of 2002, that:





|1. | The Report    fully complies with the requirements of section 13(a) or 15(d) of the    Securities Exchange Act of 1934; and                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           
|2. | The    information contained in the Report fairly presents, in all material    respects, the financial condition and results of operations of the Company.




Date: December 24, 2003





|/s/               
|------------------
|                  
|John J.    Arlotta




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Exhibit 32.2  CERTIFICATIONS PURSUANT TO TO  18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANESOXLEY  ACT OF 2002





In connection with the filing  of
    the NeighborCares Annual Report on Form 10K for the period ended
    September 30, 2003 with the Securities and Exchange Commission on the date
    hereof (the  Report), I, Richard W. Sunderland, Jr., the Chief
    Financial Officer of NeighborCare, Inc, certify, pursuant to 18 U.S.C. Section
    1350
    as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002,
    that:





|1. | The Report    fully complies with the requirements of section 13 (a) or 15(d) of the    Securities Exchange Act of 1934; and                              
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           
|2. | The information    contained in the Report fairly presents, in all material respects, the    financial condition and results of operations of the Company.




Date: December 24, 2003





|/s/                          
|-----------------------------
|                             
|Richard W.    Sunderland, Jr.




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