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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

|(Mark One)                                                         |                                                                                         
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                                                  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended September 30, 2004                      
|or                                                                
|o                                                                  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                  to

Commission File Number: 000-33217

NEIGHBORCARE, INC.(Exact name of registrant as specified in its charter)

|Pennsylvania(State or other jurisdiction of incorporation or organization)                     |  | 06-1132947(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|601 East Pratt Street, 3rd Floor
Baltimore, Maryland(Address of principal executive offices)   |  | 21202(Zip code)                               
|(410) 528-7300(Registrant's telephone number, including area code)                            
|N/A(Former name, former address and former fiscal year, if changed since last report)         
|Securities registered pursuant to Section 12(b) of the Act:                                   
|NONE                                                                                          
|Securities registered pursuant to Section 12(g) of the Act:                                   
|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    ý            NO    o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A.

YES    ý            NO    o

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant is $907,817,957 (1). As of
December 1, 2004, 44,114,529 shares of the registrant's common stock were outstanding and 259,522 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    ý            NO    o

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    ý            NO    o

DOCUMENTS INCORPORATED BY REFERENCE

NONE

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INDEX



|CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|---------------------------------------------------------
|RISK FACTORS                                             
|PART I                                                   
|ITEM 1:                                                  
|ITEM 2:                                                  
|ITEM 3:                                                  
|ITEM 4:                                                  
|ITEM 4A:                                                 
|PART II                                                  
|ITEM 5:                                                  
|ITEM 6:                                                  
|ITEM 7:                                                  
|ITEM 7A:                                                 
|ITEM 8:                                                  
|ITEM 9:                                                  
|ITEM 9A:                                                 
|ITEM 9B:                                                 
|PART III                                                 
|ITEM 10:                                                 
|ITEM 11:                                                 
|ITEM 12:                                                 
|ITEM 13:                                                 
|PART IV                                                  
|ITEM 14:                                                 
|ITEM 15:                                                 

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CAUTIONARY STATEMENT 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:



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:



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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.

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RISK FACTORS

Set forth below are risks that we believe are material to our business operations. Additional risks and uncertainties not known to us or that we currently deem immaterial may
also impair our business operations.

Risks Relating to Our Business

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, 2004, approximately 46% of our pharmacy services revenues 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 efforts to change the federal funding formula to limit federal expenditures to states under their Medicaid program could negatively affect our business.

Continuing efforts to contain healthcare costs may reduce our future revenue and operating income.

Our sales and profitability are affected by the efforts of private and public healthcare payors to contain or reduce the cost of healthcare by lowering
reimbursement rates, limiting eligibility or the scope of covered services, and negotiating reduced or 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 legislative 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
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, referred to as the Medicare Modernization Act or MMA, enacted on December 8, 2003, is likely to have a
significant impact on long-term care pharmacy services. Currently, we provide services to long-term care clients

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and
are reimbursed by private pay, Medicare and Medicaid. Under the MMA, effective January 1, 2006, prescription drug coverage for certain Medicare beneficiaries known as dual eligibles
(Medicare beneficiaries who are also eligible for Medicaid) will be shifted from Medicaid to Medicare. Under Medicare, the prescription drug benefit will be provided through new, private,
at-risk, regional Prescription Drug Plans, referred to as PDPs, or managed care type "Medicare Advantage" plans that offer the new Medicare prescription drug benefit, referred to as
MA-PD Plans.

Within
broad parameters established by the legislation, PDPs and MA-PD Plans have discretion to design their drug benefit packages and to design and implement utilization controls such
as formularies, prior authorization and mandatory generic substitution. The Secretary of the Department of Health and Human Services, referred to as DHHS, is prohibited by law from interfering with
the price negotiations between drug plan sponsors, manufacturers and pharmacies. The MMA requires that plans enroll all beneficiaries without discrimination. In enacting the MMA, Congress believed
that competition among private plans would drive down drug prices. The MMA covers most prescription drugs, insulin and certain insulin supplies and approved vaccines. However, certain drugs are
excluded from coverage under Part D including several drugs that are commonly prescribed for nursing home and other long-term care residents including barbiturates and
benzodiazepines.

Shifting
prescription drug coverage from the Medicaid program to the Medicare programs affects approximately 75% of all nursing home residents and potentially impacts approximately 46%
of our revenues. Since PDPs will negotiate their own reimbursement structure, PDPs may have a financial incentive to drive lower payment rates for pharmacy services that may substantially affect our
margins. Additionally, excluding certain drugs commonly prescribed in nursing homes from coverage under Part D also potentially adversely affects our business. DHHS is in the process of
promulgating rules implementing the MMA.

Because
of the potential effect of the MMA on long-term care pharmacy services, we have submitted comments to the proposed regulations. Also, DHHS is undertaking a
Congressionally mandated study of the MMA effects on long-term care pharmacy's role in promoting quality of care in long-term care facilities. Until the study and rules are
finalized, numerous regulatory and policy issues that affect long-term care pharmacies remain unresolved, including how many and which plans will be operating in each region, or whether
Congress may delay implementation of the law or make other changes to address significant concerns being raised by various constituencies. As a result, the precise nature of the MMA's impact remains
unclear and depends on a variety of factors that cannot be fully anticipated or controlled. Given such uncertainty regarding the MMA, we cannot provide assurances regarding our ability to be
competitive in this market.

We
have described only certain provisions of the MMA 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.

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, referred to as CMS, 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 our lowest charge to other consumers in the state. Since 2000,
federal Medicaid requirements establishing payment caps on certain drugs have been periodically revised. Because states are losing a significant portion of their leverage to

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Medicare
under the MMA, states are pursuing other strategies to manage cost, such as managing prescription benefits while negotiating lower prices, entering into multi-state buying pools, and
directing patients to generic drugs. The MMA phase out of the use of average wholesale price, or AWP, related to certain outpatient pharmaceutical drugs and biologicals currently reimbursed under
Medicare Part B 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 prescription drug costs not otherwise covered under Medicare Part A or B, 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, gross profit margins could
deteriorate. 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. Mail order pharmacies, some of which are owned by pharmacy benefit

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managers,
or PBMs, are competing to an increasing extent with our community-based retail pharmacies and our institutional pharmacies in assisted living facilities. This trend may accelerate if these
PBMs become PDPs under the Medicare Modernization Act.

We face intense competition in our business.

We compete with a variety of other companies in providing pharmacy services, some 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.

Omnicare, Inc.'s tender offer to purchase all of our outstanding common stock may have an adverse effect on our business and results of operations.

On May 24, 2004, Omnicare, Inc. announced its intention to purchase all of the outstanding shares of our common stock for $30 per share in cash. On
June 3, 2004, Omnicare, Inc. announced its intention to commence a tender offer to purchase all of the outstanding shares of our common stock for $30 per share in cash. The tender offer
formally commenced on June 4, 2004 and has been extended on several occasions, most recently to January 7, 2005. This offer may have an adverse effect on our business and results of
operations. For example, the tender offer may impact our ability to attract and retain customers, management personnel and pharmacy professionals. We will also continue to incur advisory fees and
other expenses of this tender offer which will negatively impact our results of operations.

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 of GHC on December 1, 2003. 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.

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

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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 and a corporate integrity program that we believe are sufficient to ensure that our facilities will operate in substantial compliance with the
law. 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, no system of policies and procedures, audit and
enforcement can guarantee that a small number of employees will not commit inappropriate acts.

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, referred to as HIPAA, was enacted first, to ensure that employees can retain and at times transfer their

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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 Secretary of Health and Human Services has adopted pursuant to HIPAA 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 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. Failure to comply with HIPAA 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 97% 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.

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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 have made, and may continue to make, acquisitions that could subject us to a number of operating risks.

We have made and anticipate that we may continue to 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:



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.

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

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.

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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 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 and the ability of our subsidiaries to:



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.

Provisions in Pennsylvania law and anti-takeover provisions of our corporate charter documents could deter, delay or prevent another company from acquiring control
of NeighborCare.

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.

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



In
addition, we have a shareholder rights plan which has the practical effect of making it extremely difficult for any person or group to acquire a significant interest in our common
stock, whether by tender offer or otherwise, without advance approval of our Board of Directors. One of the conditions of the Omnicare tender offer is the removal or amendment of the shareholder
rights such that Omnicare's acquisition of our stock would not trigger the provisions of the shareholder rights plan. To date, our Board of Directors has not agreed to such removal or amendment.

The
overall effect of the foregoing provisions may be to deter future tender offers or other offers to acquire us or our shares, or to delay or prevent any such offer that may be made or
any proposals to change the control or directors of NeighborCare, including transactions in which our stockholders might otherwise receive a premium over the market price of the common stock at that
time. In addition, these provisions may enable the directors to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.

Risks Relating to the Spin-off of GHC

We have limited history operating as an entity without our eldercare businesses.

Prior to the spin-off, 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 we nor GHC have an extended
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.

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

Prior to the spin-off, our operations were conducted as part of a consolidated entity with GHC and not as a separate entity. Accordingly, the
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.

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Furthermore,
our pre-spin-off 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 qualified
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 agreed 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.

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, some of our officers and certain members of our Board of Directors received GHC stock in the
spin-off distribution to our shareholders. In addition, we and 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 former 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.

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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.

Subsequent to December 1, 2003, sales to facilities of GHC, our largest customer, represented 11% of our total revenues for the year ended
September 30, 2004. As a result of the spin-off,
GHC 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.

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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, which we refer to as the "spin-off," of the common stock of Genesis HealthCare Corporation, or "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 U.S. 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 "Management's Discussion and Analysis of Financial Condition and Results of
Operations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 and "GHC" refers to Genesis HealthCare Corporation and its subsidiaries.

Subsequent
to the spin-off, we have reclassified the operations of GHC as discontinued in our consolidated financial statements for all periods presented. We provide pharmacy
services nationwide that serve approximately 263,000 institutional beds in long-term care settings. We also operate 32 community-based retail pharmacies and a group purchasing
organization. The business description below of NeighborCare is as it existed after the spin-off.

Description of Business

We are the second largest provider of institutional pharmacy services in the United States. As of September 30, 2004, we provided pharmacy services for
approximately 263,000 beds in long-term care facilities in 32 states and the District of Columbia. Our pharmacy operations consist of 66 institutional pharmacies (five are jointly-owned),
32 community-based professional retail pharmacies (two are jointly-owned) and 19 on-site pharmacies which are located in customers' facilities and serve only customers of that facility. In
addition, we operate 17 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.

Our
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 our internal
organization. We have two reportable segments: institutional pharmacy and corporate and other, as described below.



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

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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 nursing facility client 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 nursing facility
client 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
97% of our institutional pharmacy revenues for the year ended September 30, 2004 consisted of the sale of prescription and non-prescription
pharmaceuticals. At September 30, 2004, we had contracts to provide services to approximately 263,000 residents in long-term care facilities in 32 states and the District of
Columbia. Many of these contracts, as is typical in the industry, are for a period of one year but can be terminated by either party for any reason upon 30-60 days written notice.
For the year ended September 30, 2004, other than sales to facilities owned or leased as of December 1, 2003 by GHC (11% of institutional pharmacy revenue and 10% of beds served) and
Manor Care (12% of institutional pharmacy revenue and 10% 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 effective through
November 30, 2013. In addition, we have a pharmacy services agreement with Manor Care which expires in 2006.

We
obtain approximately 97% 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.

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

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services
to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. Our consulting services include:





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.



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).



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:

2004

2003

2002Medicaid

44%

42%

40%Long-term care facilities

29%

30%

34%Third-party payor

15%

16%

14%Private

10%

10%

10%Medicare Part B

2%

2%

2%Totals

100%

100%

100%




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 four 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 Advantage or Medicare Part C. Effective January 1, 2006, Medicare Part D will provide coverage for prescription drugs that are not
otherwise covered by Medicare Part A or B. Under Medicare Part B, we are entitled to payment for products that replace a bodily function (e.g., ostomy supplies), home medical equipment
and supplies, some infusion therapy 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 CMS 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.

Any
future changes in Medicaid reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels, the timing of processing of payments,
or the increased use of managed care delivery systems could adversely affect our business. The annual increase in the federal share could vary from state to state based on a variety of factors, which,
if

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ultimately
signed into law, could further impact our business. Additionally, effective January 1, 2006, as a result of the MMA, the Medicaid program will cease covering prescription drugs for
beneficiaries who are eligible for both Medicare and Medicaid. Instead, these residents will be covered by private, at-risk regional PDPs or MA-PD plans established under the
authority of the MMA and payment rates will be established through negotiations with these new plans. If payment rates under Medicare for prescription drugs are lower than Medicaid payment rates,
these changes could adversely affect our business. See "Laws Affecting Revenues."

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.



Congress has enacted laws directly affecting our business and the nursing and other 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Risks Relating to our Business."

The
recently enacted MMA is likely to have a significant impact on our business or the business of our primary customers, nursing facilities. Specifically, the MMA 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 Medicare Part B using the "average wholesale price" methodology. For these drugs and biologicals, the legislation shifts the payment methodology
from average wholesale price to "average sales price." 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 MMA also establishes a new federal prescription drug benefit. The new drug benefit increases federal Medicare resources for prescription drugs in 2006, but
also ends Medicaid prescription coverage for most nursing home residents. Finally, the MMA 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 MMA 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 our 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 on the industry. DHHS has not yet finalized regulations implementing the MMA and is in the process of conducting a study on
long-term care pharmacies to help inform the rule-making process. We will continue to work closely with CMS directly, as well as through the Long Term Care Pharmacy Alliance as
discussed below, to offer its expertise in pharmaceutical care for the elderly.

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Until
January 1, 2006, the reimbursement rates for pharmacy services under Medicaid will continue to be determined on a state-by-state basis subject to
review by CMS 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 participated in the efforts to review and interact with CMS 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 MMA are expected to provide some fiscal 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 and the prescription drug benefit 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 Long Term Care Pharmacy Alliance, referred to as the 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 MMA, expanded Medicare coverage of 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.

Government Regulation



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.

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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 and adopt and implement changes in our policies and procedures, as necessary, to maintain compliance with all applicable laws and regulations.



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.

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.

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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:



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.

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
DHHS 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. DHHS 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 "Revenue Sources."



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.

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

DHHS
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:



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 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.

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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 designed to train employees to prevent, detect and resolve any conduct or action that
fails to satisfy 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 the Audit and Compliance
Committee of our Board of Directors.

We
established the Corporate Integrity Program hotline, which offers a live toll-free number (800-738-3059) available 24 hours a day to all of
our employees to report non-compliance issues, including any alleged privacy violations under HIPAA and inappropriate accounting and auditing practices. 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
compliance committee was established to ensure a mechanism exists for us to monitor compliance issues. The compliance committee members are senior members of the human resources,
legal, internal audit and operations departments.

Periodically,
we receive information from DHHS 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 DHHS 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, 2004, we employed approximately 6,100 people, including approximately 5,000 full-time and 1,100 part-time
employees. Approximately 17% of these employees are pharmacists or nurses.

We
currently have one facility that is covered by two 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Risks Relating to Our Business. 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.

We
maintain a pharmacist scholarship program to provide financial assistance to 3rd and 4th year pharmacy school students in return for future service terms. In addition, we offer
tuition assistance programs to our internal associates that enroll in an accredited educational program in return for future service terms commensurate with the tuition reimbursed.

23

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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 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.

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 second largest provider of institutional pharmacy services in the United States, but our
largest competitor has sales of more than twice ours. 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Risks Relating to Our Business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 experience beyond an aggregate level.

We
also carry director and officer liability insurance in addition to fiduciary liability insurance.

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

24

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Other



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.



On October 2, 2001, the effective date of our reorganization, 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 "Management's Discussion and Analysis of Financial Condition and Results of OperationsCertain
Transactions and Events" 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.

Available Information

Our Internet address is www.NeighborCare.com. Prior to December 1, 2003, we made available free of charge on www.ghv.com and, after 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.
601 East Pratt Street, Third Floor
Baltimore, MD 21202
Attention: Investor Relations
Telephone: (410) 528-7300

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.

25

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ITEM 2:    PROPERTIES

Pharmacy Sites of Service

The following table provides information by state as of December 1, 2004 regarding the pharmacy service locations owned or leased by our NeighborCare
pharmacy operations.

|               |        |   |    | Corporate and Other |    |    |    |   
|-------------- | ------ | - | -- | ------------------- | -- | -- | -- | --
|
|Maryland       |        | 5 |    | 6                   |    | 26 |    | 37
|New Jersey     |        | 4 |    | 1                   |    | 1  |    | 6 
|Pennsylvania   |        | 5 |    | 3                   |    | 3  |    | 11
|Virginia       |        | 4 |    | 2                   |    | 2  |    | 8 
|Florida        |        | 4 |    | 1                   |    |   |    | 5 
|California     |        | 4 |    | 1                   |    |   |    | 5 
|Indiana        |        | 3 |    |                    |    |   |    | 3 
|Wisconsin      |        | 4 |    |                    |    |   |    | 4 
|Massachusetts  |        | 2 |    | 1                   |    |   |    | 3 
|Connecticut    |        | 2 |    | 1                   |    |   |    | 3 
|Ohio           |        | 3 |    |                    |    |   |    | 3 
|Texas          |        | 3 |    |                    |    |   |    | 3 
|Rhode Island   |        | 1 |    |                    |    |   |    | 1 
|West Virginia  |        | 2 |    |                    |    |   |    | 2 
|New Hampshire  |        | 1 |    |                    |    |   |    | 1 
|Oregon         |        | 1 |    |                    |    |   |    | 1 
|Colorado       |        | 1 |    |                    |    |   |    | 1 
|Oklahoma       |        | 1 |    |                    |    |   |    | 1 
|North Carolina |        | 3 |    |                    |    |   |    | 3 
|New York       |        | 2 |    | 1                   |    |   |    | 3 
|Illinois       |        | 2 |    |                    |    |   |    | 2 
|Michigan       |        | 1 |    |                    |    |   |    | 1 
|Kansas         |        | 1 |    |                    |    |   |    | 1 
|Iowa           |        | 2 |    |                    |    |   |    | 2 
|Washington     |        | 1 |    |                    |    |   |    | 1 
|Kentucky       |        | 1 |    |                    |    |   |    | 1 
|Missouri       |        | 1 |    |                    |    |   |    | 1 
|South Carolina |        | 1 |    |                    |    |   |    | 1 
|Nebraska       |        | 1 |    |                    |    |   |    | 1 
|               |        |   |    |                     |    |    |    |   
|               | Totals |   | 66 |                     | 17 |    | 32 |   
|               |        |   |    |                     |    |    |    |   

In
addition to the locations listed in the table above, we also operate 19 on-site pharmacies which are located in customers' facilities and serve only customers of that
facility.

All
but three 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.

26

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ITEM 3:    LEGAL PROCEEDINGS

We are a party to litigation arising in the ordinary course of business. We accrue for legal proceedings when an unfavorable outcome is probable and reasonably
estimable. With exception to the discussion which follows, we do not believe the results of such litigation, even if the outcome is unfavorable, would have a material adverse effect on our financial
position. While the outcome of the cases discussed below could have a material effect if decided adversely, our management considers this result unlikely. 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 us 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 United States 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 United States Bankruptcy Court granted our 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 United States 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 United States District Court for several reasons, including that the
plaintiff was unlikely to succeed on the merits. When the injunction was denied by the United States 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 United States District Court denied the plaintiff's appeal and upheld the summary judgment decision rendered by the United
States Bankruptcy Court. The Third Circuit Court of Appeals affirmed the decision of the District Court on October 12, 2004.

In
light of the Third Circuit Court decision, we expect the New Jersey District Court case to be dismissed.

Haskell et al v. Goldman Sachs & Co. et al.

This action was brought January 27, 2004 in the Supreme Court of New York, County of New York, by 275 former investors who collectively held over
$205 million in subordinated debentures prior to the filing of our Chapter 11 bankruptcy petition in 2000. The case was subsequently removed to federal court and it is now pending in the U.S.
Bankruptcy Court for the District of Delaware. The plaintiffs allege fraud and grossly negligent misrepresentation by the defendants in connection with the Bankruptcy Court's approval of our plan of
reorganization confirmed by the Bankruptcy Court in 2001, canceling the subordinated debentures. The defendants, in addition to us, are Goldman Sachs & Co., Mellon Bank, N.A., Highland Capital
Management, LP, and George V. Hager, Jr., our chief financial officer during the period in question. The plaintiffs seek to recover $200 million plus interest costs and fees. The defendants
have made a motion to dismiss, which is currently pending before the U.S. Bankruptcy Court. Mellon Bank N.A. has filed a cross-claim for indemnification against us. We filed a motion to dismiss and
Mellon filed a motion for summary judgement, both of which are also pending before the U.S. Bankruptcy Court.

27

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Freeport Partners, LLC v. Arlotta et al.

This action was brought June 8, 2004, against us and our directors in the Supreme Court of New York, County of New York, as a purported class action
alleging that our Board of Directors breached their fiduciary duties to the plaintiff and the class and aided and abetted such breaches in connection with a proposal by Omnicare, Inc. to
acquire all of our outstanding common stock.

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 2004.

ITEM 4A:    EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to our executive officers:

|Name                 |  | Age |  | Position                                                                          
|-------------------- |  | --- |  | ----------------------------------------------------------------------------------
|John J. Arlotta      |  | 55  |  | Chairman, President and Chief Executive Officer                                   
|Robert A. Smith      |  | 56  |  | Chief Operating Officer                                                           
|John L. Kordash      |  | 62  |  | Executive Vice President and Assistant to the Chairman and Chief Executive Officer
|Richard W. Hunt      |  | 50  |  | Senior Vice President and Chief Financial Officer                                 
|John F. Gaither, Jr. |  | 55  |  | Senior Vice President, General Counsel and Secretary                              

John
J. Arlotta has served as our chairman, president and chief executive officer since December 2003. From July 2003 to December 2003, Mr. Arlotta served as
our vice chairman with primary responsibility for the NeighborCare business. Prior to joining us, Mr. Arlotta served as a consultant to Caremark Rx, Inc., a pharmaceutical services
provider, from February 2002 to July 2003. Mr. Arlotta was president and chief operating officer of Caremark Rx, Inc. from May 1998 to February 2002 and chief
operating officer of Caremark Rx, Inc. from September 1997 to May 1998.

Robert
A. Smith has served as our chief operating officer since December 2003. From May 2001 to December 2003, Mr. Smith served as president and chief
operating officer of NeighborCare and in
December 2003, following the spin-off of GHC, Mr. Smith became our chief operating officer. Mr. Smith served as executive vice president and chief operating officer of
NeighborCare from November 1999 to May 2001. 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 chairman and chief executive officer since December 2003. From July 2003 to
December 2003, Mr. Kordash served as our executive vice president and assistant to the vice chairman. 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. Hunt has served as our senior vice president and chief financial officer since July 2004. From February 2004 to July 2004, Mr. Hunt served as chief
executive officer of Gresham Holdings, LLC, a consulting services firm. From August 2000 until February 2004, Mr. Hunt served as senior vice president and chief financial officer
of Global Healthcare Exchange, LLC, a supplier of business-to-business procurement solutions for the healthcare industry. From 1982 to 2000, Mr. Hunt served in various
financial positions of increasing responsibility with Baxter International, Inc., a leading manufacturer and marketer of healthcare products and services.

28

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John
F. Gaither, Jr. has served as our senior vice president, general counsel and secretary since 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.

29

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PART II

ITEM 5:    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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". The following table indicates, for each of the quarters in the fiscal years ended September 30, 2004 and 2003, the range of high and low closing prices of our common stock as
reported on the Nasdaq National Market.

Fiscal Year Ended

High

LowSeptember 30, 2004First Quarter

$
31.65

$
18.79Second Quarter


25.94


20.12Third Quarter


32.02


17.02Fourth Quarter


31.23


24.44September 30, 2003First Quarter

$
17.51

$
12.79Second Quarter


16.79


13.01Third Quarter


17.90


14.35Fourth Quarter


24.21


17.55


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. 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.

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 December 1, 2004, there were 6,438 shareholders of record of our common stock. As of
December 1, 2004, 259,522 shares of our common stock were reserved for issuance to the unsecured claimants.

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 "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources." Management does not anticipate the payment of cash dividends on our common stock in the foreseeable future.

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.

30

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ITEM 6:    SELECTED FINANCIAL DATA

The selected financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes thereto included elsewhere in this report. Our consolidated statement of operations data for the years ended September 30,
2004, 2003, and 2002 and our consolidated balance sheet data as of September 30, 2004 and 2003 have been derived from our audited consolidated financial statements included elsewhere in this
report which have been audited by KPMG LLP, whose report is included elsewhere in this report. Our statement of operations data for the years ended September 30, 2001 and 2000 and our balance
sheet data as of September 30, 2002, 2001, and 2000 have been derived from our audited consolidated financial statements, which are not presented in this report.

Upon
emergence from Chapter 11 bankruptcy proceedings on October 2, 2001, our subsidiaries adopted the American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," also referred to as "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 2001 joint plan of reorganization were implemented, assets and
liabilities were adjusted to their estimated fair values and our accumulated owner's deficit was eliminated. Any financial information labeled "predecessor company" refers to periods prior to the
adoption of fresh-start reporting, while those labeled "successor company" refers to periods following September 30, 2001. Predecessor company and successor company financial information is
generally not comparable and is therefore separated by a vertical line. The lack of comparability within the statement of operations data is most apparent in our capital costs (interest, depreciation
and amortization), as well as with income taxes and debt restructuring and reorganization costs. Predecessor company and successor company balance sheet data are not comparable due to the change in
accounting basis of long-lived assets to estimated fair value and the discharge of liabilities subject to compromise.

On
December 1, 2003, we completed the spin-off of GHC. Under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, "referred to as "SFAS 144," discontinued businesses, including assets held for sale or distributed to shareholders, are removed from the results of continuing
operations. The results of operations of GHC have been reclassified as discontinued operations in the consolidated statements of operations for all periods presented. Businesses sold or closed prior
to the adoption of SFAS 144 continue to be reported in the results of continuing operations.

31

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|                                                         |  | Successor Company |           | Predecessor Company |  
|-------------------------------------------------------- |  | ----------------- | --------- | ------------------- | -
|
|
|Statement of Operations Data(1):                         |  |                   |           |                     |  
|Net revenues                                             |  | $                 | 1,443,583 |                     | $
|Gross profit                                             |  |                   | 306,365   |                     |  
|Gross Margin %                                           |  |                   | 21.2%     |                     |  
|Income (loss) from continuing operations                 |  |                   | (6,592    | )                   |  
|Income (loss) from discontinued operations, net of taxes |  |                   | 8,435     |                     |  
|Net income (loss)                                        |  |                   | 1,843     |                     |  
|Preferred dividends                                      |  |                   |          |                     |  
|Net income available to common shareholders              |  |                   | 1,843     |                     |  
|Ratio of Earnings to Fixed
Charges(2)                    |  |                   |          |                     |  
|Diluted Earnings per Share Data                          |  |                   |           |                     |  
|Income (loss) from continuing operations                 |  | $                 | (0.15     | )                   | $
|Income (loss) from discontinued operations, net          |  |                   | 0.19      |                     |  
|Net income (loss) available to common shareholders       |  |                   | 0.04      |                     |  
|Weighted average shares outstanding                      |  |                   | 42,863    |                     |  
|EBITDA(5)                                                |  |                   | 46,941    |                     |  
|EBITDA %                                                 |  |                   | 3.3%      |                     |  

|                                          |  | Successor Company |         | Predecessor Company |  
|----------------------------------------- |  | ----------------- | ------- | ------------------- | -
|
|
|Balance Sheet Data                        |  |                   |         |                     |  
|Working capital                           |  | $                 | 291,008 |                     | $
|Total assets(3)                           |  |                   | 849,408 |                     |  
|Liabilities subject to compromise         |  |                   |        |                     |  
|Long-term debt, including current portion |  |                   | 262,271 |                     |  
|Redeemable preferred stock(4)             |  |                   |        |                     |  
|Shareholders' equity (deficit)(3)         |  |                   | 386,780 |                     |  

---

32

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| |  |                                                                     |  | Fiscal year ended September 30, |       
| |  | ------------------------------------------------------------------- |  | ------------------------------- | ------
|
| |  | EBITDA Reconciliation                                               |  |                                 |       
| |  | Net income available to common shareholders                         |  | $                               | 1,843 
| |  | Subtract:                                                           |  |                                 |       
| |  | Income from discontinued operations, net                            |  |                                 | 8,435 
| |  | Add back:                                                           |  |                                 |       
| |  | Preferred dividends                                                 |  |                                 |      
| |  | Minority interest and equity in income of unconsolidated affiliates |  |                                 | 4,457 
| |  | Income tax provision (benefit)                                      |  |                                 | 3,372 
| |  | Interest expense                                                    |  |                                 | 19,018
| |  | Depreciation and amortization expense                               |  |                                 | 26,686
| |  |                                                                     |  |                                 |       
| |  | EBITDA                                                              |  | $                               | 46,941
| |  |                                                                     |  |                                 |       

| |  |                                       |  | Fiscal year ended September 30, 2004
| |  | ------------------------------------- |  | ------------------------------------
|
| |  | Operating income (loss)               |  | $                                   
| |  | Add back:                             |  |                                     
| |  | Depreciation and amortization expense |  |                                     
| |  |                                       |  |                                     
| |  | EBITDA                                |  | $                                   
| |  |                                       |  |                                     

| |  |                                       |  | Fiscal year ended September 30, 2003
| |  | ------------------------------------- |  | ------------------------------------
|
| |  | Operating income (loss)               |  | $                                   
| |  | Add back:                             |  |                                     
| |  | Depreciation and amortization expense |  |                                     
| |  |                                       |  |                                     
| |  | EBITDA                                |  | $                                   
| |  |                                       |  |                                     

| |  |                                       |  | Fiscal year ended September 30, 2002
| |  | ------------------------------------- |  | ------------------------------------
|
| |  | Operating income (loss)               |  | $                                   
| |  | Add back:                             |  |                                     
| |  | Depreciation and amortization expense |  |                                     
| |  |                                       |  |                                     
| |  | EBITDA                                |  | $                                   
| |  |                                       |  |                                     

33

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ITEM 7:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

NeighborCare, Inc. (formerly named Genesis Health Ventures, Inc.) was incorporated in May 1985 as a Pennsylvania corporation. As used herein,
unless the context otherwise requires, "NeighborCare," the "Company," "we," "our" or "us" refers to NeighborCare, Inc. and subsidiaries and "GHC" refers to Genesis HealthCare Corporation and
its subsidiaries.

We
are the second largest provider of institutional pharmacy services in the United States. As of September 30, 2004, we provided pharmacy services for approximately 263,000 beds
in long-term care facilities in 32 states and the District of Columbia. Our pharmacy operations consist of 66 institutional pharmacies (five are jointly-owned), 32 community-based
professional retail pharmacies (two are jointly-owned) and 19 on-site pharmacies which are located in customers' facilities and serve only customers of that facility. In addition, we
operate 17 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.

Our
institutional pharmacy business provides prescription and non-prescription pharmaceuticals, infusion therapy and medical supplies, services and equipment to the elderly,
chronically ill and disabled in long-term care facilities, including skilled nursing facilities, assisted living facilities, residential and independent living communities and other
institutional healthcare facilities. The pharmacy services provided in these settings are tailored to meet the needs of the institutional customer. These services include highly specialized packaging
and dispensing systems, computerized medical records processing and 24-hour emergency services. We also provide pharmacy consulting services to assure proper and effective drug therapy,
including monitoring and reporting on prescription drug therapy and assisting the facility in compliance with applicable federal and state regulations.

Our
community-based professional pharmacies are retail operations branded under the NeighborCare® name that are 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 pharmacists.

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 who 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, total parenteral nutrition, chemotherapy and pain management).

We
also own and operate Tidewater Healthcare Shared Services Group, Inc., or Tidewater, 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.

On
December 1, 2003, we completed the distribution, or the spin-off, of the common stock of GHC, reported as our inpatient services division. On December 2,
2003, we changed our name to NeighborCare, Inc. The spin-off was effected by way of a pro rata tax-free distribution of the common stock of GHC to holders of our common
stock on December 1, 2003 at a rate of 0.5 shares of GHC stock for each share of our common stock owned as of October 15, 2003. On November 4, 2003, in anticipation of the
spin-off, we refinanced all of our remaining long-term debt through the issuance of $250 million aggregate principal amount of our 6.875% senior subordinated notes due
2013 and

34

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through
proceeds received from GHC in accordance with its issuance in October 2003 of $225 million aggregate principal amount of 8% senior subordinated notes due 2013.

Certain Transactions and Events

Change in Strategic Direction and Objectives

Since our inception, our principal business plan was to build networks of skilled nursing and assisted living centers in concentrated geographic markets and
broaden our array of higher margin specialty medical services; principally institutional pharmacy and rehabilitation services. By offering a broad array of services, we sought to create an integrated
delivery system connecting our eldercare centers and ancillary service capabilities to hospitals, physicians, managed care plans and other providers in a seamless delivery network. Through
acquisitions of both eldercare facilities and pharmacy operations in the 1990's, we fulfilled our stated business plan and operated under the mission to "redefine how eldercare is delivered."

In
2000, we and certain of our direct and indirect subsidiaries filed for voluntary relief under Chapter 11 of the United States Code with the United States Bankruptcy Court for the
District of Delaware. See "Reorganization." We emerged from bankruptcy in late 2001 and constituted a new Board of Directors who evaluated our current business portfolio and identified
strategies to optimize the performance of our operations. The new Board of Directors initially decided to focus on expanding
the growth and margins of our pharmacy services segment and to maintain the current market position of our inpatient services segment. This was primarily the result of our inpatient services segment
suffering from significant cuts in funding sources, nursing labor cost increases in excess of inflation, intensified regulatory oversight and intervention and increases in the cost of medical
malpractice insurance. The new Board of Directors also implemented a short-term strategy to reduce overhead costs to pursue operational efficiencies with the intent of absorbing the
financial performance of the inpatient services business.

After
the short-term objectives of the Board of Directors were achieved, we continued to evaluate strategic alternatives to enhance shareholder value and improve market
performance. Such evaluations led to exploration of separating our business into two distinct businesses. In late 2002, our Board of Directors retained independent consultants to evaluate the impact
of potentially separating the pharmacy business and the eldercare business by way of a spin-off. By February 2003, our Board of Directors approved a plan to spin-off the
inpatient services segment into a separate legal operating entity under the name Genesis HealthCare Corporation ("GHC"). The spin-off of GHC was completed on December 1, 2003 by way
of a distribution of GHC common stock to shareholders on record as of October 15, 2003 in the form of a tax-free spin-off. See "Distribution of Net Assets
to GHC and Discontinued Operations."



We have incurred costs that are directly attributable to the transformation to a pharmacy-based business and certain of our short-term strategic
objectives. These costs are segregated in the

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consolidated
statements of operations as "Strategic planning, severance and other operating items." A summary of these costs as of, and for the year ended, September 30, 2004 follows (in
thousands):

|                                                                                           |  | Fiscal Year Ended September 30, 2004
|------------------------------------------------------------------------------------------ |  | ------------------------------------
|
|Employee contract termination, transaction completion bonuses, severance and related costs |  | $                                   
|Strategic planning and other items                                                         |  |                                     
|                                                                                           |  |                                     
|Total                                                                                      |  | $                                   
|                                                                                           |  |                                     



Strategic planning, severance and other operating items for the fiscal year ended September 30, 2004 relate primarily to legal, professional and other fees
incurred to complete the spin-off transaction of $16.7 million; costs incurred to extinguish long-term debt and related obligations in connection with the
spin-off of $14.5 million; costs pursuant to the termination provisions of employment contracts and transaction completion bonuses with NeighborCare and GHC executives of
$10.3 million; and severance and related costs incurred pursuant to our corporate and regional consolidation in fiscal 2004 of $4.1 million.

Included
in the debt extinguishment costs of $14.5 million are costs to write-off unamortized deferred financing costs of $5.9 million, consent fees required to
eliminate our commitments under GHC debt of $5.0 million and the settlement of interest rate swap arrangements related to debt extinguishment of $3.6 million. The majority of the amounts
accrued at September 30, 2004 are expected to be paid during the first quarter of fiscal 2005.



In fiscal 2003, we incurred strategic planning, severance and other operating items of approximately $27.2 million, which included: severance and related
costs for a former vice chairman of $4.8 million; expense associated with the offer and exchange of all outstanding stock options as of April 1, 2003 of $7.2 million; strategic
consulting expense of $12.9 million; and certain executive compensation of $2.2 million. Executive compensation related to the recruitment of John J. Arlotta as our new chief executive
officer and incentive compensation paid to Robert H. Fish for services rendered during his term as our interim chief executive officer.

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

36

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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 expense relates to consulting services for 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 further development of our strategic plan. 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, ultimately, the legal, accounting and
other professional fees directly attributed to the spin-off transaction.

In
fiscal 2002, we incurred strategic planning, severance and other operating items of approximately $21.5 million, which included: severance and related costs for the termination
of 100 individuals of $3.8 million; severance and related costs for a former chief executive officer and vice chairman of $12.6 million; and strategic consulting expense of
$5.1 million.



On May 24, 2004, Omnicare, Inc. announced its intention to purchase all of the outstanding shares of our common stock for $30 per share in cash. On
May 25, 2004, we announced that our Board of Directors unanimously rejected the proposal. On June 3, 2004, Omnicare, Inc. announced its intention to commence a tender offer to
purchase all of the outstanding shares of our common stock for $30 per share in cash. The tender offer formally commenced on June 4, 2004 and was originally stated to expire on July 7,
2004 but has been subsequently extended, most recently to January 7, 2005. On June 14, 2004, we announced that our Board of Directors had unanimously recommended that shareholders reject
the tender offer and not tender shares pursuant to the offer. Further information relating to the tender offer, including the Board's recommendation and reasons therefore, can be found in our
Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission on June 14, 2004, and in subsequent amendments we have filed with
the Securities and Exchange Commission.

This
offer may have an adverse effect on our business and results of operations. For example, the tender offer may impact our ability to attract and retain customers, management
personnel and pharmacy professionals. We will also continue to incur advisory fees and other expenses which will negatively impact our results of operations.

We
have incurred various expenses as a result of the tender offer, including legal, investment banking and other fees aggregating $18.2 million as of September 30, 2004, of
which $17.5 million remains accrued at September 30, 2004. We anticipate that we will continue to incur additional takeover defense expenses through the duration of the tender offer,
however, the impact of these expenses cannot be reasonably estimated.



Effective December 1, 2003, we completed our plan of disposition of GHC through a distribution of GHC common stock to our shareholders of record as of
October 15, 2003 in the form of a tax-free spin-off as described at "Management's Discussion and Analysis of Financial Condition and Results of
OperationsOverview". Under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), discontinued businesses, including assets
held for sale or distributed to shareholders, are removed from the results of continuing operations and are classified as discontinued operations in the consolidated statements of operations.

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The
following table sets forth the components of income from discontinued operations for the period from October 1, 2003 to December 1, 2003 and for the fiscal years ended
September 30, 2003 and 2002 (in thousands):

2004

2003

2002Net revenues of GHC

$
250,927

$
1,405,122

$
1,349,051Net operating income of GHC


16,450


65,569


132,723Interest expense allocation


2,467


19,937


23,373Income tax expense


5,548


16,900


42,843Net income from discontinued operations

$
8,435

$
28,732

$
66,507


In
accordance with SFAS 144, only those overhead costs that are solely attributable to the discontinued business segments can be allocated to discontinued operations. As a result,
fiscal 2003 and 2002 include overhead expenses that were incurred for the benefit of both our continuing and discontinued operations, which are included in continuing operations. Consolidated interest
expense in periods prior to the spin-off has been allocated to discontinued operations using a basis of net assets of each of the continuing and discontinued operating segments as of
September 30, 2003.

The
assets and liabilities transferred to GHC in connection with the spin-off included those specific to GHC operations and an allocation of corporate assets and liabilities,
which were originally based on estimates. The following table summarizes the net assets and liabilities distributed to GHC on December 1, 2003 (in thousands):

Assets:Accounts receivable, net

$
199,704Other current assets


137,771Property, plant and equipment


693,081Other non-current assets


72,044Total assets

$
1,102,600Liabilities:Accounts payable and accrued expenses

$
121,192Other current liabilities


3,076Long-term debt


274,800Other non-current liabilities


41,113Total liabilities

$
440,181Net assets distributed to GHC before cash

$
662,419Less: net cash received from GHC


(72,731
)Net assets distributed to GHC

$
589,688


In
the fourth quarter of fiscal 2004, we completed the analysis of the corporate assets and liabilities, including the components of deferred income taxes giving effect to the
spin-off of GHC. As a result, we determined that certain deferred tax liabilities, which were initially recorded in connection with the fresh-start reporting upon the emergence of Genesis
Health Ventures, Inc. from bankruptcy on September 30, 2001, had been overstated by $43.7 million. Additionally, we determined that the initial allocation of deferred income taxes
between GHC and us on December 1, 2003 did not reflect the tax effect of distributing tax-basis goodwill to GHC of $89.8 million and thereby underestimated the deferred tax
liabilities attributable to us by $36.2 million. Accordingly, in the fourth quarter of fiscal 2004, we decreased goodwill by $43.7 million, increased the deferred tax liabilities by
$36.2 million, and

38

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increased
the charge to equity for the distribution of net assets of GHC by $79.9 million. This adjustment had no effect on reported operating results and cash flows and no effect on working
capital, other liquidity measures or debt covenants. We considered relevant quantitative and qualitative effects of these adjustments and concluded that such adjustments did not have material effect
on our consolidated financial statements.



In furtherance of the spin-off, we and GHC entered into a 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 contains other agreements governing the relationship between us and GHC thereafter. We or our
subsidiaries, as applicable, and GHC have also entered into certain mutually beneficial commercial arrangements which govern the current relationship between us and GHC.

These
agreements include: (i) a tax sharing agreement which 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; (ii) a transition services agreement which
provides for the provision of
transitional services by GHC to us, including, without limitation, the provision of information systems, tax services, financial systems and bankruptcy claims processing; (iii) a master
agreement for pharmacy, pharmacy consulting and related products and services pursuant to which we provide pharmacy, pharmacy consulting and medical supply products and services to all
long-term care facilities owned or leased by GHC or its affiliates, as amended; (iv) a Tidewater membership agreement which provides the terms and conditions on which Tidewater
provides group purchasing and shared services programs to the skilled nursing facilities and assisted living facilities operated by GHC; (v) an employee benefits agreement which provides for
our and GHC's responsibilities and obligations regarding certain employee compensation, benefit and labor related matters after the spin-off; (vi) a pharmacy benefit management
agreement which provides the terms and conditions under which we provide pharmacy benefit management services, as well as access to retail and mail pharmacy services, to GHC; and (vii) a master
agreement for specialty beds and oxygen concentrators which we provide relating to the provision of certain equipment and related services to GHC's skilled nursing and assisted living facilities.



In the ordinary course of business, we make strategic acquisitions to enhance our geographical market presence and to create beneficial operating synergies
through acquisitions in locations in which we have an existing market presence. On June 1, 2004, we completed the acquisition of The Medicine Centre, LLC by purchasing all outstanding ownership
interests in The Medicine Centre, LLC. Also on June 1, 2004, we acquired all of the outstanding stock of Capitol Home Infusion, Inc. On January 22, 2004, we completed the
acquisition of certain of the assets of Texas Long-Term Care Pharmacy Services, LLC. The aggregate purchase price for these acquisitions was approximately $32.0 million including
liabilities assumed and were accounted for under the purchase method for accounting for business combinations in accordance with SFAS No. 141 "Business Combinations."

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Results
of these completed acquisitions are included in our consolidated statements of operations from the date of acquisition. Our purchase price allocation is as follows (in
thousands):

Accounts receivable, net

$
3,884Inventories


1,789Other current assets


77Property, plant and equipment


937Goodwill


25,084Other intangible assets


3,819Total liabilities assumed


(3,598
)Net assets acquired through acquisitions

$
31,992


Reorganization



As described above, 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:



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On
October 2, 2001, and in connection with the consummation of the Plan, we entered into a senior credit facility agreement.

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.

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.

Arbitration Award

On February 14, 2002, an arbitrator ruled in favor of us on all claims and counterclaims in a 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 us, so that those contracts remained in full force and effect until the end of
September 2004, subsequently extended through January 2006. The arbitrator awarded us $21.8 million in damages, which were recognized in fiscal 2002, for respondents' failure to
allow us to exercise our 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 us $9.1 million in funds representing the amounts withheld during the course of the
Arbitration pursuant to the arbitrator's prior ruling.

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

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of
the patients as well as payor mix among private pay, Medicare and Medicaid will affect our profitability.



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 four 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 Advantage or Medicare Part C. Effective January 1, 2006, Medicare Part D will provide coverage for prescription drugs that are not
otherwise covered by Medicare Part A or B. Under Medicare Part B, we are entitled to payment for products that replace a bodily function (e.g., ostomy supplies), home medical equipment
and supplies, some infusion therapy 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 CMS 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.

Any
future changes in Medicaid reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels, the timing of processing of payments,
or the increased use of managed care delivery systems could adversely affect our business. The annual increase in the federal share could vary from state to state based on a variety of factors, which,
if ultimately signed into law, could further impact our business. Additionally, effective January 1, 2006, as a result of the MMA, the Medicaid program will cease covering prescription drugs
for beneficiaries who are eligible for both Medicare and Medicaid. Instead, these residents will be covered by private, at-risk regional PDPs or MA-PD plans established under
the authority of the MMA and payment rates will be established through negotiations with these new plans. If payment rates under Medicare for prescription drugs are lower than Medicaid payment rates,
these changes could adversely affect our business. See "Laws Affecting Revenues."

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.

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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.



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Risks Relating to our Business."

The
recently enacted MMA is likely to have a significant impact on our business or the business of our primary customers, nursing facilities. Specifically, the MMA 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 Medicare Part B using the "average wholesale price" methodology. For these drugs and biologicals, the legislation shifts the payment methodology
from average wholesale price to "average sales price." 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 MMA also establishes a new federal prescription drug benefit. The new drug benefit increases federal Medicare resources for prescription drugs in 2006, but
also ends Medicaid prescription coverage for most nursing home residents. Finally, the MMA 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 MMA 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 our 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 on the industry. DHHS has not yet finalized
regulations implementing the MMA and is in the process of conducting a study on long-term care pharmacy to help inform the rule-making process. We will continue to work closely
with CMS directly, as well as through the Long Term Care Pharmacy Alliance as discussed below, to offer its expertise in pharmaceutical care for the elderly.

Until
January 1, 2006, the reimbursement rates for pharmacy services under Medicaid will continue to be determined on a state-by-state basis subject to
review by CMS 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 participated in the efforts to review and interact with CMS 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.

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Revisions
made by the MMA are expected to provide some fiscal 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 and the prescription drug
benefit 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 Long Term Care Pharmacy Alliance, referred to as the 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 MMA, expanded Medicare coverage of 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.

Results of Operations

Factors Affecting Comparability of Financial Information

When comparing results for the year ended September 30, 2004 to the results for all prior periods presented, it is important to note that the prior year
results include shared overhead costs. In accordance with SFAS 144, only those overhead costs that are solely attributable to the discontinued business segment can be allocated to discontinued
operations. As a result, prior periods include significant overhead charges that could not be allocated to discontinued operations. See "Certain Transactions and
EventsDistribution of Net Assets to GHC and Discontinued Operations." Additionally, consolidated net revenues do not include the intersegment revenue of $13.0 million in 2004,
$78.0 million in 2003 and $100.5 million in 2002 between us and GHC prior, and up to, the spin-off date.

Reasons for Non-GAAP Financial Disclosure

The following discussion contains non-GAAP financial measures. 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

44

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adjustments
that have the effect of excluding amounts, that are included in the most directly comparable financial 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 financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States of America.
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.

EBITDA
is a non-GAAP financial measure that is presented in the following discussion. Our 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 as well as for evaluating our capacity to incur
and service debt, fund capital expenditures and expand our business. We use EBITDA primarily as a performance measure for our consolidated results of operations and those of our operating segments,
and believe that the GAAP financial measure most directly comparable to EBITDA is net income. We also use EBITDA in our annual budgeting 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 and our operating segments thereof, as well as the employees responsible for operating 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 unconsolidated
affiliates, our partners' share of the earnings or losses of our consolidated majority-owned affiliates 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 EBITDA as the only measure of our performance or financial condition could draw an incomplete or misleading
conclusion regarding our financial performance or condition. 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 such performance. EBITDA should be considered in addition to, and not as a substitute for, or superior to, the comparable GAAP financial measure or an indicator
of operating performance.

We
define EBITDA as earnings from continuing operations before preferred stock dividends, 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 or cash flow from operations, as defined by GAAP. See "Selected Financial Data" for reconciliations of EBITDA to our net income (loss) available to common shareholders and our
consolidating operating income by segments.

Fiscal 2004 Compared to Fiscal 2003



For the fiscal year ended September 30, 2004, net revenues increased $199.7 million, or 16.1%, to $1,443.6 million from
$1,243.9 million in the prior fiscal year. Revenues from our institutional pharmacy segment accounted for $198.3 million of the increase which is primarily the result of net bed gains of
approximately 17,000 beds, in addition to higher patient acuity mix and drug price inflation. Total prescriptions filled during fiscal 2004 increased 1.6 million to 35.2 million total
fills. The remaining $1.4 million increase in revenues is attributable to growth in our community-based business, which is

45

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included
in our corporate and other operating segment. See "Segment Results" below for a discussion of the operating results of our institutional pharmacy and corporate and other
operating segments. The net revenues presented do not include intersegment revenues to GHC of $13.0 million and $78.0 million for the fiscal years ended September 30, 2004 and
2003, respectively.

Cost
of revenues increased $175.2 million, or 18.2% for the fiscal year ended September 30, 2004 to $1,137.2 million compared to $962.0 million during the
fiscal year ended September 30, 2003. The increase in cost of revenues is mainly attributable to an increase in product costs of approximately $168.6 million in fiscal 2004 compared to
fiscal 2003. Of the increase in product costs in fiscal 2004, $123.0 million is attributable to revenue growth and $45.6 million is mainly the result of drug price inflation. The
remaining $6.6 million increase in cost of revenues relates to direct cost of service, which declined as a percentage of revenues from 15.7% to 14.0%. The improvement in direct cost of service
as a percentage of revenues is directly attributable to our regional consolidations and our cost reduction initiatives. Rebates earned from our pharmaceutical manufacturers as a percentage of revenue
increased to 2.1% in the current year from 1.7% in the prior fiscal year as a result of
renegotiations of our contracts with our primary drug wholesaler and pharmaceutical manufacturers and implementing new tracking and diagnostic tools for formulary compliance.

Gross
profit for the fiscal year ended September 30, 2004 increased $24.5 million, or 8.7%, to $306.4 million from $281.9 million in fiscal 2003. As a
percentage of revenues, gross profit declined to 21.2% from 22.7%. This decline is a result of reduced Medicaid reimbursement rates in addition to competitive pricing reductions to our customers. We
expect to see reimbursement rates and competitive price issues continue to affect industry margins. Specifically, going forward, we will be affected by reimbursement changes in New York and Michigan,
as well as the revised federal upper limit list introduced in the first quarter of fiscal 2005. We think that our continuing efforts to drive costs down will help to mitigate these margin pressures in
future periods. The gross profits presented do not include gross profits on intersegment revenues of $2.7 million and $16.1 million for the fiscal years ended September 30, 2004
and 2003, respectively.

Selling,
general and administrative costs decreased $16.9 million, or 8.0%, to $195.6 million for the year ended September 30, 2004 compared to $212.6 million
in the prior year. The overall decline in selling, general and administrative costs is the direct result of shared corporate overhead expenses between us and GHC that did not exist in fiscal 2004.
These shared corporate overhead expenses of approximately $31.6 million in fiscal 2003 could not be allocated to discontinued operations in accordance with generally accepted accounting
principles. When taking these shared overhead expenses into account for the prior year, our selling, general and administrative expenses increased $14.6 million, or 8.1% over the prior year.
Key factors contributing to the increase in selling, general and administrative expenses include restricted stock grants to key management and members of our Board of Directors, legal fees, and
consulting fees incurred in connection with compliance with the Sarbanes-Oxley Act of 2002. We expect to incur significant costs in fiscal 2005 related to consulting fees in connection with compliance
with the Sarbanes-Oxley Act of 2002.

Depreciation
and amortization expense declined $4.9 million, or 15.6%, to $26.7 million during the fiscal year ended September 30, 2004 from $31.6 million in
the prior year, primarily because of depreciation and amortization of shared corporate assets prior to the spin-off of GHC.

Net
interest expense increased to $19.0 million during the fiscal year ended September 30, 2004 from $14.4 million in fiscal 2003 reflecting an increase of
$4.6 million. Interest expense for the prior year was based on an allocation of the net assets of the continuing operations and the discontinued operating segment. Other expense was
$4.5 million in fiscal year 2004 compared to $4.3 million in fiscal year 2003. Other expense consists of minority interest expense offset by our proportionate share of the net earnings
of businesses in which we have invested, which are recorded under the equity method of accounting. The operating results of joint ventures in which we have a controlling interest are included

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in
our consolidated financial statements. Minority interest expense represents the non-controlling owners' share of the joint ventures' operating profit.

Income
tax expense increased $5.4 million during the fiscal year ended September 30, 2004 to a provision of $3.4 million from an income tax benefit in fiscal 2003 of
$2.0 million. The principal reason for the overall increase results from certain non-deductible expenses incurred in connection with the spin-off of GHC. The income tax
benefit reported in fiscal 2003 also included a net operating loss carryforward of $4.4 million.

Income
from discontinued operations, net of taxes, for the fiscal year ended September 30, 2004 was $8.4 million compared to $28.7 million in fiscal 2003. The main
cause for the decline is essentially due to the inclusion of only two months of discontinued operations in fiscal 2004 representing the period before the spin-off compared to twelve months
in fiscal 2003.

Preferred
stock dividend requirements were eliminated during the fiscal year ended September 30, 2004 as our Board of Directors exercised its option to require the mandatory
conversion of all outstanding preferred shares on December 16, 2003.

Net
income available to common shareholders declined $28.1 million during the fiscal year ended September 30, 2004 to $1.8 million from $30.0 million in the
fiscal year ended September 30, 2003. This decline is mainly derived from $18.4 million of additional strategic planning, severance and other operating items, $18.2 million of
expenses related to our defense of the outstanding tender offer to acquire all of our outstanding common stock by one of our competitors, $10.0 million of net gain from the break up fee of a
significant agreement recognized in fiscal 2003, an increase in interest expense of $4.6 million over the prior year, an income tax provision of $3.4 million in fiscal 2004 compared to
an income tax benefit of $2.0 in fiscal 2003 resulting in a net increase in income tax expense of $5.4 million, and decreased net income attributed to discontinued operations of
$20.3 million in fiscal 2004. These decreases in net income available to common shareholders were partially offset by a gross profit improvement of $24.5 million and reductions in
selling, general and administrative expenses of $17.0 million, depreciation and amortization expenses of $4.9 million and a $2.7 million reduction in preferred stock dividends.
The components of strategic planning, severance and other operating items, in addition to the net gain from break up fee, are discussed at "Certain Transactions and Events."



Net revenues of our institutional pharmacy segment increased $198.3 million, or 19.2%, to $1,228.8 for the fiscal year ended September 30, 2004
compared to $1,030.4 million in the prior fiscal year. This increase is mainly due to net bed gains of approximately 17,000 during the year and can also be attributed to the effects of higher
patient acuity and drug price inflation.

Operating
income of our institutional pharmacy segment increased $25.0 million, or 27.1%, to $117.3 million for the fiscal year ended September 30, 2004 compared to
$92.3 million in the fiscal year ended September 30, 2003. EBITDA of our institutional pharmacy segment increased $26.0 million, or 24.8%, to $130.7 million for the fiscal
year ended September 30, 2004 compared to $104.7 million in the fiscal year ended September 30, 2003. This increase is primarily the result of increased gross profit during the
year ended September 30, 2004 of $27.7 million, or 13.0%, to $240.3 million compared to $212.6 million during the fiscal year ended September 30, 2003. Gross profit
as a percentage of institutional pharmacy revenues declined 1.0% to 19.6% in fiscal 2004 compared to 20.6% in fiscal 2003. This decline in gross profit as a percentage of institutional pharmacy
revenues is mainly due to Medicaid reimbursement reductions and competitive pricing reductions. The increase in product costs as a percentage of institutional pharmacy revenues is offset by a decline
in service costs included in cost of revenue, representing a net decrease as a percentage of revenue of 2.1% to 14.0% of institutional

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pharmacy
revenues in fiscal 2004 compared to 16.1% in fiscal 2003. Selling, general and administrative expenses for the institutional pharmacy segment increased $1.8 million, or 1.6%, to
$109.7 million during the fiscal year ended September 30, 2004 compared to $107.9 million in 2003. This increase in selling, general and administrative expenses is mainly the
result of our acquisitions during the year. The operating income and EBITDA presented do not include gross profits on intersegment revenues of $2.7 million and $16.1 million for the
fiscal years ended September 30, 2004 and 2003, respectively. See "Selected Financial Data" for reconciliations of EBITDA to our net income (loss) available to common shareholders and our
consolidating operating income by segments.



Net revenues of our corporate and other operating segment increased $1.4 million to $214.8 million during the fiscal year ended September 30,
2004 from $213.4 million in the prior year. This increase was primarily driven by growth of our retail pharmacies and community-based businesses. Gross profit of the corporate and other segment
declined $3.2 million to $66.0 million in fiscal 2004 compared to $69.2 million in 2003. The decline in gross profit results from increased product costs, decreased Medicaid
reimbursement rates and price compression in our community-based business.

Operating
income of our corporate and other operating segment declined $25.3 million, or 35.2%, to a loss of $97.1 million for the fiscal year ended September 30,
2004 compared to a loss of $71.8 million for the fiscal year ended September 30, 2003. EBITDA of our corporate and other operating segment declined $31.2 million to a loss of
$83.7 million for the fiscal year ended September 30, 2004 from a loss of $52.5 in the fiscal year ended September 30, 2003. In addition to the decline in gross profit of the
corporate and other operating segment in fiscal 2004, EBITDA also declined due to additional spin-off and regional consolidation expenses of $18.4 million in fiscal 2004 and the
addition of $18.2 million of expenses incurred pursuant to our defense of our competitor's tender offer to purchase all of our outstanding common stock. In addition to these incremental expense
increases, we had net settlement gains recognized in fiscal 2003 of $10.0 million. Partially offsetting the effects of these factors is a reduction of selling, general and administrative
expenses of $18.7 million in fiscal 2004 resulting from reduced shared corporate overhead expenses with GHC. See "Selected Financial Data" for reconciliations of EBITDA to our net income (loss)
available to common shareholders and our consolidating operating income by segments.

Fiscal 2003 Compared to Fiscal 2002



For the fiscal year ended September 30, 2003, revenues were $1,243.9 million, an increase of $107.1 million, or 9.4%, over the prior fiscal
year. Of this growth, institutional pharmacy revenue increased by $107.8 million and corporate and other revenues decreased $0.7 million. See "Segment Results" below for a
discussion of institutional pharmacy and corporate and other revenue fluctuations. The institutional pharmacy revenue increase of $107.8 million is principally attributable to favorable changes
in bed mix, higher patient acuity mix, and drug price inflation. Net revenues do not include intersegment revenues with GHC of $78.0 million and $100.5 million for the years ended
September 30, 2003 and 2002, respectively.

The
increase in gross margin from $255.2 in the fiscal year ended September 30, 2002 to $281.9 in the fiscal year ended September 30, 2003 is principally due to the
increased revenues of our institutional pharmacy segment coupled with the realization of our institutional pharmacy margin initiatives. See "Segment Results" below for a discussion of
institutional pharmacy results of operations. The gross profits presented do not include the gross profit on intersegment revenues from GHC of $16.1 million and $22.2 million for the
fiscal years ended September 30, 2003 and 2002, respectively.

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Selling,
general and administrative expenses increased $3.6 million, or 1.7%, during the fiscal year ended September 30, 2003 from $209.0 million in the prior year
to $212.6 million in the fiscal year ended September 30, 2003. As a percentage of revenues, selling, general and administrative expense declined to 17.1% compared to 18.4% in the prior
year. This decline is primarily the result of our initiatives to reduce costs through process re-engineering and best-practice implementation.

Depreciation
and amortization expense increased $1.6 million, or 5.3%, to $31.6 million for the fiscal year ended September 30, 2003 compared to $30.0 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.

Interest
expense decreased $2.8 million, or 16.3%, from $17.2 million to $14.4 million for the fiscal year ended September 30, 2003 and September 30,
2002, respectively. Debt levels and the corresponding interest expense attributable to our continuing operations were lower than the same period in the prior year due to unscheduled debt repayments.

Other
expense is comprised of minority interest and equity in the net income of our unconsolidated affiliates. Other expense increased $1.2 million, or 38.7%, from
$3.1 million in the prior fiscal year to $4.3 million in the fiscal year ended September 30, 2003. The principal factor driving this increase is the increased operating margins of
our consolidated joint ventures.

The
decrease in income tax benefit from continuing operations is primarily related to the utilization of a net operating loss carryforward of $10.3 million in 2002 as compared to
$4.4 million in 2003 and the remaining increase is due to non-deductible expenses incurred in preparation for the spin-off of GHC.

Income
from discontinued operations, net of taxes, was $28.7 million in the fiscal year ended September 30, 2003 and $66.5 million in the prior fiscal year. The
change is due in part to an $8.9 million
(after-tax) write-down of inpatient services assets in fiscal 2003 compared to $6.7 million (after-tax) recorded in fiscal 2002, combined with the relative
results of operations of those inpatient services businesses identified as discontinued operations. The deterioration in the operating results of our discontinued businesses is primarily 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 inpatient services
businesses. See "Certain Transactions and EventsSpin-off and Discontinued Operations of GHC."

Preferred
stock dividends were relatively unchanged at $2.7 million for the fiscal year ended September 30, 2003 versus $2.6 million for the prior fiscal year.
Preferred stock dividends were accrued in the form of additional shares of preferred stock (paid-in-kind).

Net
income available to common shareholders for the fiscal year ended September 30, 2003 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 a $3.6 million of growth in selling, general and administrative expenses,
$5.7 million of additional strategic planning, severance and other operating items, $1.6 million in additional depreciation and amortization expense, $7.6 million of additional
expenses including debt restructuring charges, net gains from settlements, interest and other expense, $10.6 million decrease in income tax benefit and a $37.8 million decrease in the
income reported by our discontinued operations, partially offset by $26.7 million of favorable gross margin growth. The components of strategic planning, severance and other operating items, in
addition to the debt restructuring and reorganization charges and net settlement gains, are discussed at "Certain Transactions and Events."

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For fiscal 2003 and 2002, our operating segments included institutional pharmacy and corporate and other.



Institutional pharmacy revenues increased $107.8 million, or 11.7% to $1,030.4 million in the fiscal year ended September 30, 2003 from
$922.6 million in the prior fiscal year. The increase in pharmacy service
revenues is net of approximately $20.0 million of reduced revenue related to price concessions made in the extension of our contracts with HCR Manor Care, Inc., and the State of New
Jersey. The increase in institutional pharmacy revenue is attributable to favorable changes in bed mix, higher patient acuity mix and drug price inflation.

Operating
income of our institutional pharmacy segment increased $24.5 million, or 36.1%, to $92.3 million for the fiscal year ended September 30, 2003 compared to
the fiscal year ended September 30, 2002. EBITDA of the institutional pharmacy segment increased $25.5 million, or 32.3%, to $104.7 million for the fiscal year ended
September 30, 2003 from $79.2 million for the prior fiscal year. EBITDA margin improved to 10.2% in the fiscal year ended September 30, 2003 from 8.6% 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 revenues increased $80.9 million, or 11.0%, for the fiscal year
ended September 30, 2003 to $817.8 million from $736.9 million for the same period in the prior year. Of this growth, $86.1 million is attributed to institutional pharmacy
revenue growth and $5.2 million is due to margin compression related changes in payor mix and reductions in reimbursement rates. As a percentage of revenue, cost of revenues was 79.4% for the
fiscal year ended September 30, 2003 and 79.9% for the same period in the prior year. Selling, general and administrative costs increased $1.4 million, or 1.3%, from
$106.5 million in the prior fiscal year to $107.9 million in the fiscal year ended September 30, 2003. As a percentage of revenue, selling, general and administrative expenses
declined 1.0% from 11.5% of revenue in the prior fiscal year to 10.5% in the fiscal year ended September 30, 2003. This decrease in selling, general and administrative expenses as a percent of
revenue is the result of cost control initiatives. The operating income and EBITDA presented do not include the gross profit on intersegment revenues from GHC of $16.1 million and
$22.2 million for the fiscal years ended September 30, 2003 and 2002, respectively. See "Selected Financial Data" for reconciliations of EBITDA to our net income (loss) available to
common shareholders and our consolidating operating income by segments.



Corporate and other revenues remained relatively unchanged from $214.1 million in the fiscal year ended September 30, 2002 to $213.4 million
in the fiscal year ended September 30, 2003. Gross margins for this segment also remained relatively constant at $69.2 million from $69.5 million in the fiscal years ended
September 30, 2003 and September 30, 2002, respectively.

Operating
income of our corporate and other operating segment declined $17.7 million, or 32.8%, to a loss of $71.8 million for the fiscal year ended September 30,
2003 compared to the fiscal year ended September 30, 2002. EBITDA of the corporate and other segment decreased $17.2 million, or 48.7%, to a $52.5 million loss in the fiscal year
ended September 30, 2003 from a $35.3 million loss in the prior year. The primary reason for the decline in EBITDA is related to the decrease in net gains resulting from settlements and
debt discharges of $11.7 million. See "Selected Financial Data" for reconciliations of EBITDA to our net income (loss) available to common shareholders and our consolidating operating income by
segments.

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Liquidity and Capital Resources

Fiscal 2004



At September 30, 2004, we had cash and equivalents of $81.9 million, net working capital of $291.0 million and $97.6 million of unused
commitment under our $100.0 million revolving credit facility.

Our
net cash provided by operating activities in fiscal 2004 generated cash of $71.8 million compared to $110.6 million in fiscal 2003. The decline in the current year is
primarily due to a decrease in net income available to common shareholders adjusted for net charges included in operations not requiring funds, partially offset by an increase in accounts payable and
accrued expenses. In fiscal 2004, net income available to common shareholders adjusted for net charges included in operations not requiring funds was $68.6 million compared to
$173.3 million in the prior year. This decline was primarily the result of the spin-off, as the former eldercare segment was only included for two months in fiscal 2004 versus the
entire year in fiscal 2003, as well as the incurrence in fiscal 2004 of strategic planning, severance and other operating items related to the spin-off of $41.5 million. In
addition, takeover defense expenses incurred in fiscal 2004 were $18.2 million. The increase in accounts payable and accrued expenses during fiscal 2004 of $48.6 million is due primarily
to the timing of payment to our primary pharmaceutical supplier in addition to an increase in accrued expenses associated with the takeover defense. Amounts due to our primary pharmaceutical supplier
increased from $15.5 at September 30, 2003 to $43.8 million at September 30, 2004. Accrued takeover defense expenses as of September 30, 2004 were $17.5 million.

We
expect our net cash provided by operating activities to improve in fiscal 2005 relative to fiscal 2004 as a result of an expected increase in profitability. Additionally, we expect to
have available tax net
operating loss carryforwards of approximately $50.0 million after the completion of the current year's income tax returns to offset against future pre-tax income.

Our
days sales outstanding at September 30, 2004 was 52 days compared to 51 days at September 30, 2003. This increase is mainly due to temporary Medicaid and
third party payment delays associated with our reorganization initiatives as well as increased competitive pressure to offer extended payment terms to facility customers.

Our
net cash used in investing activities during fiscal 2004 was $88.7 million and is inclusive of two months of GHC net investing cash outflows of $32.8 million. Capital
expenditures were $29.6 million, of which $3.6 million is attributable to GHC. The remaining $26.0 million is attributed to NeighborCare's continuing operations and consists
primarily of investments in computer hardware and software and furniture and equipment used in operations including packaging machines and medication carts in addition to medical equipment rented to
customers. Acquisitions of three pharmacy businesses during fiscal 2004 resulted in net cash outflows of $32.0 million and GHC's business acquisitions during the two month period prior to the
spin-off generated a net cash outflow of $34.9 million.

Our
financing activities during fiscal 2004 resulted in a net cash outflow of $33.9 million. In connection with the spin-off, we restructured and refinanced nearly all
of our indebtedness. 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 debts and to provide
capital to both separate organizations. These new financing arrangements provided approximately $475.0 million in cash resulting from our issuance of $250.0 million 6.875% senior
subordinated notes due 2013 and GHC's issuance of $225.0 million 8% senior subordinated notes due 2013. These cash inflows, along with existing cash and a portion of the GHC term loan proceeds,
were used to repay indebtedness of $567.7 million during the year, inclusive of payments made on capital lease obligations in our ordinary course of business. These proceeds were also used to
fund the related debt issuance costs of $16.8 million. Also as a result of the spin-off, we

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received
$72.7 million of cash from GHC to fund the repayment of our existing indebtedness, which is net of $63.1 million initially distributed to GHC. Additionally, certain members of
our Board of Directors exercised 190,844 stock options generating cash proceeds of $2.8 million during the fiscal year ended September 30, 2004.

We
currently have a $33.0 million deposit with our primary pharmaceutical wholesaler which brings our net payment terms with them to zero days. 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 source to meet our working capital
requirements, debt service and other cash needs over the next year, if needed.

We
believe that the 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 such funds, together with funds available through the revolving line of credit and the available return of the deposit from our pharmaceutical wholesaler, will provide
the necessary resources to expand and grow our business either through internal growth or acquisitions.

Fiscal 2003



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 were 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 were restricted by statutory capital requirements in Bermuda. In addition, certain of
these investments were pledged as security for letters of credit issued by LHC. As a result of such restrictions and encumbrances, we and LHC were precluded from freely transferring funds through
intercompany loans, advances or cash dividends.

Our
net cash provided by operating activities before debt restructuring and reorganization costs in fiscal 2003 was $115.2 million compared to $233.4 million in fiscal
2002. A year-over-year comparison of the primary operating cash flow activities includes: 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.

Our
days sales outstanding at September 30, 2003 was 51 days compared to 54 days at September 30, 2002. This reduction was 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 services business, offset by $55.1 million of proceeds for the sale of eldercare

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centers
principally located in Florida and Illinois. Capital expenditures consisted primarily of betterments and expansion of eldercare centers and investments in computer hardware and software.

Our
investing activities in fiscal 2003 also included $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 included $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.

Financing Arrangements

The agreements and instruments governing our senior subordinated notes and our revolving credit facility 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:



Our
financing arrangements require us to maintain compliance with certain financial and non-financial covenants, including minimum earnings before interest, taxes,
depreciation and amortization; limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios. We were in compliance with these covenants at September 30,
2004.

Under
the terms of our senior subordinated notes, the notes are not redeemable until on or after November 15, 2008. We 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 at 106.875% of the principal amount thereof, plus accrued and unpaid interest
to the redemption date, subject to the terms of the notes.

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Contractual Obligations and Commitments

We have future obligations for debt repayments including: capital leases, future minimum rentals under operating leases, employment agreements and purchase
obligations. The obligations as of September 30, 2004 are summarized as follows (in thousands):

|                                     |  |   |         | Payments Due by Period
|------------------------------------ |  | - | ------- | ----------------------
|
|Principal payments on long-term debt |  | $ | 253,867 |                       
|Interest payments on long-term debt  |  |   | 163,279 |                       
|Capital lease obligations            |  |   | 8,404   |                       
|Operating leases                     |  |   | 39,188  |                       
|Employment agreements                |  |   | 1,763   |                       
|Purchase obligations and other       |  |   | 6,896   |                       
|                                     |  |   |         |                       
|Total                                |  | $ | 473,397 |                       
|                                     |  |   |         |                       

We enter into employment agreements with our senior executives pursuant to which we are contractually obligated to compensate them a base salary
throughout the remaining term of their respective agreements. The agreements provide for automatic renewal each year, however, the amounts reflected in the table above represent only the base salary
requirements for existing contracts before any automatic renewals and assume continuous employment throughout the initial terms of the employment agreements.

We
maintain a purchase obligation with our primary pharmaceutical vendor to purchase at least 93% of our total pharmaceuticals and supplies from them and at least 72% of our generic
pharmaceuticals from them each fiscal year. These requirements are not included in the table above. In addition, we maintain information systems maintenance and purchase requirements for our major
telephone, data and software providers, which is included in the table above under purchase obligations and other.

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, 2004 are summarized as follows (in thousands):

|                             |  |   |        | Amount of Commitment Expiration Per Period
|---------------------------- |  | - | ------ | ------------------------------------------
|
|Letters of credit            |  | $ | 2,404  |                                           
|Guarantees for GHC subleases |  |   | 17,775 |                                           
|                             |  |   |        |                                           
|Total                        |  | $ | 20,179 |                                           
|                             |  |   |        |                                           

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.

We
have an agreement with a vendor, which supplies approximately 97% of our pharmaceutical products, pursuant to which we are required to maintain a deposit to secure purchase terms. The
deposit of $33.0 million and $37.9 million at September 30, 2004 and 2003, respectively, is refundable upon our election of alternative purchase terms.

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In
accordance with our credit agreement entered into on December 1, 2003, certain letters of credit reduce the available funds under our revolving credit facility. In addition, we
have a guarantee obligation that collateralizes the payments of certain properties that are leased and subleased by GHC. As the surviving entity after the spin-off, we have assumed this
guarantee as a result of the transaction and the respective guarantees have not been assigned in accordance with the separation and distribution agreement. GHC has agreed to indemnify us for the
majority of the guarantees to the extent that we remain the guarantor for annual lease payments approximating $4.2 million through 2009.

Significant Accounting Policies

Management's discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the United States. Such financial statement preparation requires management to make judgments and use estimates regarding
significant accounting policies. We consider an accounting policy to be significant if it is important to our financial condition and results, and requires significant judgment and estimates on the
part of management in its application. Our significant accounting estimates 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 a 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.

Revenue Recognition / Contractual Allowances

Revenues are recognized 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.

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.

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 required allowance 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 doubtful. Accounts receivable that we specifically estimate to be doubtful, 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 collected or written-off.

55

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We
continue to refine our assumptions and methodologies underlying the Aging Method. 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 future collection patterns. Changes in market conditions and/or budgetary constraints of government funded programs such as
Medicare and Medicaid can cause changes in overall collection patterns. Such changes can adversely impact the collectibility of receivables, but may 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 or impact of adverse events 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 selling, general and administrative expenses.

Inventories and Cost of Revenues

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.

Inventories
for all business units consist primarily of purchased pharmaceuticals and medical supplies and equipment and are stated at acquisition cost. Counts of inventories on hand are
performed on at least a quarterly basis at all sites. Because we do not utilize a perpetual inventory system, cost of goods sold as a component of cost of revenues is estimated using the latest
acquisition cost and adjusted to actual by recording the results of the quarterly count of actual physical inventories.

There
are no significant obsolescence reserves recorded since we have not historically experienced (nor do we expect to experience) significant levels of inventory obsolescence.

Cost
of revenues includes the net product costs of pharmaceuticals sold and direct charges attributable to providing revenue-generating services.

Manufacturer Rebates

Certain of our manufacturers of pharmaceutical products offer rebates for meeting a targeted volume of purchases on a quarterly basis. These rebate agreements are
contractually binding. We record these rebates as a reduction of inventory in the period in which they are earned when they are reasonably estimable and payment is probable. These rebates are
recognized in earnings as a reduction of cost of revenues when the inventory is sold.

Valuation of Long-Lived Assets

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 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,"Goodwill and Other Intangible Assets," on September 30, 2001 in accordance with the early adoptions provisions of SOP
90-7 "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code." SFAS No. 142 provides that goodwill no longer be amortized on a recurring basis but rather is
subject to periodic impairment

56

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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, 2004. 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.

Our
senior management has reviewed these critical accounting policies and estimates with our Audit and Compliance Committee. During the fiscal year ended September 30, 2004, we
did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting policies.

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
changes and payroll tax obligations, seasonal census cycles, weather conditions and the number of calendar days in a given quarter.

Impact of Inflation

Our product costs are sensitive to the impact of inflation. We have 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 Statement Regarding Forward-Looking Statements."

ITEM 7A:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes in the normal course of its business. We use interest rate swaps to hedge our interest rate exposures with the objective
of offsetting gains and losses resulting from these exposures with the losses and gains on the derivative instruments used to hedge them, thereby reducing volatility of earnings or protecting fair
values of liabilities.

In
August 2004, we entered into an interest rate swap agreement with a notional amount of $125 million, which expires November 15, 2013, in which we receive a
fixed-rate of 6.875% and pays a floating rate based on the six-month London InterBank Offered Rate ("LIBOR") LIBOR plus 1.8475% with measurement and settlement performed
semiannually (4.017% as of September 30, 2004). The swap was designated as a fair value hedge, as the critical terms of the interest rate swap and the hedged item are designed to match thereby
satisfying the criteria for short-cut method of accounting as defined by SFAS No. 133, as amended. Accordingly, the swap and the underlying debt obligation are recorded on the
balance sheet at their fair value, with the changes in fair value of the derivative and the related debt are recorded in the consolidated statement of operations. Based upon valuations provided by
third party financial institutions, the fair value of the interest rate swap as of September 30, 2004 was $0.3 million.

57

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The
existing swap arrangement effectively converts $125 million our $250 million fixed-rate debt into variable-rate debt. Consequently, a 1.0%
change in LIBOR would result in additional annualized interest of $1.25 million. The fair value of our remaining fixed rate debt, excluding capital leases, as of September 30, 2004 was
$125.3 million.

As
of September 30, 2003, we had two interest rate swap agreements with notional amounts aggregating $200 million, which were to expire at times through
September 13, 2007, in which we received a fixed-rate of approximately 3.5% and paid variable rate one-month
LIBOR. In addition, at September 30, 2003, we had a $75 million interest rate cap, which was to expire on September 13, 2004, in which we received interest when LIBOR exceeded 3%.
We purchased the interest rate cap in September 2002 for $0.7 million, which was being amortized to interest expense over the two-year agreement. The swaps were designated as
a cash flow hedges, recorded on the consolidated balance sheet at fair value with the related unrealized gain or loss as a component of accumulated other comprehensive income. Based upon valuations
provided by third party financial institutions, the fair value of the interest rate swaps and cap as of September 30, 2003 was $7.0 million. In fiscal 2004, in conjunction with the debt
refinancing and the spin-off of GHC, these interest rate swaps and cap were discontinued and we recognized a loss of $3.5 million in the consolidated statement of operations.

On
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. There are no borrowings outstanding under the revolving credit facility as of September 30, 2004.

58

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ITEM 8:    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Report of Independent Registered Public Accounting Firm                                               |  | 60 
|----------------------------------------------------------------------------------------------------- |  | ---
|Consolidated Balance Sheets as of September 30, 2004 and September 30, 2003                           |  | 61 
|Consolidated Statements of Operations for the years ended September 30, 2004, 2003 and 2002           |  | 62 
|Consolidated Statements of Shareholders' Equity for the years ended September 30, 2004, 2003 and 2002 |  | 63 
|Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002           |  | 64 
|Notes to Consolidated Financial Statements                                                            |  | 65 
|Schedule Valuation and Qualifying Accounts                                                            |  | 123

59

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
NeighborCare, Inc.:

We
have audited the accompanying consolidated balance sheets of NeighborCare, Inc. and subsidiaries as of September 30, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended September 30, 2004. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2004, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the related 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.

/s/
KPMG LLP

Baltimore,
Maryland
November 18, 2004

60

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NEIGHBORCARE, INC
CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                        |                                                                                                                                                                                                                                              | September 30,
2004         |         | September 30,
2003 |        
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------------ | -------
|Assets                                                  |                                                                                                                                                                                                                                              |                            |         |                    |        
|Current assets:                                         |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        | Cash and equivalents                                                                                                                                                                                                                         |                            | $       | 81,923             |        
|                                                        | Restricted investments in marketable securities                                                                                                                                                                                              |                            |         |                   |        
|                                                        | Accounts receivable, net allowance for doubtful accounts of $13,608 in 2004 and $48,628 in 2003                                                                                                                                              |                            |         | 230,903            |        
|                                                        | Inventories                                                                                                                                                                                                                                  |                            |         | 64,111             |        
|                                                        | Prepaid expenses and other current assets                                                                                                                                                                                                    |                            |         | 40,046             |        
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        |                                                                                                                                                                                                                                              | Total current assets       |         |                    | 416,983
|Property, plant and equipment, net                      |                                                                                                                                                                                                                                              |                            | 84,215  |                    |        
|Restricted investments in marketable securities         |                                                                                                                                                                                                                                              |                            |        |                    |        
|Other long-term assets                                  |                                                                                                                                                                                                                                              |                            | 18,797  |                    |        
|Investments in unconsolidated affiliates                |                                                                                                                                                                                                                                              |                            | 556     |                    |        
|Identifiable intangible assets, net                     |                                                                                                                                                                                                                                              |                            | 12,737  |                    |        
|Goodwill                                                |                                                                                                                                                                                                                                              |                            | 316,120 |                    |        
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        |                                                                                                                                                                                                                                              | Total assets               |         | $                  | 849,408
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|Liabilities and Shareholders' Equity:                   |                                                                                                                                                                                                                                              |                            |         |                    |        
|Current liabilities:                                    |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        | Current installments of long-term debt                                                                                                                                                                                                       |                            | $       | 4,263              |        
|                                                        | Accounts payable                                                                                                                                                                                                                             |                            |         | 77,750             |        
|                                                        | Accrued expenses                                                                                                                                                                                                                             |                            |         | 14,346             |        
|                                                        | Current portion of self-insurance liability reserves                                                                                                                                                                                         |                            |         |                   |        
|                                                        | Accrued compensation and benefits                                                                                                                                                                                                            |                            |         | 23,154             |        
|                                                        | Accrued interest                                                                                                                                                                                                                             |                            |         | 6,462              |        
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        |                                                                                                                                                                                                                                              | Total current liabilities  |         |                    | 125,975
|Long-term debt                                          |                                                                                                                                                                                                                                              |                            | 258,008 |                    |        
|Deferred income taxes                                   |                                                                                                                                                                                                                                              |                            | 62,607  |                    |        
|Other long-term liabilities                             |                                                                                                                                                                                                                                              |                            | 8,158   |                    |        
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        |                                                                                                                                                                                                                                              | Total liabilities          |         |                    | 454,748
|Minority interests                                      |                                                                                                                                                                                                                                              |                            | 7,880   |                    |        
|Redeemable preferred stock, including accrued dividends |                                                                                                                                                                                                                                              |                            |        |                    |        
|Shareholders' equity:                                   |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        | Common stockpar value $0.02, 200,000,000 shares authorized, 45,963,552 and 41,813,603 shares issued, 44,058,439 and 39,514,351 shares outstanding, and 259,522 and 260,493 shares to be issued at September 30, 2004 and
2003, respectively |                            |         | 924                |        
|                                                        | Additional paid-in-capital                                                                                                                                                                                                                   |                            |         | 434,507            |        
|                                                        | Deferred compensation                                                                                                                                                                                                                        |                            |         | (8,187             | )      
|                                                        | Retained earnings (accumulated deficit)                                                                                                                                                                                                      |                            |         | (9,879             | )      
|                                                        | Accumulated other comprehensive loss                                                                                                                                                                                                         |                            |         |                   |        
|                                                        | Treasury stock, at cost1,905,113 and 2,299,252 shares, respectively                                                                                                                                                                         |                            |         | (30,585            | )      
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|                                                        |                                                                                                                                                                                                                                              | Total shareholders' equity |         |                    | 386,780
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        
|Total liabilities and shareholders' equity              |                                                                                                                                                                                                                                              | $                          | 849,408 |                    | $      
|                                                        |                                                                                                                                                                                                                                              |                            |         |                    |        

See
accompanying notes to consolidated financial statements.

61

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NEIGHBORCARE, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                                                        |         | Fiscal Year Ended September 30,                    |          
|------------------------------------------------------- | ------- | -------------------------------------------------- | ---------
|
|Net revenues                                            |         | $                                                  | 1,443,583
|Cost of revenues                                        |         |                                                    | 1,137,218
|                                                        |         |                                                    |          
|Gross profit                                            |         |                                                    | 306,365  
|Selling, general and administrative                     |         |                                                    | 195,603  
|Depreciation and amortization                           |         |                                                    | 26,686   
|Strategic planning, severance and other operating items |         |                                                    | 45,598   
|Net gain from break-up fee and other settlements        |         |                                                    |         
|Takeover defense expenses                               |         |                                                    | 18,223   
|                                                        |         |                                                    |          
|Operating income                                        |         |                                                    | 20,255   
|Interest expense, net                                   |         |                                                    | 19,018   
|Other expense, net                                      |         |                                                    | 4,457    
|                                                        |         |                                                    |          
|Income (loss) before income tax provision (benefit)     |         |                                                    | (3,220   
|Income tax provision (benefit)                          |         |                                                    | 3,372    
|                                                        |         |                                                    |          
|Income (loss) from continuing operations                |         |                                                    | (6,592   
|Income from discontinued operations, net of taxes       |         |                                                    | 8,435    
|                                                        |         |                                                    |          
|Net income                                              |         | $                                                  | 1,843    
|Preferred stock dividends                               |         |                                                    |         
|                                                        |         |                                                    |          
|Net income available to common shareholders             |         | $                                                  | 1,843    
|                                                        |         |                                                    |          
|Per common share data                                   |         |                                                    |          
|                                                        | Basic   |                                                    |          
|                                                        |         | Income (loss) from continuing operations           |          
|                                                        |         | Income from discontinued operations                |          
|                                                        |         | Net income available to common shareholders        |          
|                                                        |         | Weighted average shares outstanding                |          
|                                                        | Diluted |                                                    |          
|                                                        |         | Income (loss) from continuing operations           |          
|                                                        |         | Income from discontinued operations                |          
|                                                        |         | Net income (loss) available to common shareholders |          
|                                                        |         | Weighted average shares outstanding                |          

See
accompanying notes to consolidated financial statements.

62

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NEIGHBORCARE, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)

|                                           |                                                                   | Common
Stock |     | Additional
Paid-in-
capital |   | Deferred
Compensation |   | Retained
Earnings
(Accumulated
Deficit) |        | Accumulated
Other
Comprehensive
Income (loss) |   | Treasury
Stock |        | Total
Shareholders'
Equity |       
|------------------------------------------ | ----------------------------------------------------------------- | ------------ | --- | --------------------------- | - | --------------------- | - | --------------------------------------- | ------ | --------------------------------------------- | - | -------------- | ------ | -------------------------- | ------
|Balance at September 30, 2001              |                                                                   | $            | 820 |                             | $ | 832,710               |   | $                                       |       |                                               | $ | 1,136          |        | $                          | 192   
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Issuance of common stock                   |                                                                   |              | 10  |                             |   | 10,915                |   |                                         |       |                                               |   |               |        |                            |      
|Preferred dividends                        |                                                                   |              |    |                             |   |                      |   |                                         |       |                                               |   | (2,599         | )      |                            |      
|Comprehensive income                       |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|                                           | Net unrealized gain on marketable securities                      |              |     |                            |   |                       |  |                                         |        |                                              |   |                |       |                            |       
|                                           | Net change in fair value of interest rate swap and cap agreements |              |     |                            |   |                       |  |                                         |        |                                              |   |                |       |                            |       
|                                           | Net income                                                        |              |     |                            |   |                       |  |                                         |        |                                              |   |                | 72,766 |                            |       
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Total comprehensive income                 |                                                                   |              |    |                             |   |                      |   |                                         |       |                                               |   |               |        |                            |      
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Balance at September 30, 2002              |                                                                   | $            | 830 |                             | $ | 843,625               |   | $                                       |       |                                               | $ | 71,303         |        | $                          | (1,635
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Issuance of common stock                   |                                                                   |              | 12  |                             |   | 9,915                 |   |                                         |       |                                               |   |               |        |                            |      
|Purchases of common stock for the treasury |                                                                   |              |    |                             |   |                      |   |                                         |       |                                               |   |               |        |                            |      
|Preferred dividends                        |                                                                   |              |    |                             |   |                      |   |                                         |       |                                               |   | (2,701         | )      |                            |      
|Comprehensive income                       |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|                                           | Net unrealized gain on marketable securities                      |              |     |                            |   |                       |  |                                         |        |                                              |   |                |       |                            |       
|                                           | Net change in fair value of interest rate swap and cap agreements |              |     |                            |   |                       |  |                                         |        |                                              |   |                |       |                            |       
|                                           | Net income                                                        |              |     |                            |   |                       |  |                                         |        |                                              |   |                | 32,688 |                            |       
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Total comprehensive income                 |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Balance at September 30, 2003              |                                                                   | $            | 842 |                             | $ | 853,540               |   | $                                       |       |                                               | $ | 101,290        |        | $                          | (3,301
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Exercise of stock options                  |                                                                   |              | 4   |                             |   | 2,793                 |   |                                         |       |                                               |   |               |        |                            |      
|Tax effect of stock option exercises       |                                                                   |              |    |                             |   | 878                   |   |                                         |       |                                               |   |               |        |                            |      
|Conversion of redeemable preferred stock   |                                                                   |              | 69  |                             |   | 46,762                |   |                                         |       |                                               |   |               |        |                            |      
|Restricted stock grants                    |                                                                   |              | 9   |                             |   | 6,109                 |   |                                         | (8,187 | )                                             |   |               |        |                            |      
|Distribution of net assets to GHC (note 2) |                                                                   |              |    |                             |   | (475,575              | ) |                                         |       |                                               |   | (113,012       | )      |                            | (1,101
|Comprehensive income                       |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|                                           | Net income                                                        |              |     |                            |   |                       |  |                                         |        |                                              |   |                | 1,843  |                            |       
|                                           | Interest rate swap termination                                    |              |     |                            |   |                       |  |                                         |        |                                              |   |                |       |                            |       
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Total comprehensive income                 |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       
|Balance at September 30, 2004              |                                                                   | $            | 924 |                             | $ | 434,507               |   | $                                       | (8,187 | )                                             | $ | (9,879         | )      | $                          |      
|                                           |                                                                   |              |     |                             |   |                       |   |                                         |        |                                               |   |                |        |                            |       

See accompanying notes to consolidated financial statements.

63

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NEIGHBORCARE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                          |                                                                                                                                                                                             | Fiscal year ended September 30,            |        
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------
|
|Cash flows from operating activities:                     |                                                                                                                                                                                             |                                            |        
|                                                          | Net income                                                                                                                                                                                  |                                            | $      
|                                                          | Adjustments to reconcile net income to net cash provided by operating activities:                                                                                                           |                                            |        
|                                                          | Loss on impairmentDiscontinuation of businesses                                                                                                                                            |                                            |        
|                                                          | Depreciation and amortization (including GHC depreciation and amortization of $7.5 million in 2004)                                                                                         |                                            |        
|                                                          | Amortization of deferred financing costs through interest expense                                                                                                                           |                                            |        
|                                                          | Provision for losses on accounts receivable (including GHC provision of $3.0 million in 2004)                                                                                               |                                            |        
|                                                          | Non-cash stock compensation                                                                                                                                                                 |                                            |        
|                                                          | Equity in (earnings) loss of unconsolidated affiliates and minority interests, net of distributions (including GHC equity in earnings of unconsolidated affiliates of $0.5 million in 2004) |                                            |        
|                                                          | Amortization of deferred gains and net unfavorable leases                                                                                                                                   |                                            |        
|                                                          | Provision for deferred taxes                                                                                                                                                                |                                            |        
|                                                          | Strategic planning, severance and other operating items, including net gains from settlements                                                                                               |                                            |        
|                                                          | Changes in assets and liabilities, excluding the effects of acquisitions:                                                                                                                   |                                            |        
|                                                          |                                                                                                                                                                                             | Accounts receivable                        |        
|                                                          |                                                                                                                                                                                             | Inventories                                |        
|                                                          |                                                                                                                                                                                             | Prepaid expenses and other assets          |        
|                                                          |                                                                                                                                                                                             | Accounts payable and accrued expenses      |        
|Cash paid for debt restructuring and reorganization costs |                                                                                                                                                                                             |                                            |       
|                                                          |                                                                                                                                                                                             |                                            |        
|Net cash provided by operating activities                 |                                                                                                                                                                                             |                                            | 71,765 
|                                                          |                                                                                                                                                                                             |                                            |        
|Cash flows from investing activities:                     |                                                                                                                                                                                             |                                            |        
|                                                          | Capital expenditures                                                                                                                                                                        |                                            |        
|                                                          | Proceeds on maturity or sales of restricted marketable securities                                                                                                                           |                                            |        
|                                                          | Purchases of restricted marketable securities                                                                                                                                               |                                            |        
|                                                          | Pharmacy business acquisitions                                                                                                                                                              |                                            |        
|                                                          | Inpatient services business acquisitions                                                                                                                                                    |                                            |        
|                                                          | Proceeds from sale of inpatient services assets                                                                                                                                             |                                            |        
|                                                          | Notes receivable and other investment additions, net                                                                                                                                        |                                            |        
|                                                          | Other, net                                                                                                                                                                                  |                                            |        
|                                                          |                                                                                                                                                                                             |                                            |        
|Net cash used in investing activities                     |                                                                                                                                                                                             |                                            | (88,655
|                                                          |                                                                                                                                                                                             |                                            |        
|Cash flows from financing activities:                     |                                                                                                                                                                                             |                                            |        
|                                                          | Repayment of long-term debt and payment of sinking fund requirements                                                                                                                        |                                            |        
|                                                          | Proceeds from issuance of long-term debt                                                                                                                                                    |                                            |        
|                                                          | Debt issuance costs                                                                                                                                                                         |                                            |        
|                                                          | Funds received from GHC to refinance debt (note 2)                                                                                                                                          |                                            |        
|                                                          | Distributions of cash to GHC (note 2)                                                                                                                                                       |                                            |        
|                                                          | Exercise of stock options                                                                                                                                                                   |                                            |        
|                                                          | Repurchase of common stock                                                                                                                                                                  |                                            |        
|                                                          |                                                                                                                                                                                             |                                            |        
|Net cash (used in) provided by financing activities       |                                                                                                                                                                                             |                                            | (33,913
|                                                          |                                                                                                                                                                                             |                                            |        
|Net (decrease) increase in cash and equivalents           |                                                                                                                                                                                             |                                            | (50,803
|Cash and equivalents:                                     |                                                                                                                                                                                             |                                            |        
|                                                          | Beginning of year                                                                                                                                                                           |                                            |        
|                                                          |                                                                                                                                                                                             |                                            |        
|                                                          | End of year                                                                                                                                                                                 |                                            | $      
|                                                          |                                                                                                                                                                                             |                                            |        
|Supplemental cash flow information:                       |                                                                                                                                                                                             |                                            |        
|                                                          | Interest paid                                                                                                                                                                               |                                            | $      
|                                                          | Income taxes paid, net of refunds                                                                                                                                                           |                                            |        
|                                                          | Non-cash investing and financing activities:                                                                                                                                                |                                            |        
|                                                          |                                                                                                                                                                                             | Distribution of net assets to GHC (note 2) |        
|                                                          |                                                                                                                                                                                             | Capital leases                             |        

See accompanying notes to consolidated financial statements.

64

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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
general, pursuant to the terms of the separation and distribution agreement between NeighborCare and GHC, all assets of the inpatient services business prior to the date of the
spin-off became assets of GHC. The separation and distribution agreement also provides for assumptions of liabilities and cross-indemnities arising out of or in connection with the
inpatient services business to GHC and all liabilities arising out of or in connection with the pharmacy services business to NeighborCare. In addition, GHC will indemnify NeighborCare for liabilities
relating to the past inpatient services business. As a result of the spin-off, the Company's financial statements have been revised to reflect GHC as discontinued operations for all
periods presented (see note 2).

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. 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
Company provides pharmacy services nationwide through its NeighborCare® integrated pharmacy operation that serves approximately 263,000 institutional beds in
long-term care settings. NeighborCare also operates 32 community-based retail pharmacies and a group purchasing organization.

Factors Affecting Comparability of Financial Information

When comparing results for the fiscal year ended September 30, 2004 to the results for the fiscal years ended September 30, 2003 and 2002, it is
important to note that the prior year results include shared overhead costs. In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," only those
overhead costs that are solely attributable to the discontinued business segment can be allocated to discontinued operations. As a result, 2003 and 2002 include significant overhead charges that could
not be allocated to discontinued operations. Additionally, consolidated net

65

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revenues
do not include the intersegment revenue of $13.0 million in 2004, $78.0 million in 2003 and $100.5 million in 2002 between NeighborCare and GHC prior, and up to, the
spin-off date.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of NeighborCare, Inc. and its subsidiaries as of September 30, 2004 and 2003
and for the fiscal years ended September 30, 2004, 2003 and 2002. All significant intercompany accounts and transactions have been eliminated in consolidation.

Investments
in unconsolidated affiliated companies, owned 20% to 50%, are accounted for using the equity method of accounting. The equity in earnings (loss) of these companies is
reflected as a component of other expense, net in the consolidated statements of operations. The Company consolidates entities in which the Company is the primary beneficiary, in accordance with FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities," as amended (FIN 46R). FIN 46R requires variable interest entities to be consolidated if the Company is subject to a majority
of the risk of loss from the entity's activities or entitled to receive a majority of the entity's returns, including residual returns. Adoption of FIN 46R had no impact on the Company's consolidated
financial statements.

Revenue Recognition / Contractual Allowances

Revenues are recognized 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.

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 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. 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.

Manufacturer Rebates

Certain of the Company's manufacturers of pharmaceutical products offer rebates for meeting a targeted volume of purchases on a quarterly basis. These rebate
agreements are contractually binding. The Company records these rebates as a reduction of inventory in the period in which they are earned when they are reasonably estimable and payment is probable.
These rebates are recognized in earnings as a reduction of cost of revenues when the inventory is sold.

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 include $4.7 million of restricted cash. This restricted cash was held by the Company's
wholly-owned captive insurance subsidiary, Liberty Health Corp., LTD ("LHC"), was substantially restricted to securing the outstanding claims losses of LHC, and was distributed to GHC on
December 1, 2003.

66

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Restricted Investments in Marketable Securities

Restricted investments in marketable securities, which were comprised of fixed interest securities, equity securities and money market funds were considered to be
available for sale and, accordingly, were 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 were based on quoted market prices. A decline in the market value of any security below cost
that was deemed other than temporary was charged to operations, resulting in the establishment of a new cost basis for the security.

Premiums
and discounts on fixed interest securities were 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 were included in other revenue and were derived using the specific identification method for determining the cost of securities sold.

Marketable
securities were held by the Company's wholly-owned captive insurance subsidiary, LHC, were substantially restricted to securing the outstanding claims losses of LHC and were
distributed to GHC on December 1, 2003.

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 payors 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 doubtful. Accounts receivable that Company management specifically estimates to be doubtful, 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 collected or written-off.

Management
believes the assumptions used in the Aging Method employed in fiscal 2004 and 2003, coupled with continued improvements in the Company's collection patterns suggests the
allowance for doubtful accounts is adequate as of September 30, 2004 and 2003. 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 future 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 may 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.

At
least annually, the Company updates its historical collection studies in order to evaluate the propriety of the assumptions underlying the Aging Method. Any changes to the underlying
assumptions or impact of adverse events are implemented immediately. Changes to these assumptions can have a material impact on the Company's bad debt expense, which is reported in the consolidated
statements of operations as a component of selling, general and administrative expenses.

Inventories and Cost of Revenues

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.

67

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Inventories
for all business units consist primarily of purchased pharmaceuticals and medical supplies and equipment and are stated at acquisition cost, less an allowance for purchase
rebates. Counts of inventories on hand are performed at least on a quarterly basis at all sites. Because the Company does not utilize a perpetual inventory system, cost of goods sold, a component of
cost of revenues, is estimated using the latest acquisition cost and adjusted to actual by recording the results of the quarterly count of actual physical inventories.

There
are no significant obsolescence allowances recorded since the Company has not historically experienced (nor does it expect to experience) significant levels of inventory
obsolescence.

Cost
of revenues includes the net product costs of pharmaceuticals sold and direct charges attributable to providing revenue-generating services.

Property, Plant and Equipment

As part of fresh-start reporting upon emerging from bankruptcy, substantially all property, plant and equipment was stated at 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. Costs of purchased software are capitalized along with internal and external costs incurred during the application development stage (i.e. from the time software is selected until it
is ready for use.)

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. Capitalized costs are amortized on a straight-line basis over the expected life of the
software. Computer software maintenance costs are expensed as incurred. 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.

Depreciation
expense from continuing operations for the fiscal years ended September 30, 2004, 2003 and 2002 was $22.2 million, $23.6 million and
$20.8 million, respectively.

Deferred Financing Costs

Financing costs are deferred and amortized on a straight-line basis, which approximates the effective interest method, over the terms of the related
debt. Deferred financing costs were $9.5 million and $12.0 million at September 30, 2004 and 2003, respectively, and are included in other long-term assets.
Amortization of deferred financing costs is included in interest expense in the consolidated statements of operations.

Valuation of Long-Lived Assets

The Company accounts for long-lived assets, other than goodwill, 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 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.

The
Company accounts for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 provides that goodwill no longer be amortized on a
recurring basis

68

---



but
rather is subject to periodic impairment testing. The impairment test requires companies to compare the fair value of its businesses to their carrying value including assigned goodwill. The
Company performed annual impairment tests effective September 30, 2004 and 2003 and the results of these tests indicated that there was no impairment in goodwill.

Self Insurance Programs

Workers' compensation and general and professional liability

Prior to December 1, 2003, certain of the Company's workers compensation and general and professional liability coverage was provided by a wholly-owned
insurance company, LHC. Effective December 1, 2003, the Company's workers compensation, automobile liability and general and professional liability coverage is provided by external insurance
providers under premium based policies.

Outstanding
losses and loss expenses were comprised of 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.

For
general and professional liability costs the Company was 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. 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. Effective
December 1, 2003, the general and professional liability coverage provides for deductibles on individual claims and an aggregate annual deductible of $1 million after which losses are
borne by the insurance carrier.

For
workers compensation and automobile liability insurance, as of December 1, 2003, the Company's coverage provides for individual claim deductibles with a combined aggregate
deductible limit of $5.1 million. All claims above the individual claim and aggregate deductible amounts are insured through a third-party insurer. For periods prior to the
spin-off, the Company was self-insured through LHC up to the first $0.5 million per incident for workers compensation. The Company's provision for losses under the new
policy in the ten month period ended September 30, 2004 was approximately $1.4 million, including $.7 million for incurred but not reported claims. 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.

The
Company (through LHC) had restricted investments in marketable securities of $90.6 million at September 30, 2003 which were substantially restricted to securing the
outstanding claim losses of LHC. Both the assets and liabilities were distributed to GHC on December 1, 2003.

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 individual 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 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 and benefits in the accompanying consolidated balance sheets.

69

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Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income taxes are provided for temporary differences between financial statement and
taxable income. Deferred income taxes are recognized 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. 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 be realized.

Derivative Financial Instruments

The Company accounts for derivative financial instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity" (as amended by
SFAS No. 138). SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities and requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments at fair value. These fair value adjustments are to be included either in the
determination of net income or as a component of other comprehensive income, depending on the purpose of the derivative transaction.

On
the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge or a cash flow hedge. The Company formally documents relationships between
hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking hedge transactions. The Company also assesses, both at inception, and on an ongoing
basis, whether derivatives that are used in hedging transactions are highly effective in mitigating the identified risks.

Derivatives
used to hedge fixed rate debt obligations and the underlying debt obligation are recorded on the balance sheet at their fair value. The changes in fair value of the
derivative and the debt that is hedged are recorded in the consolidated statement of operations.

Derivatives
used to hedge variable interest rate risk were recorded on the balance sheet at their fair value, as either liabilities or assets with the related unrealized gain or loss as
a component of accumulated other comprehensive income. Any realized gains or losses due to hedge ineffectiveness are recorded as an adjustment to interest expense in the consolidated statements of
operations. If the Company discontinues a cash flow hedge because it is probable that the original forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income
is immediately reclassified into operations.

The
Company does not hold or issue derivative financial instruments for speculative or trading purposes.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure" (SFAS 148). SFAS 148 amends the transition and disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As permitted by SFAS 148, the Company applies the intrinsic value method as defined in APB Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock option and restricted stock plans. Had the Company determined compensation cost of outstanding stock options based on the fair value at the grant date consistent with the
provisions of

70

---



SFAS 123,
the Company's net income available to common shareholders would have been changed to the pro forma amounts indicated below (in thousands):

Fiscal year ended September 30,2004

2003

2002Net income available to common shareholders  as reported

$
1,843

$
29,987

$
70,167Add stock-based compensation expense included in reported net income, net of tax effect


2,132


6,117


4,161Deduct stock-based compensation expense determined under the fair-value-based method for all awards, net of tax effect


(6,376
)

(10,157
)

(16,906
)Net income (loss) available to common shareholders  pro forma

$
(2,401
)
$
25,947

$
57,422Earnings (loss) per share:Basicas reported

$
0.04

$
0.74

$
1.70Basicpro forma


(0.06
)

0.64


1.39Dilutedas reported


0.04


0.74


1.70Dilutedpro forma


(0.06
)

0.64


1.39


The
fair value of stock options granted during years ended September 30, 2004, 2003 and 2002, respectively, is estimated at the grant date using the Black-Scholes option-pricing
model with the following assumptions for 2004, 2003 and 2002:

Fiscal year ended September 30,2004

2003

2002Volatility

60.00%

39.18%

36.92%Expected life (in years)

5.0

3.7

8.1Rate of return

2.2%

2.69%

3.80%Dividend yield

0%

0%

0%


Discontinued Operations

In the normal course of business, NeighborCare evaluates the performance of its operating units, with an emphasis on selling or closing under-performing or
non-strategic assets. Under SFAS No. 144, discontinued businesses, including assets held for sale or distributed to shareholders, are removed from the results of continuing
operations. Effective December 1, 2003, the Company completed its plan of disposition of GHC through a distribution of GHC common stock to NeighborCare's shareholders of record as of
October 15, 2003 in the form of a tax-free spin-off as described earlier.

GHC's
revenue was recognized in the period the related services were rendered. The Company derived a substantial portion of its inpatient services revenue under Medicaid and Medicare
reimbursement systems. The Company was 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 was recorded as contractual adjustments and deducted from revenues. (See note 2.)

71

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Comprehensive Income

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

Fair Value of Financial Instruments

Fair values of financial instruments approximate their carrying values in the consolidated financial statements.

Earnings or Loss Per Share

Basic earnings or loss per share is calculated by dividing net income available 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.

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

|                                                                                                                       |                                             | Fiscal year ended September 30,
|---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------------------------------
|
|Earnings (loss) used in computation:                                                                                   |                                             |                                
|Income (loss) from continuing operationsbasic and diluted computation                                                 |                                             | $                              
|                                                                                                                       |                                             |                                
|Income from discontinued operationsbasic and diluted computation                                                      |                                             |                                
|                                                                                                                       |                                             |                                
|Net income available to common shareholdersbasic computation                                                          |                                             |                                
|Elimination of preferred stock dividend requirements upon assumed conversion of preferred stock                        |                                             |                                
|                                                                                                                       |                                             |                                
|Net income available to common shareholdersdiluted computation                                                        |                                             | $                              
|                                                                                                                       |                                             |                                
|Shares used in computation:                                                                                            |                                             |                                
|Weighted average shares outstandingbasic computation                                                                  |                                             |                                
|Dilutive effect of outstanding stock options                                                                           |                                             |                                
|Contingent consideration related to an acquisition                                                                     |                                             |                                
|                                                                                                                       |                                             |                                
|Weighted average shares outstandingdiluted computation, income from continuing operations and discontinued operations |                                             |                                
|Add: assumed conversion of preferred stock                                                                             |                                             |                                
|                                                                                                                       |                                             |                                
|Weighted average shares outstandingdiluted computation, income available to common shareholders                       |                                             |                                
|                                                                                                                       |                                             |                                
|Earnings (loss) per common share:                                                                                      |                                             |                                
|Basic:                                                                                                                 |                                             |                                
|                                                                                                                       | Income (loss) from continuing operations    |                                
|                                                                                                                       | Income from discontinued operations         |                                
|                                                                                                                       | Net income available to common shareholders |                                
|Diluted:                                                                                                               |                                             |                                
|                                                                                                                       | Income (loss) from continuing operations    |                                
|                                                                                                                       | Income from discontinued operations         |                                
|                                                                                                                       | Net income available to common shareholders |                                

72

---



For the fiscal year ended September 30, 2004, basic and diluted shares outstanding are the same because the Company reported a net loss from continuing operations for the period,
thus the impact of including the effect of unexercised stock options, unvested restricted stock awards and conversion of preferred stock would be anti-dilutive. For the fiscal year ended
September 30, 2003, the assumed conversion of preferred stock is anti-dilutive and therefore is not included in calculating diluted shares outstanding.

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 U.S. generally accepted accounting principles. 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.

(2)   Spin-off of GHC and Discontinued Operations

Effective December 1, 2003, the Company completed its plan of disposition of GHC through a distribution of GHC common stock to NeighborCare's shareholders
of record as of October 15, 2003 in the form of a tax-free spin-off as described in Note 1. Under SFAS No. 144, discontinued businesses, including assets
held for sale or distributed to shareholders, are removed from the results of continuing operations and are classified as discontinued operations in the consolidated statements of operations.

The
following table sets forth the components of income from discontinued operations for the period from October 1, 2003 to December 1, 2003 and for the fiscal years ended
September 30, 2003 and 2002 (in thousands):

2004

2003

2002Net revenues of GHC

$
250,927

$
1,405,122

$
1,349,051Net operating income of GHC


16,450


65,569


132,723Interest expense allocation


2,467


19,937


23,373Income tax expense


5,548


16,900


42,843Net income from discontinued operations

$
8,435

$
28,732

$
66,507


In
accordance with SFAS 144, only those overhead costs that are solely attributable to the discontinued business segments can be allocated to discontinued operations. As a result,
fiscal 2003 and 2002 include overhead expenses that were incurred for the benefit of both our continuing and discontinued operations, which are included in continuing operations. Consolidated interest
expense in periods prior to the spin-off has been allocated to discontinued operations using a basis of net assets of each of the continuing and discontinued operating segments as of
September 30, 2003.

The
assets and liabilities distributed to GHC in connection with the spin-off included those specific to GHC operations and an allocation of corporate assets and liabilities,
which were originally based on

73

---



estimates.
The following table summarizes the net assets and liabilities distributed to GHC on December 1, 2003 (in thousands):

Assets:Accounts receivable, net

$
199,704Other current assets


137,771Property, plant and equipment


693,081Other non-current assets


72,044Total assets


1,102,600Liabilities:Accounts payable and accrued expenses


121,192Other current liabilities


3,076Long-term debt


274,800Other non-current liabilities


41,113Total liabilities


440,181Net assets distributed to GHC before cash


662,419Less: net cash received from GHC


(72,731
)Net assets distributed to GHC

$
589,688


In
the fourth quarter of fiscal 2004, the Company completed the analysis of the corporate assets and liabilities, including the components of deferred income taxes giving effect to the
spin-off of GHC. As a result, the Company determined that certain deferred tax liabilities, which were initially recorded in connection with the fresh-start reporting upon the emergence of
Genesis Health Ventures, Inc. from bankruptcy on September 30, 2001, had been overstated by $43.7 million. Additionally, the Company determined that the initial allocation of
deferred income taxes between GHC and NeighborCare on December 1, 2003 did not reflect the tax effect of distributing tax-basis goodwill to GHC of $89.8 million and thereby
underestimated the Company's deferred tax liabilities attributable to NeighborCare by $36.2 million. Accordingly, in the fourth quarter of fiscal 2004, the Company decreased goodwill by
$43.7 million increased the deferred tax liabilities by $36.2 million, and increased the charge to equity for the distribution of net assets to GHC by $79.9 million. This
adjustment had no effect on reported operating results and cash flows and no effect on working capital, other liquidity measures or debt covenants. The Company considered relevant quantitative and
qualitative effects of the adjustments and concluded that such adjustments did not have a material effect on the consolidated financial statements.

(3)   Certain Significant Transactions and Events



NeighborCare has incurred costs that are directly attributable to the Company's transforming to a pharmacy-based business and certain of its
short-term strategic initiatives. These costs are segregated in the consolidated statements of operations as "Strategic planning, severance and other operating items."

74

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A
summary of these costs for the years ended September 30, 2004, 2003 and 2002 follows (in thousands):

|                                                                                           |  | Fiscal Year Ended September 30, 2004
|------------------------------------------------------------------------------------------ |  | ------------------------------------
|
|Employee contract termination, transaction completion bonuses, severance and related costs |  | $                                   
|Strategic planning and other operating items                                               |  |                                     
|                                                                                           |  |                                     
|Total                                                                                      |  | $                                   
|                                                                                           |  |                                     



In connection with the spin-off of GHC, NeighborCare incurred $10.3 million in costs pursuant to the termination provisions of employment
contracts and transaction completion bonuses with both NeighborCare and GHC executives. In addition, NeighborCare incurred $3.2 million of expenses related to corporate and regional operational
consolidations during the fiscal year ended September 30, 2004.



Strategic planning and other operating items for the fiscal year ended September 30, 2004 relate primarily to legal, professional and other fees incurred
to complete the spin-off transaction of $16.7 million; costs incurred to extinguish long-term debt and related obligations in connection with the spin-off of
$14.5 million; and consulting and related costs incurred pursuant to the Company's corporate and regional consolidation in fiscal 2004 of $0.9 million.

Included
in the debt extinguishment costs of $14.5 million are costs to write-off unamortized deferred financing costs of $5.9 million, consent fees required to
eliminate the Company's commitments under GHC debt of $5.0 million and the settlement of GHC interest rate swap arrangements related to debt extinguishment of $3.6 million. The majority
of the amounts accrued at September 30, 2004 are expected to be paid during the first quarter of fiscal 2005.

|                                                                                           |  | Fiscal Year Ended September 30, 2003
|------------------------------------------------------------------------------------------ |  | ------------------------------------
|
|
|Employee contract termination, transaction completion bonuses, severance and related costs |  | $                                   
|Strategic planning and other items                                                         |  |                                     
|                                                                                           |  |                                     
|Total                                                                                      |  | $                                   
|                                                                                           |  |                                     



The fiscal 2003 provision for employee contract termination, transaction completion bonuses, severance and related costs included $2.2 million for
workforce reduction severance; $4.8 million for severance for the Company's former Vice Chairman; and $7.2 million for the repurchase of outstanding stock options discussed below.

75

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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 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.



During fiscal year 2003, the Company incurred strategic consulting costs of $12.9 million in connection with several of its new strategic objectives.
Initially, 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 further development of its
strategic plan. 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 inpatient services business and 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.

In
fiscal 2002, the Company incurred strategic planning, severance and other operating items of approximately $21.5 million, which included: severance and related costs for the
termination of 100 individuals of $3.8 million; severance and related costs for a former chief executive officer and vice chairman of $12.6 million; and strategic consulting expense of
$5.1 million.



On May 24, 2004, Omnicare, Inc. announced its intention to purchase all of the outstanding shares of NeighborCare, Inc. common stock for $30
per share in cash. On May 25, 2004, NeighborCare announced that its Board of Directors unanimously rejected the proposal. On June 3, 2004, Omnicare, Inc. announced its intention
to commence a tender offer to purchase all of the outstanding shares of NeighborCare, Inc. common stock for $30 per share in cash. The tender offer formally commenced on June 4, 2004 and
was originally stated to expire on July 7, 2004 but has been subsequently extended on several occasions, most recently to January 7, 2005. On June 14, 2004,
NeighborCare, Inc. announced that the Board of Directors had unanimously recommended that shareholders reject the tender offer and not tender shares pursuant to the offer. Further information
relating to the tender offer, including the Board's recommendation and reasons therefore, can be found in the Company's Solicitation/Recommendation Statement on Schedule 14D-9 filed
with the Securities

76

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and
Exchange Commission on June 14, 2004, and in subsequent amendments filed with Securities and Exchange Commission.

The
Company has incurred various expenses as a result of the tender offer including legal, investment banking and other fees aggregating $18.2 million as of September 30,
2004, of which $17.5 million remains accrued at September 30, 2004. The Company anticipates that additional takeover defense expenses will continue to be incurred through the duration of
the tender offer; however, the impact of these expenses cannot be reasonably estimated.



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



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 facilities 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.



On July 28, 2002, NeighborCare, Inc. 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").

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.

77

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On
December 15, 2002, NeighborCare, Inc. 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 $22.0 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
$10.0 million gain resulting from the $22.0 million break-up fee, net of $12.0 million of costs associated with the proposed NCS transaction.



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 a $19.2 million net gain in fiscal 2002, net of professional fees of $2.7 million. 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.

(4)   Acquisitions

In the ordinary course of business, the Company makes strategic acquisitions to enhance its geographical market presence and to create beneficial operating
synergies through acquisitions in locations that it has an existing market presence. On June 1, 2004, the Company completed the acquisition of The Medicine Centre, LLC ("Medicine Centre") by
purchasing all outstanding ownership interests in Medicine Centre. Also on June 1, 2004, the Company acquired all of the outstanding stock of Capitol Home Infusion, Inc. On
January 22, 2004, the Company completed the acquisition of certain of the assets of Texas Long-Term Care Pharmacy Services, LLC. The aggregate purchase price for these acquisitions
was approximately $32.0 million. These acquisitions were accounted for under the purchase method for accounting for business combinations in accordance with SFAS No. 141 "Business
Combinations."

Results
of these completed acquisitions are included in the Company's consolidated statements of operations from the date of acquisition. Pro-forma financial information has
not been prepared because the acquisitions are not material to the consolidated operations and financial position of the Company. The Company's aggregate purchase price allocation is as follows (in
thousands):

Accounts receivable, net

$
3,884Inventories


1,789Other current assets


77Property, plant and equipment


937Goodwill


25,084Other intangible assets


3,819Total liabilities assumed


(3,598
)Net assets acquired through acquisitions

$
31,992


Prior
to the spin-off date of December 1, 2003, GHC completed the acquisition of three eldercare facilities in October and November 2003 aggregating
approximately $12.9 million. In addition, GHC

78

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acquired
eldercare facilities in accordance with the ElderTrust transactions discussed in note 3 of approximately $22.0 million. These eldercare facilities were included in the net
assets distributed to GHC on December 1, 2003.

(5)   Certain Significant Risks, Uncertainties and Business Concentrations

The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long-term care
facilities which utilize the Company's 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.

The
Company's percentages of revenues from the following payor sources during each of the three years ended September 30 were as follows:

2004

2003

2002Medicaid

44
%
42
%
40
%Long-term care facilities

29

30

34Third-party payor

15

16

14Private

10

10

10Medicare Part B

2

2

2Total

100
%
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.

Approximately
97% of the Company's institutional pharmacy revenues for the year ended September 30, 2004 consisted of the sale of prescription and non-prescription
pharmaceuticals. At September 30, 2004, the Company had contracts to provide services to approximately 263,000 residents in long-term care facilities in 32 states and the District
of Columbia. Many of these contracts, as is typical in the industry, are for a period of one year but can be terminated by either party for any reason upon thirty-sixty days written notice. For the
year ended September 30, 2004, net revenues from GHC, excluding the period from October 1, 2003 to December 1, 2003, were 11% of institutional pharmacy revenue. Net revenues from
HCR Manor Care, Inc. ("Manor Care") in fiscal 2004, 2003 and 2002 were 12%, 12% and 10%, respectively, of institutional pharmacy revenue. No other individual customer or market group represented more
than 5% of the total revenues of the Company's

79

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institutional
pharmacy business. In connection with the spin-off, the Company entered into a pharmacy services agreement, a pharmacy benefit management agreement and a durable medical
equipment agreement with GHC, effective through November 30, 2013. In addition, the Company has a pharmacy services agreement with Manor Care which expires in 2006. As of September 30,
2004, 2.5% of the Company's accounts receivable balance is attributable to sales to GHC facilities and 5.1% is attributable to sales to Manor Care facilities. As of September 30, 2003, 2.4% of
the Company's accounts receivable is attributable to sales to Manor Care facilities.

The
Company obtains approximately 97% of its institutional pharmaceutical products from one supplier pursuant to contracts that are terminable by either party on 90 days notice.
The Company has not experienced any difficulty in obtaining pharmaceutical products or supplies used in the conduct of the Company's business. As of September 30, 2004, 50.2% and at
September 30, 2003, 43.1% of the Company's accounts payable related to inventory purchases from the supplier. In addition, included in prepaid expenses and other current assets as of
September 30,2004 and 2003, were deposits held by the supplier of $33.0 million and $37.9 million, respectively.

(6)   Restricted Investments in Marketable Securities

Marketable securities at September 30, 2003 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  |            |    
|                                                |                                 |                |        |                  |   |                   |     |            |    
|                                                |                                 |                | 16,614 |                  |   | 1,356             |     |            | (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                |                                 |                |        |                  |   |                   |     |            |    
|                                                |                                 |                |        |                  |   |                   |     |            |    

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

Amortized Cost

Fair ValueDue in one year or less

$
3,060

$
3,088Due after one year through five years


10,988


11,983Due after five years through 10 years


2,010


2,229Over ten years


556


628$
16,614

$
17,928


Marketable
securities were distributed to GHC on December 1, 2003.

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---



(7)   Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at September 30, 2004 and 2003 consist of the following (in thousands):

2004

2003Deposit with supplier

$
32,982

$
37,900Deferred tax asset


3,162


Other prepaid expenses and other current assets


3,902


52,018$
40,046

$
89,918


On
December 1, 2003 $40.2 million of prepaid expenses and other current assets were distributed to GHC.

(8)   Property, Plant and Equipment

Property, plant and equipment at September 30, 2004 and 2003 consist of the following (in thousands):

2004

2003Land

$
2,071

$
72,515Buildings and improvements


16,070


584,263Furniture and fixtures


47,715


104,332Computer hardware and software


27,275


54,481Rental equipment


28,420


23,159Leased property


22,168


21,647Construction in progress


2,399


6,372146,118


866,769Less accumulated depreciation


(61,903
)

(114,773
)Property, plant and equipment, net

$
84,215

$
751,996


On
December 1, 2003 $693.1 million of net property, plant and equipment was distributed to GHC.

(9)   Other Long-Term Assets

Other long-term assets at September 30, 2004 and 2003 consist of the following (in thousands):

|                                                                                                           |  | 2004 |        | 2003
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ----
|Notes receivable, net of allowance for doubtful accounts of $0.2 million in 2004 and $26.5 million in 2003 |  | $    | 2,198  |     
|Deferred financing costs, net of accumulated amortization of $1.1 million in 2004 and $4.7 million in 2003 |  |      | 9,534  |     
|Deposits and funds held in escrow                                                                          |  |      | 701    |     
|Employee deferred compensation                                                                             |  |      | 3,066  |     
|Other, net                                                                                                 |  |      | 3,298  |     
|                                                                                                           |  |      |        |     
|Other long-term assets                                                                                     |  | $    | 18,797 |     
|                                                                                                           |  |      |        |     

On
December 1, 2003 $53.6 million of other long-term assets, net were distributed to GHC.

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(10) Goodwill and Identifiable Intangible Assets

The change in the carrying amount of goodwill for the years ended September 30, 2004 and 2003 is summarized as follows (in thousands):

2004

2003Balance at beginning of year

$
337,695

$
336,701Goodwill acquired during the year (note 4)


25,084


3,040Distributed to GHC on December 1, 2003


(2,990
)

Fresh start valuation adjustments (note 2)


(43,669
)

Utilization of net operating losses





(2,046
)Balance at end of year

$
316,120

$
337,695


In
fiscal 2003, in accordance with Statement of Position (SOP) No. 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", the Company utilized $5.0 million of net operating loss carryforwards which resulted in a $2.0 million reduction in goodwill.

Identifiable
intangible assets, which are amortized on a straight-line basis over their estimated useful lives at September 30, 2004 and 2003 consist of the following
(in thousands):

Classification

2004

2003

Estimated
Life
(Years)Customer contracts

$
23,990

$
28,164

2-6Trademarks and trade names





5,000

5Non-competition agreements


3,441


4,081

1-6Identifiable intangible assets


27,431


37,245Accumulated amortization


(14,694
)

(16,379
)Identifiable intangible assets, net

$
12,737

$
20,866


Aggregate
amortization expense for identifiable intangible assets for the years ended September 30, 2004 and 2003 was $4.0 million and $6.2 million, respectively.
Estimated amortization expense for the next five fiscal years is $4.4 million in fiscal 2005, $3.8 million in fiscal 2006, $3.5 million in fiscal 2007 and $0.4 million in
fiscal 2008 and 2009.

On
December 1, 2003 $6.6 million of net intangible assets were distributed to GHC.

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(11) Long-Term Debt

Long-term debt at September 30, 2004 and 2003 consists of the following (in thousands):

2004

2003Senior Credit FacilityTerm loan

$


$
246,875Delayed draw term loan





68,162Total senior credit facility





315,037Senior secured notes





240,176Senior subordinated notes due 2013


250,000


Mortgages and other secured debt


12,271


56,406Total debt


262,271


611,619Less:Current portion of long-term debt


(4,263
)

(20,135
)Long-term debt

$
258,008

$
591,484


In
contemplation of 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 capital to both separate organizations. As such, NeighborCare and GHC
entered into the following new financing arrangements:

NeighborCare:



GHC:



The
$475.0 million of proceeds from the senior subordinated notes of NeighborCare and GHC, in addition to a portion of the proceeds from the $185.0 million term loan of GHC
were used to repay the Company's previous senior credit facility of $315.1 million ($246.9 million term loan and $68.2 million delayed drawn term loan) and the Company's previous
$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 Company distributed $274.8 million of
long-term debt in the spin-off to GHC on December 1, 2003.

The
agreements and instruments governing NeighborCare's new financing arrangements contain various restrictive covenants that, among other things, require NeighborCare to comply with or
maintain certain financial tests and ratios and restrict the Company's ability to incur more debt; pay

83

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dividends,
redeem stock or make other distributions; make certain investments; create liens; enter into transactions with affiliates; merge or consolidate; and transfer or sell assets.

The
agreements require the Company 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. The Company was in compliance with its
covenants as of September 30, 2004.

Under
the terms of NeighborCare's senior subordinated notes, the notes are not redeemable until on or after November 15, 2008 and October 28, 2008, respectively.
NeighborCare 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 at
106.875% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, subject to the terms of the notes.

Senior Credit Facility

On October 2, 2001, and in connection with the consummation of the Plan of Reorganization, 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 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. The Senior Credit Facility was repaid in the first quarter of fiscal 2004 as described above.

Senior Secured Notes

On October 2, 2001, and in connection with the consummation of the Plan, the Company entered into 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. The Senior Secured Notes were repaid in the first quarter of fiscal 2004 as described above.

Installments
of long-term debt are as follows (in thousands):

Years ending September 30,

Principal Amount2005

$
4,2632006


3,8552007


2,4242008


1,0472009


258Thereafter


250,424$
262,271


(12) Guarantor Subsidiaries and Condensed Consolidating Financial Statements

The Company's $250 million senior subordinated notes due 2013 are fully and unconditionally guaranteed on a joint and several basis by certain 100% owned
subsidiaries of the Company (Guarantors). Those subsidiaries that do not guarantee the notes consist of the joint ventures in which

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NeighborCare
has a greater than 50% share in the equity and earnings thereof (Non-Guarantors). Separate financial statements of the guarantor subsidiaries have not been prepared because
management believes it would not be material to investors. The following tables present the condensed consolidating financial statements of NeighborCare, Inc. (Parent), the guarantor
subsidiaries and the non-guarantor subsidiaries:

Condensed Consolidating Balance Sheets
September 30, 2004
(in thousands)

|                                      |  | Parent |         | Guarantors |   | Non-
Guarantors |  | Eliminations |        | Consolidated
|------------------------------------- |  | ------ | ------- | ---------- | - | --------------- |  | ------------ | ------ | ------------
|Assets                                |  |        |         |            |   |                 |  |              |        |             
|Accounts receivable, net              |  | $      | 146,197 |            | $ | 195,364         |  | $            | 18,365 |             
|Other current assets                  |  |        | 108,879 |            |   | 63,787          |  |              | 13,414 |             
|Property, plant and equipment, net    |  |        | 18,685  |            |   | 58,069          |  |              | 7,461  |             
|Investment in subsidiaries            |  |        | 20,209  |            |   | 1,381           |  |              |       |             
|Goodwill                              |  |        | 287,142 |            |   | 26,720          |  |              | 2,258  |             
|Other long-term assets                |  |        | 25,795  |            |   | 5,676           |  |              | 63     |             
|                                      |  |        |         |            |   |                 |  |              |        |             
|                                      |  | $      | 606,907 |            | $ | 350,997         |  | $            | 41,561 |             
|                                      |  |        |         |            |   |                 |  |              |        |             
|Liabilities and Shareholders' Equity  |  |        |         |            |   |                 |  |              |        |             
|Accounts payable and accrued expenses |  | $      | 82,876  |            | $ | 155,346         |  | $            | 12,513 |             
|Current portion of long-term debt     |  |        | 4,263   |            |   |                |  |              |       |             
|Long-term debt less current portion   |  |        | 256,240 |            |   | 254             |  |              | 1,514  |             
|Other non-current liabilities         |  |        | 78,645  |            |   |                |  |              |       |             
|Shareholders' equity                  |  |        | 184,883 |            |   | 195,397         |  |              | 27,534 |             
|                                      |  |        |         |            |   |                 |  |              |        |             
|                                      |  | $      | 606,907 |            | $ | 350,997         |  | $            | 41,561 |             
|                                      |  |        |         |            |   |                 |  |              |        |             

85

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Condensed Consolidating Balance Sheets
September 30, 2003
(in thousands)

|                                      |  | Parent |           | Guarantors |   | Non-
Guarantors |  | Eliminations |           | Consolidated
|------------------------------------- |  | ------ | --------- | ---------- | - | --------------- |  | ------------ | --------- | ------------
|Assets                                |  |        |           |            |   |                 |  |              |           |             
|Accounts receivable, net              |  | $      | 777,592   |            | $ | 155,782         |  | $            | 213,111   |             
|Other current assets                  |  |        | 186,884   |            |   | 61,069          |  |              | 70,758    |             
|Property, plant and equipment, net    |  |        | 14,687    |            |   | 51,682          |  |              | 685,627   |             
|Investment in subsidiaries            |  |        | 25,435    |            |   | 1,088           |  |              | 10,058    |             
|Goodwill                              |  |        | 330,975   |            |   | 1,509           |  |              | 5,211     |             
|Other long-term assets                |  |        | 64,300    |            |   | 3,604           |  |              | 86,715    |             
|                                      |  |        |           |            |   |                 |  |              |           |             
|                                      |  | $      | 1,399,873 |            | $ | 274,734         |  | $            | 1,071,480 |             
|                                      |  |        |           |            |   |                 |  |              |           |             
|Liabilities and Shareholders' Equity  |  |        |           |            |   |                 |  |              |           |             
|Accounts payable and accrued expenses |  | $      | 29,786    |            | $ | 117,386         |  | $            | 851,232   |             
|Current portion of long-term debt     |  |        | 18,069    |            |   |                |  |              | 2,066     |             
|Long-term debt less current portion   |  |        | 545,224   |            |   | 340             |  |              | 45,920    |             
|Other non-current liabilities         |  |        | 152,918   |            |   | 9,856           |  |              | 29,368    |             
|Shareholders' equity                  |  |        | 653,876   |            |   | 147,152         |  |              | 142,894   |             
|                                      |  |        |           |            |   |                 |  |              |           |             
|                                      |  | $      | 1,399,873 |            | $ | 274,734         |  | $            | 1,071,480 |             
|                                      |  |        |           |            |   |                 |  |              |           |             

Condensed Consolidating Statements of Operations
Fiscal Year Ended
September 30, 2004
(in thousands)

|                                          |  | Parent |          | Guarantors |   | Non-
Guarantors |   | Consolidated |        
|----------------------------------------- |  | ------ | -------- | ---------- | - | --------------- | - | ------------ | -------
|Net revenues                              |  | $      |         |            | $ | 1,290,893       |   | $            | 152,690
|Cost of revenues                          |  |        |         |            |   | 1,025,494       |   |              | 111,724
|                                          |  |        |          |            |   |                 |   |              |        
|Gross profit                              |  |        |         |            |   | 265,399         |   |              | 40,966 
|Operating expenses                        |  |        | 117,329  |            |   | 146,576         |   |              | 22,205 
|Interest expense (income), net            |  |        | 18,599   |            |   | 201             |   |              | 218    
|Other expense (income)                    |  |        | 5,130    |            |   | (673            | ) |              |       
|                                          |  |        |          |            |   |                 |   |              |        
|Income (loss) before income tax provision |  |        | (141,058 | )          |   | 119,295         |   |              | 18,543 
|Income tax provision                      |  |        | 3,369    |            |   | 3               |   |              |       
|Income (loss) from continuing operations  |  |        | (144,427 | )          |   | 119,292         |   |              | 18,543 
|                                          |  |        |          |            |   |                 |   |              |        
|Income from discontinued operations       |  |        | 8,435    |            |   |                |   |              |       
|                                          |  |        |          |            |   |                 |   |              |        
|Net income (loss)                         |  | $      | (135,992 | )          | $ | 119,292         |   | $            | 18,543 
|                                          |  |        |          |            |   |                 |   |              |        

86

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Condensed Consolidating Statements of Operations
Fiscal Year Ended
September 30, 2003
(in thousands)

|                                          |  | Parent |         | Guarantors |   | Non-
Guarantors |   | Consolidated |        
|----------------------------------------- |  | ------ | ------- | ---------- | - | --------------- | - | ------------ | -------
|Net revenues                              |  | $      | 1,598   |            | $ | 1,105,767       |   | $            | 136,492
|Cost of revenues                          |  |        |        |            |   | 865,105         |   |              | 96,873 
|                                          |  |        |         |            |   |                 |   |              |        
|Gross profit                              |  |        | 1,598   |            |   | 240,662         |   |              | 39,619 
|Operating expenses                        |  |        | 20,070  |            |   | 219,898         |   |              | 21,356 
|Interest expense (income), net            |  |        | 14,230  |            |   | (111            | ) |              | 239    
|Other expense (income)                    |  |        | 4,867   |            |   | (578            | ) |              |       
|                                          |  |        |         |            |   |                 |   |              |        
|Income (loss) before income tax provision |  |        | (37,569 | )          |   | 21,453          |   |              | 18,024 
|Income tax provision (benefit)            |  |        | (3,960  | )          |   | 1,912           |   |              |       
|Income (loss) from continuing operations  |  |        | (33,609 | )          |   | 19,541          |   |              | 18,024 
|                                          |  |        |         |            |   |                 |   |              |        
|Income from discontinued operations       |  |        | 28,732  |            |   |                |   |              |       
|                                          |  |        |         |            |   |                 |   |              |        
|Net income (loss)                         |  | $      | (4,877  | )          | $ | 19,541          |   | $            | 18,024 
|                                          |  |        |         |            |   |                 |   |              |        

Condensed Consolidating Statements of Operations
Fiscal Year Ended
September 30, 2002
(in thousands)

|                                          |  | Parent |         | Guarantors |   | Non-
Guarantors |  | Consolidated |        
|----------------------------------------- |  | ------ | ------- | ---------- | - | --------------- |  | ------------ | -------
|Net revenues                              |  | $      | 2,126   |            | $ | 1,029,272       |  | $            | 105,339
|Cost of revenues                          |  |        |        |            |   | 805,233         |  |              | 76,350 
|                                          |  |        |         |            |   |                 |  |              |        
|Gross profit                              |  |        | 2,126   |            |   | 224,039         |  |              | 28,989 
|Operating expenses                        |  |        | 1,727   |            |   | 220,059         |  |              | 19,561 
|Interest expense (income), net            |  |        | 16,427  |            |   | 506             |  |              | 253    
|Other expense (income)                    |  |        | 3,061   |            |   |                |  |              |       
|                                          |  |        |         |            |   |                 |  |              |        
|Income (loss) before income tax provision |  |        | (19,089 | )          |   | 3,474           |  |              | 9,175  
|Income tax provision (benefit)            |  |        | (13,468 | )          |   | 769             |  |              |       
|Income (loss) from continuing operations  |  |        | (5,621  | )          |   | 2,705           |  |              | 9,175  
|                                          |  |        |         |            |   |                 |  |              |        
|Income from discontinued operations       |  |        | 66,507  |            |   |                |  |              |       
|                                          |  |        |         |            |   |                 |  |              |        
|Net income (loss)                         |  | $      | 60,886  |            | $ | 2,705           |  | $            | 9,175  
|                                          |  |        |         |            |   |                 |  |              |        

87

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Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended
September 30, 2004
(in thousands)

|                                    |  | Parent |         | Guarantors |   | Non-
Guarantors |   | Consolidated |        
|----------------------------------- |  | ------ | ------- | ---------- | - | --------------- | - | ------------ | -------
|Cash flow from operating activities |  | $      | (76,191 | )          | $ | 140,358         |   | $            | 7,598  
|Cash flow from investing activities |  |        | (6,002  | )          |   | (51,937         | ) |              | (30,716
|Cash flow from financing activities |  |        | (26,918 | )          |   | (4              | ) |              | (6,991 

Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended
September 30, 2003
(in thousands)

|                                    |  | Parent |         | Guarantors |   | Non-
Guarantors |   | Consolidated |        
|----------------------------------- |  | ------ | ------- | ---------- | - | --------------- | - | ------------ | -------
|Cash flow from operating activities |  | $      | 59,402  |            | $ | 21,124          |   | $            | 30,035 
|Cash flow from investing activities |  |        | (18,823 | )          |   | (9,126          | ) |              | 15,661 
|Cash flow from financing activities |  |        | (81,736 | )          |   | (1,980          | ) |              | (29,861

Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended
September 30, 2002
(in thousands)

|                                    |  | Parent |         | Guarantors |   | Non-
Guarantors |   | Consolidated |        
|----------------------------------- |  | ------ | ------- | ---------- | - | --------------- | - | ------------ | -------
|Cash flow from operating activities |  | $      | (62,314 | )          | $ | 105,479         |   | $            | 136,020
|Cash flow from investing activities |  |        | (8,648  | )          |   | (11,717         | ) |              | (74,474
|Cash flow from financing activities |  |        | 54,359  |            |   | (490            | ) |              | (22,324

(13) Income Taxes

Income tax provision (benefit) for the years ended September 30, 2004, 2003 and 2002 is as follows (in thousands):

2004

2003

2002Income tax from continuing operations

$
3,372

$
(2,048
)
$
(12,699
)Income tax from discontinued operations


5,548


16,900


42,843Total

$
8,920

$
14,852

$
30,144


88

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The components of the provision (benefit) for income taxes for income from continuing operations for the fiscal years ended September 30, 2004, 2003 and 2002 are as follows (in
thousands):

2004

2003

2002Current:Federal

$
(3,471
)
$
(7,850
)
$
(10,285
)State


(878
)

3,859


2,736Total current


(4,349
)

(3,991
)

(7,549
)Deferred:Federal


6,162


5,318


(1,926
)State


1,559


(3,375
)

(3,224
)Total deferred


7,721


1,943


(5,150
)$
3,372

$
(2,048
)
$
(12,699
)


Total
income tax provision (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income from continuing operations before income taxes
(in thousands):

|                                                     |                                                                                  | Fiscal Year Ended September 30, |       
|---------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------- | ------
|
|Computed "expected" tax (benefit)                    |                                                                                  | $                               | (1,127
|Increase (reduction) in income taxes resulting from: |                                                                                  |                                 |       
|                                                     | State and local income taxes, net of federal tax benefit                         |                                 |       
|                                                     | Carryback of losses allowed under Job Creation and Worker Assistance Act of 2002 |                                 |       
|                                                     | Write-off of non-deductible goodwill                                             |                                 |       
|                                                     | Non-deductible strategic planning, severance and other
operating items           |                                 |       
|                                                     | Other permanent nondeductible items                                              |                                 |       
|                                                     |                                                                                  |                                 |       
|Total income tax provision (benefit)                 |                                                                                  | $                               | 3,372 
|                                                     |                                                                                  |                                 |       

The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2004 and 2003 are
presented below (in thousands):

|                          |                                  | 2004                           |                     | 2003                         |        
|------------------------- | -------------------------------- | ------------------------------ | ------------------- | ---------------------------- | -------
|Deferred tax assets:      |                                  |                                |                     |                              |        
|                          | Accounts receivable              |                                | $                   | 8,161                        |        
|                          | Accrued liabilities and reserves |                                |                     | 7,109                        |        
|                          | Net operating loss carryforwards |                                |                     | 20,388                       |        
|                          | Other                            |                                |                     | 374                          |        
|                          |                                  |                                |                     |                              |        
|                          |                                  | Total deferred tax assets      |                     |                              | 36,032 
|                          |                                  |                                | Valuation allowance |                              |        
|                          |                                  |                                |                     |                              |        
|                          |                                  |                                |                     | Net deferred tax assets      |        
|                          |                                  |                                |                     |                              |        
|Deferred tax liabilities: |                                  |                                |                     |                              |        
|                          | Goodwill and other intangibles   |                                |                     | (64,769                      | )      
|                          | Depreciation                     |                                |                     | (4,875                       | )      
|                          | Other                            |                                |                     | (1,088                       | )      
|                          |                                  |                                |                     |                              |        
|                          |                                  | Total deferred tax liabilities |                     |                              | (70,732
|                          |                                  |                                |                     |                              |        
|                          |                                  |                                |                     | Net deferred tax liabilities |        
|                          |                                  |                                |                     |                              |        

89

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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 $10.3 million in federal tax refunds during the
year ended September 30, 2002.

The
Company had NOL carryforwards of $256.1 million at September 30, 2003. On December 1, 2003, the Company distributed approximately $46.6 million of net
deferred tax assets to GHC, including $205.5 million of NOL for which a 100% valuation allowance had been provided. The remaining $50.6 million of NOLs are available for use by the
Company through September 30, 2020 and 2021.

In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The
ultimate realization of the deferred tax assets may be limited under the Internal Revenue Code, and thus management determined a valuation allowance of $24.7 million and $98.8 million
was required at September 30, 2004 and 2003, respectively. The decrease in valuation allowance in fiscal 2004 relates primarily to the spin-off of GHC. The decreases in valuation
allowance in fiscal 2003 and 2002 relate primarily to the utilization of NOLs. The income tax benefit derived from the future utilization of the NOL, prior to its emergence from bankruptcy, would
ultimately be applied to reduce goodwill and, thereafter, to increase additional paid-in-capital.

(14) Redeemable Preferred 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.

Prior
to December 16, 2003, the Company had issued 425,946 shares of Series A Convertible Preferred Stock (the "Series A Preferred"). The Series A Preferred
had a liquidation preference of $46.8 million and accrued dividends at the annual rate of 6% payable in additional shares of Series A Preferred. The Series A Preferred was
convertible at any time, at the option of the holders. Following the spin-off, each share of Series A Preferred was 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.

(15) Shareholders' Equity

Common Stock

The authorized common stock consists of 200,000,000 shares, $0.02 par value, of which 45,963,552 shares were issued and 44,058,439 shares were outstanding at
September 30, 2004 and 41,813,603 shares were issued and 39,514,351 shares were outstanding at September 30, 2003. There are 259,522 shares of common stock in escrow at
September 30, 2004, which are to be issued when all outstanding claim objections and other disputed claim matters of the bankruptcy proceedings are resolved.

Treasury stock

During 2004, 438,177 shares of restricted stock were issued out of the shares held in treasury with a cost basis of $6.9 million and 44,038 of those shares
were surrendered by the recipients to fulfill income tax requirements. The 44,038 shares surrendered were restored to treasury stock at a cost of approximately $1.3 million.

90

---



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.

Restricted Stock Grants

On June 15, 2004, the Company's shareholders approved the NeighborCare 2004 Performance Incentive Plan authorizing the issuance of 5,000,000 shares of
stock to members of the Company's management and Board of Directors. During 2004, 438,177 shares of restricted stock were issued out of the shares held in treasury under varying vesting terms. The
Company records compensation expense ratably over each vesting period based on the fair value of the restricted stock at the date of grant. In 2004, the Company recognized $3.5 million in
compensation expense related to the vesting of 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 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.

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 by their terms will become exercisable only 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). Following the tender offer by Omnicare for NeighborCare's outstanding common stock, the Board of Directors on June 10, 2004, took action to postpone
exercisability of the Rights until the earlier of the acquisition by any person or group of beneficial ownership of 20% or more of NeighborCare's outstanding common stock or such date as may be
determined by the Board in its discretion. The Rights expire December 1, 2013.

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(16) Stock Option and Defined Contribution Plan

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                    |  |                       |  |            |   |            |   | 3,480,000           |  
|Granted                       |  | $18.75  $20.33        |  | 2,751,000   |   |            |   | (2,751,000          | )
|Exercisable                   |  |                       |  |            |   | 619,779     |   |                    |  
|Canceled / Forfeited          |  |                       |  | (392,000    | ) |            |   | 392,000             |  
|                              |  |                        |  |             |   |             |   |                     |  
|Balance at September 30, 2002 |  | $18.75  $20.33        |  | 2,359,000   |   | 619,779     |   | 1,121,000           |  
|                              |  |                        |  |             |   |             |   |                     |  
|Granted                       |  | $15.06  $20.33        |  | 652,500     |   |            |   | (652,500            | )
|Exercisable                   |  |                       |  |            |   | (174,466    | ) |                    |  
|Canceled / Forfeited          |  |                       |  | (2,271,500  | ) |            |   | 2,271,500           |  
|                              |  |                        |  |             |   |             |   |                     |  
|Balance at September 30, 2003 |  | $16.80  $20.33        |  | 740,000     |   | 445,313     |   | 2,740,000           |  
|                              |  |                        |  |             |   |             |   |                     |  
|Granted                       |  | $15.47  $21.50        |  | 1,590,000   |   |            |   | (1,590,000          | )
|Spin-off                      |  |                       |  | 427,748     |   | 418,947     |   | (427,748            | )
|Exercisable                   |  |                       |  |            |   | 968,711     |   |                    |  
|Exercised                     |  | $10.73  $12.99        |  | (190,844    | ) | (190,844    | ) |                    |  
|Canceled / Forfeited          |  |                       |  | (331,875    | ) | (285,000    | ) | 331,875             |  
|                              |  |                        |  |             |   |             |   |                     |  
|Balance at September 30, 2004 |  | $10.73  $21.50        |  | 2,235,029   |   | 1,357,127   |   | 1,054,127           |  
|                              |  |                        |  |             |   |             |   |                     |  

Weighted
average characteristics of outstanding and exercisable stock options by exercise price range as of September 30, 2004 were as follows

|                |  | Shares Outstanding |  | Shares Exercisable
|--------------- |  | ------------------ |  | ------------------
|
|$10.73  $15.47 |  | 704,404            |  | 7.80              
|$15.48  $21.50 |  | 1,530,625          |  | 9.22              
|                |  |                    |  |                   
|$10.73  $21.50 |  | 2,235,029          |  | 8.77              
|                |  |                    |  |                   

The
Company will no longer make option grants under the 2001 Plan pursuant to the adoption of the 2004 Performance Incentive Plan on June 15, 2004.

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
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

92

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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. 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.

The
Company employees may generally participate in a defined contribution plan that is sponsored by the Company. The plan generally provides for employee salary deferral contributions of
up to 50% of eligible employee compensation. Under the terms of the plan, the Company contributes a matching contribution of up to a maximum of 1.5% of eligible employee contributions. The Company's
costs with respect to its contributions to the defined contribution plan included in continuing operations were $1.5 million, $1.9 million and $0.8 million in fiscal 2004, 2003
and 2002, respectively.

(17) Fair Value of Financial Instruments

The carrying amount and fair value of financial instruments at September 30, 2004 and 2003 consist of the following (in thousands):

|                                                |  | 2004 |         | 2003 |  
|----------------------------------------------- |  | ---- | ------- | ---- | -
|
|Cash and equivalents                            |  | $    | 81,923  |      | $
|Restricted investments in marketable securities |  |      |        |      |  
|Accounts receivable, net                        |  |      | 230,903 |      |  
|Accounts payable                                |  |      | 77,750  |      |  
|Long-term debt, excluding capital leases        |  |      | 250,000 |      |  
|Interest rate swaps and cap                     |  |      | 281     |      |  

The
following methods and assumptions were used to estimate the fair value of each class of financial instruments:



(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 provisions for possible credit and guarantee
losses.

As
of September 30, 2004, the Company had extended letters of credit of $2.4 million. The outstanding letters of credit reduce the Company's borrowing availability under
its $100.0 million revolving credit facility to $97.6 million.

93

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Legal Proceedings

The Company is a party to litigation arising in the ordinary course of business. The Company accrues for legal proceedings when an unfavorable outcome is probable
and reasonably estimable. 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. While the outcome of the cases discussed below could have a material effect if decided adversely, management considers this result unlikely.



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 the Company 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, 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 United States 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 United States Bankruptcy Court granted the Company's
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 United States 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 United States District Court for several reasons, including that the
plaintiff was unlikely to succeed on the merits. When the injunction was denied by the United States 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 United States District Court denied the plaintiff's appeal and
upheld the summary judgment decision rendered by the United States Bankruptcy Court. The Third Circuit Court of Appeals affirmed the decision of the District Court on October 12, 2004.

In
light of the Third Circuit Court decision, the Company expects the New Jersey District Court case to be dismissed.



This action was brought January 27, 2004, in the Supreme Court of New York, County of New York, by 275 former investors who collectively held over
$205 million in subordinated debentures prior to the filing of the Company's Chapter 11 bankruptcy petition in 2000. The case was subsequently removed to federal court and it is now pending in
the U.S. Bankruptcy Court for the District of Delaware. The plaintiffs allege fraud and grossly negligent misrepresentation by the defendants in connection with the Bankruptcy Court's approval of the
Company's plan of reorganization confirmed by the Bankruptcy Court in 2001, canceling the subordinated debentures. The defendants, in addition to the Company, are Goldman Sachs & Co., Mellon
Bank, N.A., Highland Capital Management, LP, and George V. Hager, Jr., the Company's chief financial officer during the period in question. The plaintiffs seek to recover $200 million plus
interest costs and fees. The defendants have made a motion to dismiss which is currently pending before the U.S. Bankruptcy Court. Mellon Bank N.A. has filed a

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cross-claim
for indemnification against the Company. NeighborCare filed a motion to dismiss and Mellon filed a motion for summary judgement, both of which are also pending before the U.S. Bankruptcy
Court.



This action was brought June 8, 2004, against the Company and its directors in the Supreme Court of New York, County of New York, as a purported class
action alleging that the Company's Board of Directors breached their fiduciary duties to the plaintiff and the class and aided and abetted such breaches in connection with a proposal by
Omnicare, Inc. to acquire all of the Company's outstanding common stock.



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:



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:



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Leases

The Company is obligated under capital leases covering certain equipment that expire at various dates through 2009. As of September 30, 2004 and 2003, the
net book value of the equipment was
$22.2 million and $21.6 million. Amortization of assets held under capital leases is included with depreciation expense.

The
Company also has several noncancelable operating leases, primarily for pharmacy facilities, that expire over the next ten years. These leases generally contain renewal options for
periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Total rent expense associated with operating leases for fiscal 2004, 2003
and 2002, in continuing operations was $13.7 million, $12.4 million and $11.5 million, respectively.

Future
minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of
September 30, 2004 are:

Years ending September 30,

Capital
Leases

Operating
Leases2005

$
3,612

$
10,7102006


2,948


8,6122007


1,604


7,3032008


199


5,8202009


41


3,292Thereafter





3,451Total minimum lease payments


8,404

$
39,188Less amount representing interest (at rates ranging from 7.0% to 10.5%)


(909
)Present value of net minimum capital lease payments


7,495Less current installments of obligations under capital leases


(3,612
)Obligations under capital leases, excluding current installments

$
3,883


The
capital lease obligations are included with long-term debt on the consolidated balance sheets.

(19) 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: institutional pharmacy business and corporate and other.

The
institutional pharmacy business provides prescription and non-prescription pharmaceuticals, infusion therapy and medical supplies and equipment to the elderly,
chronically ill and disabled in long-term care facilities, including skilled nursing facilities, assisted living facilities, residential and independent living communities and other
institutional healthcare facilities. The pharmacy services provided in these settings are tailored to meet the needs of the institutional customer. These services include highly specialized packaging
and dispensing systems, computerized medical records processing and 24-hour emergency services. The Company also provides pharmacy consulting services to assure proper and effective drug
therapy, including monitoring and reporting on prescription drug therapy and assisting the facility in compliance with applicable federal and state regulations.

Summarized
financial information concerning the Company's reportable segments is shown in the following table for the years ended September 30, 2004, 2003 and 2002. The table has
been revised to

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reflect
the spin-off of GHC, the previously reported "Inpatient Services" segment. The "Corporate and Other" category of operations represents operating information of business units below
the prescribed quantitative thresholds under the SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Revenues from these business units are primarily derived
from the Company's community-based professional pharmacy business, home infusion, respiratory and medical equipment business and long-term care group purchasing business (Tidewater). The
"Corporate and Other" category also consists of the Company's corporate general and administrative function, for which there is generally no revenue generated.

This
approach to segment reporting is consistent with the Company's internal financial reporting and the information used by the chief operating decision makers regarding the performance
of the reportable and non-reportable segments. The accounting policies of the segments are the same as those of the consolidated organization.

|                                     |  | Institutional
Pharmacy |           | Corporate and
Other |   | Consolidated
|------------------------------------ |  | ---------------------- | --------- | ------------------- | - | ------------
|
|Fiscal year ended September 30, 2004 |  |                        |           |                     |   |             
|Net revenues                         |  | $                      | 1,228,759 |                     | $ | 214,824     
|Gross profit                         |  |                        | 240,334   |                     |   | 66,031      
|Operating income (loss)              |  |                        | 117,321   |                     |   | (97,066     
|Fiscal year ended September 30, 2003 |  |                        |           |                     |   |             
|Net revenues                         |  | $                      | 1,030,412 |                     | $ | 213,445     
|Gross profit                         |  |                        | 212,650   |                     |   | 69,229      
|Operating income (loss)              |  |                        | 92,325    |                     |   | (71,770     
|Fiscal year ended September 30, 2002 |  |                        |           |                     |   |             
|Net revenues                         |  | $                      | 922,604   |                     | $ | 214,133     
|Gross profit                         |  |                        | 185,683   |                     |   | 69,471      
|Operating income (loss)              |  |                        | 67,851    |                     |   | (54,044     
|Total assets as of                   |  |                        |           |                     |   |             
|September 30, 2004                   |  | $                      | 217,969   |                     | $ | 631,439     
|September 30, 2003                   |  |                        | 192,543   |                     |   | 1,746,186   

A
reconciliation of consolidated operating income to consolidated income from continuing operations:

|                                        |  | Fiscal year ended September 30, |       
|--------------------------------------- |  | ------------------------------- | ------
|
|Consolidated operating income           |  | $                               | 20,255
|Interest expense, net                   |  |                                 | 19,018
|Other expense                           |  |                                 | 4,457 
|Income tax provision (benefit)          |  |                                 | 3,372 
|                                        |  |                                 |       
|Income(loss) from continuing operations |  | $                               | (6,592
|                                        |  |                                 |       

See
note 5 for business concentrations.

(20) Derivative Financial Instruments

The Company is exposed to interest rate changes in the normal course of its business. The Company uses interest rate swaps to hedge its interest rate exposures
with the objective of offsetting

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gains
and losses resulting from these exposures with the losses and gains on the derivative instruments used to hedge them. Thereby reducing volatility of earnings or protecting fair values of
liabilities.

In
August 2004, the Company entered into an interest rate swap agreement with a notional amount of $125 million, which expires November 15, 2013, in which the
Company receives a fixed-rate of 6.875% and pays a floating rate based on the six-month London InterBank Offered Rate ("LIBOR") LIBOR plus 1.8475% with measurement and
settlement performed semiannually (4.017% as of September 30, 2004). The swap was designated as a fair value hedge, as the critical terms of the interest rate swap and the hedged item are
designed to match thereby satisfying the criteria for short-cut method of accounting as defined by SFAS No. 133, as amended. Accordingly, the swap and the underlying debt obligation
are recorded on the balance sheet at their fair value, with the changes in fair value of the derivative and the related debt are recorded in the consolidated statement of operations. Based upon
valuations provided by third party financial institutions, the fair value of the interest rate swap as of September 30, 2004 was $0.3 million.

As
of September 30, 2003, the Company had two interest rate swap agreements with notional amounts aggregating $200 million, which were to expire at times through
September 13, 2007, in which the Company received a fixed-rate of approximately 3.5% and paid variable rate one-month LIBOR. In addition, at September 30, 2003,
the Company had a $75 million interest rate cap, which was to expire on September 13, 2004, in which the Company received interest when LIBOR exceeded 3%. The Company purchased the
interest rate cap in September 2002 for $0.7 million, which was amortized to interest expense over the two-year agreement. The swaps were designated as a cash flow hedges,
recorded on the consolidated balance sheet at fair value with the related unrealized gain or loss as a component of accumulated other comprehensive income. Based upon valuations provided by third
party financial institutions, the fair value of the interest rate swaps and cap as of September 30, 2003 was $7.0 million. In fiscal 2004, in conjunction with the debt refinancing and
the spin-off of GHC, these interest rate swaps and cap were discontinued and the Company recognized a loss of $3.5 million in the consolidated statement of operations

(21) 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) from
Continuing
Operations Per
Common Share |        | Diluted Net
Income (Loss)
Per Common
Share |  
|------------------ |  | ------------------ | ------- | ---------------------------------------- | - | --------------------------------------------------- | - | ----------------------------------------------------------------- | ------ | ------------------------------------------ | -
|Quarter ended:     |  |                    |         |                                          |   |                                                     |   |                                                                   |        |                                            |  
|December 31, 2003  |  | $                  | 338,394 |                                          | $ | (14,149                                             | ) | $                                                                 | (5,714 | )                                          | $
|March 31, 2004     |  |                    | 356,646 |                                          |   | 8,216                                               |   |                                                                   |       |                                            |  
|June 30, 2004      |  |                    | 371,094 |                                          |   | (6,773                                              | ) |                                                                   |       |                                            |  
|September 30, 2004 |  |                    | 377,163 |                                          |   | 6,114                                               |   |                                                                   |       |                                            |  
|Quarter ended:     |  |                    |         |                                          |   |                                                     |   |                                                                   |        |                                            |  
|December 31, 2002  |  | $                  | 297,104 |                                          | $ | (1,114                                              | ) | $                                                                 | 11,937 |                                            | $
|March 31, 2003     |  |                    | 304,933 |                                          |   | (399                                                | ) |                                                                   | 4,664  |                                            |  
|June 30, 2003      |  |                    | 318,886 |                                          |   | 5,948                                               |   |                                                                   | 6,472  |                                            |  
|September 30, 2003 |  |                    | 322,934 |                                          |   | (478                                                | ) |                                                                   | 6,914  |                                            |  

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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In
the fourth quarter of fiscal 2004, the Company completed the analysis of the corporate assets and liabilities, including the components of deferred income taxes giving effect to the
spin-off of GHC. As a result, the Company determined that certain deferred tax liabilities, which were initially recorded in connection with the fresh-start reporting upon the emergence of
Genesis Health Ventures, Inc. from bankruptcy on September 30, 2001, had been overstated by $43.7 million. Additionally, the Company determined that the initial allocation of
deferred income taxes between GHC and NeighborCare on December 1, 2003 did not reflect the tax effect of distributing tax-basis goodwill to GHC of $89.8 million and thereby
under estimated the Company's deferred tax liabilities attributable to NeighborCare by $36.2 million. Accordingly, in the fourth quarter of fiscal 2004, the Company decreased goodwill by
$43.7 million, increased the deferred tax liabilities by $36.2 million, and increased the charge to equity for the distribution of net assets of GHC by $79.9 million. This
adjustment had no effect on reported operating results and cash flows and no effect on working capital, other liquidity measures or debt covenants. The Company considered relevant quantitative and
qualitative effects of the adjustments and concludes that such adjustments did not have a material effect on the consolidated financial statements.

(22) Subsequent Events

On November 2, 2004, NeighborCare, Inc. signed a definitive agreement to acquire Quest Total Care Pharmacy of Longview, Texas. On November 9,
2004, NeighborCare, Inc. signed a definitive agreement to acquire Bellville Pharmacy Services of San Diego, California. The acquisitions are expected to close in the first quarter of fiscal
2005.

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

None.

ITEM 9A:    CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission's rules and forms.

Our
principal executive officer and principal financial officer also conducted an evaluation of our internal control over financial reporting ("Internal Control") to determine whether
any changes in Internal Control occurred during the period that have materially affected or which are reasonably likely to materially affect our Internal Control. Based on that evaluation, there has
been no such change during the period covered by this report.

A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected. We conduct periodic evaluations to enhance, where necessary our procedures and controls.

ITEM 9B:    OTHER INFORMATION

None.

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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:

|Name                  |  | Age |  | Committees of the Board of Directors                                                        
|--------------------- |  | --- |  | --------------------------------------------------------------------------------------------
|John J. Arlotta       |  | 55  |  | Chairman, Executive Committee                                                               
|James H. Bloem        |  | 54  |  | Chairman, Audit and Compliance Committee; Compensation Committee                            
|James E. Dalton, Jr.  |  | 62  |  | Nominating and Governance Committee; Compensation Committee                                 
|James D. Dondero      |  | 42  |  | Chairman, Compensation Committee; Executive Committee                                       
|Robert H. Fish        |  | 54  |  | Executive Committee                                                                         
|Dr. Philip P. Gerbino |  | 57  |  | Lead Director; Audit and Compliance Committee; Chairman, Nominating and Governance Committee
|Arthur J. Reimers     |  | 50  |  | Audit and Compliance Committee; Executive Committee                                         
|Phyllis R. Yale       |  | 47  |  | Nominating and Governance Committee                                                         

John
J. Arlotta has served as our chairman, president and chief executive officer since December 2003. From July 2003 to December 2003, Mr. Arlotta served as
our vice chairman with primary responsibility for the NeighborCare business. Prior to joining us, Mr. Arlotta served as a consultant to Caremark Rx, Inc., a pharmaceutical services
company, from February 2002 to July 2003. Mr. Arlotta was president and chief operating officer of Caremark Rx, Inc. from May 1998 to February 2002 and chief
operating officer of Caremark Rx, Inc. from September 1997 to May 1998.

James
H. Bloem has served as our director since October 2, 2001. Mr. Bloem has served as senior vice president and chief financial officer of Humana, Inc., a health
benefits company, since February 2001 and is responsible for corporate development and supervising all accounting, actuarial, financial, tax, risk management, treasury, and investor relations
activities. From September 1999 to February 2001, Mr. Bloem was an independent financial and business consultant. From August 1995 to September 1999,
Mr. Bloem served first as executive vice president and 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 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.

James
E. Dalton has served as our director since October 2, 2001. Mr. Dalton is the president of Edinburgh Associates, Inc., a consulting services company, a
position he has held since 2001. From 1990 to 2001, Mr. Dalton served as president, chief executive officer and director of Quorum Health Group, Inc., a hospital ownership and management
company. Mr. Dalton's extensive management experience also includes senior management positions with HealthTrust Inc. and Humana, Inc. 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
Select Medical Corporation and Universal Health Realty Income Trust.

James
D. Dondero has served as our director since October 2, 2001. Since 1990, Mr. Dondero has served as president of Highland Capital Management, LP, an investment
advisory firm, 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

101

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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 common stocks. Mr. Dondero is a certified public accountant, chartered financial analyst, a certified management accountant and a member of the NYSSA. Mr. Dondero 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 our chairman and chief executive officer from January 2003 to
December 2003 until his resignation from these positions on December 1, 2003. Prior to serving as our chairman and chief executive officer, Mr. Fish served as our interim chairman
from November 2002 to January 2003 and as our interim chief executive officer from May 2002 to January 2003. Since November 1999, he as served as managing partner of
Sonoma-Seacrest, LLC, a California-based healthcare practice specializing in strategic planning, performance improvement, and merger and acquisition issues. From August 1995 to
September 1999, Mr. Fish served as president and chief executive officer of St. Joseph Health System, a health care provider. Mr. Fish is a member of the board of directors of
GHC.

Dr. Philip
P. Gerbino has served as our director since March 16, 2000. Since 1995, Dr. Gerbino has served as 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 DrugMax, Inc.

Arthur
J. Reimers has served as our director since October 2003. Mr. Reimers is currently an independent financial and business consultant. He 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 until 1998.
Mr. Reimers is a member of the board of directors of Rotech Healthcare, Inc.

Phyllis
R. Yale has served as our director since October 2003. Ms. Yale is a managing director of Bain and Company, Inc., a global management 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.

On
October 8, 2003, by majority vote in accordance with the Company's Amended and Restated By-Laws, the Board of Directors set the number of directors at eight and
appointed John J. Arlotta, Arthur J. Reimers and Phyllis R. Yale as directors, effective as of the consummation of the spin-off (i.e., December 1, 2003). Effective
December 1, 2003, Joseph A. LaNasa, III, a Class I director, resigned. On December 9, 2003, the Board of Directors assigned the directors to the three classes.

See
the information set forth in Part I, Item 4A, "Executive Officers of the Registrant," of this Form 10-K.

The
three Class I Directors, whose terms initially expired at the 2004 Annual Meeting of Shareholders and upon re-election now expire at the 2007 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.

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The
two Class III Directors, whose terms expire at the 2006 Annual Meeting of Shareholders, are James E. Dalton, Jr. and Dr. Philip P. Gerbino.

Audit Committee and Financial Expert

We have a separately designated standing Audit and Compliance Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), comprised of Messrs. Bloem, Reimers and Gerbino, each of whom is "independent" as defined under Exchange Act Rule 10A-3 and
Rule 4200(a)(15) of the Nasdaq Stock Market, Inc. Marketplace Rules. Our Board of Directors has determined that Mr. Bloem is an "audit committee financial expert" as defined under
Item 401(h) of Regulation S-K.

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, 2004, 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 Messrs. Reimers, Dondero and Smith
and Goldman Sachs Group, Inc. filed a late report on Form 4, each reporting one transaction, and Mr. Fish filed a late report on Form 4 reporting four transactions.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics in compliance with the Nasdaq Stock Market, Inc. Marketplace Rules and the rules and regulations of
the SEC. Our Code of Business Conduct and Ethics applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer, Controller and any other employees. A
copy of our Code of Business Conduct and Ethics is available on our website located at www.neighborcare.com/investor. We will post any amendments to our Code of Business Conduct and Ethics on our
website.

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ITEM 11:    EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the compensation earned during each of the last three fiscal years by our current and former Chief Executive Officer and our five
other most highly compensated executive officers, referred to as the Named Executive Officers, whose aggregate salaries and bonuses exceeded $100,000 for services rendered in all capacities to us
during fiscal 2004.

|                                                                                    |  | Annual Compensation |  | Long-term Compensation
|----------------------------------------------------------------------------------- |  | ------------------- |  | ----------------------
|
|John J. Arlotta
Chairman, President and
Chief Executive Officer                     |  | 2004
2003           |  | $                     
|Robert H. Fish
Former Chief Executive Officer                                       |  | 2004
2003
2002      |  |                       
|Robert A. Smith
Senior Vice President and
Chief Operating Officer                   |  | 2004
2003
2002      |  |                       
|John F. Gaither, Jr.
Senior Vice President, General Counsel and Corporate Secretary |  | 2004                |  |                       
|John L. Kordash
Vice Chairman and Executive
Vice President                          |  | 2004
2003           |  |                       
|Richard W. Sunderland, Jr.
Former Chief Financial Officer                           |  | 2004
2003
2002      |  |                       
|Richard W. Hunt
Senior Vice President and
Chief Financial Officer                   |  | 2004                |  |                       

---

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Option/SAR Grants in Last Fiscal Year

The following table sets forth certain information concerning stock options granted under the 2001 Stock Option Plan during fiscal 2004 to the Named Executive
Officers:

|                           |  | Individual Grants               |  | Potential Realized Value
at Assumed Annual Rates
of Stock Price Appreciation
for Option Terms
|-------------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------------------------
|
|John J. Arlotta            |  | 250,000
250,000
250,000
250,000 |  | 15.80%
15.80%
15.80%
15.80%                                                                  
|Robert H. Fish             |  | 3,913                           |  | 0.25%                                                                                        
|Robert A. Smith            |  | 87,500                          |  | 5.50%                                                                                        
|John F. Gaither, Jr.       |  | 150,000                         |  | 9.50%                                                                                        
|John L. Kordash            |  | 250,000                         |  | 15.80%                                                                                       
|Richard W. Sunderland, Jr. |  | 75,000                          |  | 4.70%                                                                                        
|Richard W. Hunt.           |  |                                |  |                                                                                             

---

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Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

The following table sets forth certain information concerning the number and value of unexercised options to purchase shares of our common stock held at the end
of fiscal 2004 by the Named Executive Officers:

|Name                       |  | Shares Acquired
on Exercise (#) |  | Value
Realized ($) |  | Number of
Unexercised
Securities
Underlying
Options/SARs
Fiscal Year-End (#)
Exercisable/
Unexercisable |  | Value of Unexercised
In-the-Money
Options/SARs at
Fiscal Year-End ($)
Exercisable/
Unexercisable (1)
|-------------------------- |  | ------------------------------- |  | ------------------ |  | ------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|John J. Arlotta            |  |                                |  |                   |  | 421,875/578,125                                                                                         |  | 2,026,250/3,088,594                                                                                 
|Robert H. Fish             |  | 147,797                         |  | 1,779,403          |  | 399,163/                                                                                               |  | 4,932,794/                                                                                         
|Robert A. Smith            |  |                                |  |                   |  | 38,281/49,219                                                                                           |  | 147,382/189,493                                                                                     
|John F. Gaither, Jr.       |  |                                |  |                   |  | 65,625/84,375                                                                                           |  | 252,656/324,844                                                                                     
|John L. Kordash            |  |                                |  |                   |  | 109,375/140,625                                                                                         |  | 421,094/541,406                                                                                     
|Richard W. Sunderland, Jr. |  |                                |  |                   |  | 28,125/                                                                                                |  | 108,281/                                                                                           
|Richard W. Hunt            |  |                                |  |                   |  | /                                                                                                     |  | /                                                                                                 

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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 or Board Committee attended and $1,000 for each telephonic meeting of the Board of
Directors or Board Committee attended. The chairman of our Audit and Compliance Committee receives an additional annual fee of $10,000.

Each
director also receives an annual award of restricted stock under our 2004 Performance Incentive Plan having a fair market value at the time of grant of $95,000. Such shares are 100%
vested on the date of the award but during the period commencing on the date of the award and terminating on the date the grantee no longer serves as a director, referred to as the restricted period,
the shares may not be sold, assigned, exchanged, gifted, transferred, pledged, or otherwise encumbered by the grantee except as described below. If, during the restricted period, the fair market value
of the shares is greater than $285,000, the restrictions shall be lifted with respect to that number of the shares which represents the amount of the fair market value of the shares in excess of
$285,000, but the restrictions shall continue to apply during the restricted period to that portion of the shares with a fair market value of $285,000. Upon a change of control, as defined in the
plan, the shares shall be free of restrictions.

Effective
June 15, 2004, each director was granted 3,033 shares of restricted stock valued at the closing market price of our common stock of $31.32.

Employment Agreements

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,

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2004.
The agreement provided for an incentive bonus of not less than $550,000, with a target bonus of 80% of his base salary, for fiscal 2003. Annually thereafter, the agreement provides that
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 and a performance bonus of $550,000 in fiscal 2003 pursuant to the agreement. Mr. Arlotta received an annual base salary of
$850,000 and a performance bonus of $680,000 with respect to fiscal 2004 pursuant to the agreement.

Pursuant
to the terms of the agreement, we granted to Mr. Arlotta options to purchase 1,000,000 shares of our Common Stock 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. Under the agreement, Mr. Arlotta also received 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 following the spin-off. On the date of
the restricted stock award, 25% of the shares vested immediately, with vesting in equal quarterly installments thereafter such that the shares vest in full by July 7, 2006. In addition,
Mr. Arlotta is entitled to participate in each employee benefit plan or perquisite applicable generally to our executive officers. Under the terms of the agreement, all equity-based
compensation will fully vest automatically upon a change in control, any termination by us without cause or due to Mr. Arlotta's death or disability, each as defined in the agreement, any
termination by Mr. Arlotta for good reason or our failure to automatically extend the term of the agreement.

The
Board of Directors may terminate the employment agreement with Mr. Arlotta 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 NeighborCare. 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
following 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, NeighborCare will:



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In
addition, Mr. Arlotta is entitled to the above consideration in the event that he terminates the agreement because NeighborCare has engaged or has 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, Caremark Rx, Inc.. On July 8, 2003, Caremark filed
a complaint seeking to prohibit Mr. Arlotta's employment with NeighborCare pursuant to the terms of such consulting agreement. In December 2003, NeighborCare, Caremark and
Mr. Arlotta entered into a Partial Release and Settlement Agreement pursuant to which Mr. Arlotta was permitted to accept continued employment with NeighborCare under certain conditions
and Caremark was released of certain compensation obligations to Mr. Arlotta and the complaint was dismissed without prejudice.

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 former chief
financial officer, and Robert A. Smith, our chief operating officer, respectively. Effective December 9, 2003, each of these agreements was amended and restated. Effective June 22, 2004,
the agreements with Messrs. Kordash and Gaither were further amended. The agreements with Messrs. Kordash and Gaither expire on October 1, 2005 On May 7, 2004, the Company
entered into a Separation Agreement with Richard W. Sunderland, Jr., and on August 27, 2004, Mr. Sunderland resigned as our chief financial officer. See "Transition
Agreements."

The
agreement with Mr. Smith expires on December 1, 2005. The agreements provide that annual base salaries to be paid to Messrs. Kordash, Gaither, Sunderland and
Smith are $250,000, $280,000, $250,000 and $350,000, respectively. In addition, the agreements with Messrs. Kordash and Gaither provided 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% vested immediately upon the date of grant and the remainder vests in quarterly
installments of 6.25% thereafter. The agreements with Messrs. Sunderland and Smith provided for option grants by incorporation of prior letter agreements with us, as described below, at the
same exercise price and vesting schedule described above. Under the terms of the agreements, all outstanding equity-based compensation shall automatically become fully
vested upon any termination by us without cause or due to the executive's death or disability or the executive's termination for good reason, each as defined in the agreements; provided that the
agreements with Messrs. Smith and Sunderland provide for less than full vesting upon termination on or before January 1, 2005 in certain instances.

The
agreements with Messrs. Kordash, Gaither, Sunderland and Smith contain the following provisions that are substantially similar to those provisions contained in
Mr. Arlotta's employment agreement discussed above: 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 in the event of termination without cause or for good reason

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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.

Effective
June 22, 2004, we amended our agreements with Messrs. Kordash and Gaither to further provide (i) that resignation within ninety days following a change in
control will constitute termination by the executive for good reason, (ii) for payment upon termination without cause, death or disability or termination by executive for good reason within two
years of a change in control equal to two times his average annual base salary and average annual bonus under our incentive plans for the most recent two years, and (iii) for the automatic
vesting of all equity-based compensation upon a change in control unless otherwise specifically provided by reference to the amended agreement in any plan or award thereunder or unless 75% of the
incumbent directors (as defined in our 2004 Performance Incentive Plan) determine otherwise prior to such change in control.

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:



On
June 29, 2004, we entered into an employment agreement with Richard W. Hunt, our senior vice president and chief financial officer. The agreement provides that
Mr. Hunt's base salary for the initial one-year term of the agreement is $250,000. The agreement also provides for the grant of 50,000 shares of our restricted stock, of which
12,500 vest 45 days after the grant date and the remaining amount vests in equal installments on each of the first three anniversaries of the effective date, provided that Mr. Hunt
remains employed by us on each such date. In the event that a change of control, as defined in the agreement, occurs on or prior to December 31, 2004, 30,000 of such shares of restricted stock
will immediately vest (inclusive of, and not in addition to, the 12,500 shares scheduled to vest 45 days after the grant date). In the event that a change of control occurs after
December 31, 2004, all of such shares of restricted stock will vest in full.

The
agreement with Mr. Hunt contains the following provisions that are substantially similar to those provisions contained in our agreements, as amended, with
Messrs. Kordash and Gaither discussed above: an automatic one-year extension, eligibility to participate in equity and cash 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 Mr. Hunt upon the occurrence of certain events and confidentiality and
non-competition provisions. The agreement also provides for severance compensation in the event of termination without cause or for good reason consisting of a pro rata bonus for the
portion of the year in which the date of termination occurs, a lump-sum

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payment
equal to the sum of Mr. Hunt's average base salary and the average annual bonus earned under our incentive plans for the most recent two years or, during the two-year period
following a change of control as described above with respect to our agreements with Messrs. Kordash and Gaither, two times such sum, continuation of health and life insurance benefits for up
to two years and, if but only if such termination occurs after the first anniversary of our agreement with Mr. Hunt, vesting of previously granted stock options and restricted stock.

Transition Agreements

On December 1, 2003, in connection with the spin-off, Robert Fish resigned as our chairman and chief executive officer. Mr. Fish
remained our employee for transitional purposes until his termination on February 28, 2004. Pursuant to the terms of Mr. Fish's employment agreement, upon his resignation Mr. Fish
received $766,500 in accrued and unpaid salary and bonuses through the date of termination and a continuation of health and insurance benefits for himself, his spouse and eligible dependents for a
period of one year following the date of termination. Upon his resignation, all restricted stock awards made to Mr. Fish fully vested, and all vested stock options remained exercisable through
the original terms with all rights. The employment agreement also contains provisions which restrict Mr. Fish from competing with NeighborCare for a period of one year after termination.

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.

On
May 7, 2004, we entered into a Separation Agreement with Richard W. Sunderland, Jr., our chief financial officer. Under the agreement, effective August 27, 2004,
Mr. Sunderland received incentive compensation of $59,688 and will receive $250,000 of severance through August 27, 2005. Additionally, Mr. Sunderland will continue to receive
benefits through August 27, 2006.

Benefit Plans



On June 15, 2004, our shareholders approved our 2004 Performance Incentive Plan. The purposes of our 2004 Performance Incentive Plan are to attract and
promote the long-term retention of our key employees, directors and certain other persons who are in a position to make significant contributions to our success, to reward our employees,
directors and other persons for their contributions, to provide additional incentive to our employees, directors and other persons to continue making similar contributions and to further align the
interests of our employees, directors and other persons with those of our shareholders. The 2004 Performance Incentive Plan was adopted to replace, on a prospective basis, our 2001 Stock Incentive
Plan and 2001 Stock Option Plan, each as described below. See "2001 Stock Incentive Plan" and "2001 Stock Option Plan."

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The 2004 Performance Incentive Plan permits grants of incentive stock options, options not intended to qualify as incentive stock options, stock appreciation rights, restricted and
unrestricted stock awards, restricted stock units, cash-based awards, including supplemental cash awards, and performance awards, and any combination thereof. Awards of restricted and
unrestricted stock, restricted stock units and/or deferred stock may also be issued under the 2004 Performance Incentive Plan to participants in connection with management or employee purchase
programs. Shares issuable under awards that terminate unexercised or otherwise terminate without an issuance of shares, shares issuable under awards that are payable in stock or cash but are paid in
cash and shares issued but later forfeited will be available for future awards under the 2004 Performance Incentive Plan. If shares of our common stock are not issued because such shares instead are
used to satisfy an applicable tax withholding requirement or other obligation to us in connection with the exercise of an award, then such shares will again be available for future issuance under the
2004 Performance Incentive Plan. In addition, if the exercise price of any award is satisfied by the tender of shares of our common stock (by actual delivery or attestation), only the number of shares
of our common stock issued under the 2004 Performance Incentive Plan, net of any shares so tendered, will be deemed issued to the recipient.

Incentive
stock options may be granted under the 2004 Performance Incentive Plan only to our employees. All of our current and future employees and other persons who, in the opinion of
our Compensation Committee, are in a position to make significant contributions to our success, such as consultants and non-employee directors, are eligible to receive all other types of
awards under the 2004 Performance Incentive Plan. Our Compensation Committee will determine the exercise price applicable to each stock option and stock appreciation right, which will not be less than
the fair market value of our common stock at the time of the grant. In no case may our Compensation Committee amend an outstanding award, or cancel an outstanding award and issue a new award, for the
sole purpose of reducing the exercise price thereunder.

The
aggregate number of shares of our common stock for which awards may be granted under the 2004 Performance Incentive Plan is 5,000,000 shares, with an individual limit of 500,000
shares per fiscal year for each participant (excluding grants under any individual employment agreement as an inducement material to the individual's entering into an employment contract with us).
Notwithstanding the foregoing, in the event of any stock dividend, stock split, combination or exchange of equity securities, merger, consolidation, recapitalization, reorganization, divestiture or
other distribution (other than ordinary cash dividends) of assets to our shareholders, or any other event affecting our common stock that the Compensation Committee deems, in its sole discretion, to
be similar circumstances, the aggregate number of shares of our common stock which may be issued under our 2004 Performance Incentive Plan shall be appropriately adjusted in a manner determined in the
sole discretion of our Compensation Committee.

The
maximum aggregate amount that may be awarded in the form of a cash-based award, including a supplemental cash award, in any one fiscal year to a participant who is a
"covered
employee" as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, shall not exceed $2,000,000 determined as of the date of vesting or payout, as applicable. The maximum
aggregate amount that may be awarded in the form of a cash-based award, including a supplemental cash award, in any one fiscal year to a participant who is not a "covered employee" shall
be determined by our Compensation Committee.

As
of September 30, 2004, 416,946 shares of restricted stock have been issued to our employees, of which 145,304 were fully vested and 44,038 were surrendered to fulfill employee
income tax obligations resulting from the grants, and 21,231 shares of restricted stock have been issued to members of our Board of Directors under the 2004 Performance Incentive Plan. Restrictions on
grants to our employees typically vest ratably over three years form the date of grant such that the employee cannot sell or trade the restricted stock until it becomes vested. Restrictions on grants
to our directors are described under "Directors' Compensation."

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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 generally end on October 1, 2006. 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, 2004, 625 shares of restricted common stock remain unvested and issuable through October 1, 2006. See "2001 Stock Option Plan." We will not make any future
grants under the 2001 Stock Incentive 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 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, 2004, 2,281,904 options are granted and outstanding, of which 1,632,287 are held by employees, 626,137 are held by current and former directors
and 39,134 are held by a third party consultant. We will not make any future grants under the 2001 Stock Option Plan.

On
April 1, 2003, we extended an offer to our employees, including executive officers except for our then chief executive officer, to tender all options to purchase shares of our
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 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 on the offer, with the exception of options to purchase 35,000 shares.

See
"Transition Agreements."

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On April 1, 2001, we adopted a Non-Qualified Deferred Compensation Plan. Beginning January 1, 2002, eligible employees (i.e., in
calendar 2004, employees whose base salary meets or exceeds $90,000) were permitted to defer up to 50% of their base salary and up to 90% of their incentive compensation bonus each year on a
pre-tax basis under the NeighborCare Non-Qualified Deferred Compensation Plan. Participants are able to select from several fund choices and their Deferred Compensation Plan
account increases or decreases in value in
accordance with the performance of the funds selected. The Non-Qualified Deferred Compensation Plan is administered by a trustee.



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
401(k)/cash or deferred arrangement covering all of our employees (other than certain employees covered by a collective bargaining agreement) who have completed at least 500 hours of service
during the six-month period beginning on his or her commencement date or who has completed at least 1,000 hours of service in the first year of employment or any subsequent calendar
year. Under the 401(k) component, each employee may elect to contribute a portion of his or her current compensation up to the lesser of the maximum permitted by the Internal Revenue Code or 50% (or,
in the case of a highly compensated employee, a maximum of 6% (4% for plan years ending prior to January 1, 2004)) 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
component 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

Compensation Committee Interlocks and Insider Participation

The Compensation Committee was comprised of Messrs. Gerbino and LaNasa until the consummation of the spin-off of GHC on December 1,
2003, at which time Mr. LaNasa resigned from our Board of Directors and Messrs. Dondero, Bloem and Dalton were appointed as the members of our Compensation Committee.

No
person who served as a member of our Compensation Committee during fiscal 2004 is currently nor was during or prior to fiscal 2004 an officer or employee of the Company or, except as
described in Item 13, "Certain Relationships and Related Transactions," below, engaged in certain transactions with us required to be disclosed by regulations of the Securities and Exchange
Commission. Additionally, there were no compensation committee "interlocks" during fiscal 2004, which generally means that none of our executive officers served as a director or member of the
compensation committee of another entity, one of whose executive officers served as a director or member of our Compensation Committee.

See
Item 13 "Certain Relationships and Related Transactions."

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 1, 2004 for: each person who we know
owns beneficially more than 5% of our common stock; each of our executive officers named in the Summary Compensation Table contained in Item 11, "Executive Compensation," hereof; each of our
directors; and all of our executive officers and directors as a group. On December 1, 2004 there were 44,114,529 shares of our common stock

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outstanding,
including 259,522 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 1, 2004. 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 1, 2004 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.

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All
addresses for the executive officers and directors are c/o NeighborCare, Inc., 601 East Pratt Street, Baltimore, Maryland 21202.

|                                                                                                      |  | Shares of
Common Stock
Beneficially
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) |  | 5,188,841                                     |  | 11.76                             | %
|Chesapeake Management Partners
1829 Reisterstown Road, Suite 220
Baltimore, MD 21208 (3)              |  | 2,514,293                                     |  | 5.70                              | %
|Paul Tudor Jones, II
Tudor Investment Corporation
1275 King Street, 2nd Floor
Greenwich, CT 06831 (4) |  | 2,207,400                                     |  | 5.00                              | %
|John J. Arlotta (5)                                                                                   |  | 701,033                                       |  | 1.59                              | %
|James D. Dondero (2)                                                                                  |  | 5,188,841                                     |  | 11.76                             | %
|James H. Bloem (6)                                                                                    |  | 53,663                                        |  | *                                 |  
|Robert H. Fish (7)                                                                                    |  | 405,866                                       |  | *                                 |  
|Dr. Philip P. Gerbino (8)                                                                             |  | 10,616                                        |  | *                                 |  
|James E. Dalton, Jr. (6)                                                                              |  | 53,663                                        |  | *                                 |  
|Arthur J. Reimers (9)                                                                                 |  | 16,703                                        |  | *                                 |  
|Phyllis R. Yale (9)                                                                                   |  | 6,703                                         |  | *                                 |  
|John L. Kordash (10)                                                                                  |  | 166,125                                       |  | *                                 |  
|Robert A. Smith (11)                                                                                  |  | 90,373                                        |  | *                                 |  
|Richard W. Hunt (12)                                                                                  |  | 44,821                                        |  | *                                 |  
|Richard W. Sunderland Jr.                                                                             |  |                                              |  | *                                 |  
|John F. Gaither, Jr. (13)                                                                             |  | 109,375                                       |  | *                                 |  
|All executive officers and directors as a group (12 persons) (14)                                     |  | 6,847,782                                     |  | 15.52                             | %

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Equity Compensation Plans

The following table details information regarding our existing equity compensation plans as of September 30, 2004:

|                                                               |  | A         |  | B |       | C
|-------------------------------------------------------------- |  | --------- |  | - | ----- | -
|
|Equity compensation plans approved by security holders (1)     |  | 438,177   |  |   |      |  
|Equity compensation plans not approved by security holders (2) |  | 2,235,029 |  | $ | 18.14 |  
|                                                               |  |           |  |   |       |  
|Total                                                          |  | 2,673,206 |  | $ | 18.14 |  
|                                                               |  |           |  |   |       |  

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ITEM 13:    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Joseph A. LaNasa III was an elected member of our Board of Directors until December 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.

In
fiscal 2003, 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 April 2004, we engaged Goldman Sachs to provide advisory services in connection with Omnicare, Inc.'s unsolicited tender offer to acquire all
of our outstanding common
stock. In fiscal 2004, we paid Goldman Sachs transaction fees in connection with strategic transactions and placement fees for the sale of securities and agreed to pay Goldman Sachs fees in connection
with such advisory services.

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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 2004 and 2003 all services
performed by the auditors were preapproved.

During
fiscal years 2004 and 2003, the Company retained KPMG LLP to provide services in the following categories and amounts:

2004

2003Audit fees

$
859,000

$
2,249,000Audit related fees


25,000


78,000All other fees


30,000


244,000Total

$
914,000

$
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, 2004
and 2003 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. Fiscal 2004 audit fees include the Company's Filing on Form S-4 of its debt exchange offering and Form 8-K for the spin-off of GHC. 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 related primarily to assistance and preparation of tax returns.

All
other fees for fiscal 2004 and 2003 consist primarily of services rendered in connection with Sarbanes Oxley Section 404. KPMG LLP did not perform any financial information
system design and implementation services during the fiscal years ended September 30, 2004 and 2003.

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ITEM 15:    EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

|(a)(1) |  | The following financial statements of NeighborCare, Inc. and Subsidiaries are filed as part of this Annual Report on Form 10-K:                                                                                                                                                                                                                                 
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                         
|       |  | Consolidated Balance Sheets as of September 30, 2004 and 2003                                                                                                                                                                                                                                                                                                   
|       |  | Consolidated Statements of Operations for the years ended September 30, 2004, 2003 and 2002                                                                                                                                                                                                                                                                     
|       |  | Consolidated Statements of Shareholders' Equity for the years ended September 30, 2004, 2003 and 2002                                                                                                                                                                                                                                                           
|       |  | Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002                                                                                                                                                                                                                                                                     
|       |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                      
|(a)(2) |  | Schedule                                                                                                                                                                                                                                                                                                                                                        
|(a)(3) |  | Schedule II  Valuation and Qualifying Accounts for the years ended September 30, 2004, 2003 and 2002. 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 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(5) |  | Amended and Restated Bylaws of the Company, as amended.                                                                                                                                                                                                                                                                                                         
|4.1(6) |  | Specimen of Common Stock Certificate.                                                                                                                                                                                                                                                                                                                           
|4.2(7) |  | Specimen of the Company's 6.785% Senior Subordinated Notes due 2013 (included in Exhibit 4.3).                                                                                                                                                                                                                                                                  
|4.3(7) |  | Indenture, dated as of November 4, 2003, among the Company, the Guarantors and The Bank of New York, as trustee, relating to the Company's 6.875% Senior Subordinated Notes due 2013.                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                 

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|4.4(8)    |  | Rights Agreement, dated as of November 18, 2003, by and between the Company and StockTrans, Inc., as rights agent.                                                                                   
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5(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(9)+  |  | The Company's Employee Retirement Plan, adopted January 1, 1989, as amended, and related Retirement Plan Trust Agreement.                                                                            
|10.2(10)+ |  | 2001 Stock Option Plan.                                                                                                                                                                              
|10.3(10)  |  | 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+     |  | The Company's Non-Qualified Deferred Compensation Plan, as restated effective December 1, 2003.                                                                                                      
|10.5(11)+ |  | 2001 Stock Incentive Plan.                                                                                                                                                                           
|10.6(12)+ |  | Employment Agreement, dated as of February 28, 2003, by and between the Company and Robert H. Fish.                                                                                                  
|10.7(7)+  |  | Employment Agreement, dated as of July 7, 2003, by and between the Company and John J. Arlotta.                                                                                                      
|10.8(7)+  |  | 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.                                                     
|10.9(7)+  |  | 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.                                            
|10.10(7)+ |  | 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.
|10.11(7)+ |  | Letter Agreement, dated as of November 7, 2003, by and between the Company and Richard W. Sunderland.                                                                                                
|10.12(7)+ |  | Letter Agreement, dated as of November 20, 2003, by and between the Company and Robert A. Smith.                                                                                                     
|10.13(7)+ |  | 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.                                           
|10.14(7)+ |  | 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.                                                 
|10.15(4)  |  | Tax Sharing Agreement, dated as of December 1, 2003, by and between the Company and Genesis HealthCare Corporation.                                                                                  
|10.16(4)  |  | Transition Services Agreement, dated as of December 1, 2003, by and between the Company and Genesis HealthCare Corporation.                                                                          
|10.17(4)  |  | Employee Benefits Agreement, dated as of December 1, 2003, by and between the Company and Genesis HealthCare Corporation.                                                                            
|          |  |                                                                                                                                                                                                      

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|10.18(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.                                                                                                                                                                                                                                                                                                                                                                              
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19(4)   |  | Credit Agreement by and among the Company, the domestic subsidiaries of the Company from time to 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).
|10.20(7)+  |  | Amendment, dated as of December 9, 2003, to Employment Agreement by and between the Company and John J. Arlotta.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.21(7)+  |  | Option Cancellation Agreement, dated as of December 9, 2003, by and between the Company and Robert H. Fish.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.22(13)  |  | The Company's 2004 Performance Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.23(5)+  |  | Voluntary Separation Agreement between the Company and Richard W. Sunderland dated as of May 7, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.24(14)  |  | Amendment No. 1 to Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services, dated as of May 7, 2004, by and between NeighborCare Pharmacy Services, Inc. and Genesis HealthCare Corporation.                                                                                                                                                                                                                                                                                                                                                                
|10.25(15)+ |  | Restricted Stock Agreement by and between the Company and John J. Arlotta, dated as of June 15, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.26(15)+ |  | Restricted Stock Agreement by and between the Company and Robert A. Smith, dated as of June 15, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.27+     |  | Amendment No. 1 to the Company's Non-Qualified Deferred Compensation Plan, as restated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.28(15)+ |  | Form of Restricted Stock Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.29(15)+ |  | Amendment to Employment Agreement dated as of July 7, 2003, as amended December 9, 2003, by and between the Company and John J. Arlotta, dated as of June 18, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.30(15)+ |  | Amendment to Amended and Restated Employment Agreement, dated as of December 9, 2003, by and between the Company and John F. Gaither, Jr., dated as of June 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.31(15)+ |  | Amendment to Amended and Restated Employment Agreement, dated as of December 9, 2003, by and between the Company and John L. Kordash, dated as of June 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.32(16)+ |  | Employment Agreement between the Company and Richard W. Hunt dated as of June 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.33+     |  | Form of Non-Qualified Stock Option for Officers and Other Key Employees of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|14.1(17)   |  | Code of Business Conduct and Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|21.1       |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|23.1 |  | 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).
|31.2 |  | Certificate of Richard W. Hunt, Chief Financial Officer of the Company, pursuant to Exchange Act Rule 13a-14(a).
|32.1 |  | Certificate of John J. Arlotta, Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350.      
|32.2 |  | Certificate of Richard W. Hunt, Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350.      

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122

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Schedule II

NeighborCare, Inc.  Valuation and Qualifying Accounts  Years Ended September 30, 2004, 2003 and 2002  (in thousands)

|Description                                                   |  | Balance of
Beginning of
Period |        | Charged to
Operations |   | Deductions (1) |  | Distribution of
Net Assets to
GHC (2) |        | Balance of
End of
Period
|------------------------------------------------------------- |  | ------------------------------ | ------ | --------------------- | - | -------------- |  | ------------------------------------- | ------ | ------------------------
|Year Ended September 30, 2004 Allowance for Doubtful Accounts |  | $                              | 48,628 |                       | $ | 14,227         |  | $                                     | 17,076 |                         
|Year Ended September 30, 2003 Allowance for Doubtful Accounts |  | $                              | 55,791 |                       | $ | 37,085         |  | $                                     | 44,248 |                         
|Year Ended September 30, 2002 Allowance for Doubtful Accounts |  | $                              | 83,125 |                       | $ | 44,712         |  | $                                     | 72,046 |                         

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123

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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 10, 2004 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 10, 2004.

|Signature                                     |  | Capacity                                                 
|--------------------------------------------- |  | ---------------------------------------------------------
|                                              |  |                                                          
|/s/JOHN J. ARLOTTAJohn J. Arlotta             |  | Director, Chairman, President and Chief Executive Officer
|/s/JAMES H. BLOEMJames H. Bloem               |  | Director                                                 
|/s/JAMES E. DALTON, JR.James E. Dalton, Jr.   |  | Director                                                 
|/s/JAMES D. DONDEROJames D. Dondero           |  | Director                                                 
|/s/ROBERT H. FISHRobert H. Fish               |  | Director                                                 
|/s/DR. PHILIP P. GERBINODr. Philip P. Gerbino |  | Director                                                 
|/s/ARTHUR J. REIMERSArthur J. Reimers         |  | Director                                                 
|/s/PHYLLIS R. YALEPhyllis R. Yale             |  | Director                                                 
|/s/RICHARD W. HUNTRichard W. Hunt             |  | Senior Vice President and Chief Financial Officer        

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