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

                                   ----------
                                    FORM 10-K
                                   ----------

(Mark One)

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

For the fiscal year ended December 31, 2003

                                       OR

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

Commission File Number:  000-50371

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

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

                                150 Motor Parkway
                            Hauppauge, New York 11788
                    (Address of principal executive offices)

                                 (631) 232-7000
              (Registrant's telephone number, including area code)

                    Internet Website: http://www.curative.com

          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 $.01 per share
                                (Title of Class)

                                   ----------

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

      Indicate by check mark 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 or any amendment to this
Form 10-K. |X|

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

      The aggregate market value of voting stock held by non-affiliates of the
registrant, as of June 30, 2003, was approximately $187 million (based on the
last sale price of such stock as reported by the Nasdaq National Market).

      As of March 1, 2004, there were 12,831,288 shares of the Registrant's
Common Stock, $.01 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III of this Form 10-K is incorporated by
reference to portions of our definitive proxy statement for our 2004 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 2004.

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                                     PART I

Item 1. Business

BUSINESS OF CURATIVE HEALTH SERVICES, INC.

Overview

Curative, through its two business units, Specialty Pharmacy Services and
Specialty Healthcare Services, seeks to deliver high-quality care and clinical
results that result in high patient satisfaction for patients experiencing
serious or chronic medical conditions. Our Specialty Pharmacy Services business
unit provides biopharmaceutical products to patients with chronic and critical
disease states and related clinical services to assist these patients with their
intensive disease management needs. Through the Specialty Pharmacy Services
business unit, we purchase various biopharmaceutical products from suppliers and
then contract with insurance companies and other payors, as well as retail
pharmacies, to provide direct-to-patient distribution of these products. In
addition to distribution, we also provide other support services, including
education, reimbursement and provision or coordination of injection or infusion
services, related to these biopharmaceutical products. The biopharmaceutical
products distributed and the injection or infusion therapies offered by Curative
are used by patients with chronic or severe conditions such as hemophilia,
immune system disorders, respiratory syncytial virus ("RSV"), cancer, rheumatoid
arthritis, hepatitis C, multiple sclerosis and growth hormone deficiency.
Examples of biopharmaceuticals products used by Curative's patients include
hemophilia clotting factor and intravenous immune globulins, MedImmune Inc.'s
Synagis(R) and Centocor, Inc.'s Remicade(R). As of December 31, 2003, we had
306 payor contracts and 20 retail pharmacy contracts and operated in at least
40 states. Our Specialty Pharmacy Services business unit provides services
directly to patients and caregivers and delivers our products via overnight
mail or courier and through our retail pharmacies.

Our Specialty Healthcare Services business unit is a leading disease management
company in chronic wound care management. Our Specialty Healthcare Services
business unit manages, on behalf of hospital clients, a nationwide network of
Wound Care Center(R) programs that offer a comprehensive range of services for
treatment of chronic wounds. Our Wound Management Program(TM) consists of
diagnostic and therapeutic treatment procedures that are designed to meet each
patient's specific wound care needs on a cost-effective basis. Our treatment
procedures are designed to achieve positive results for wound healing based on
our significant experience in the field. We maintain a proprietary database of
patient results that we have collected since 1988 containing over 440,000
patient cases. Our treatment procedures, which are based on our extensive
patient data, have allowed us to achieve an overall rate of healing of
approximately 85% for patients completing therapy. As of December 31, 2003, our
Wound Care Center network consisted of 86 outpatient clinics located on or near
campuses of acute care hospitals in approximately 30 states.

We have entered into a definitive agreement to acquire the capital stock of
Critical Care Systems, Inc. ("CCS"), a leading national provider of specialty
infusion pharmaceuticals and comprehensive clinical services, for a total
consideration of approximately $150.0 million in cash. The transaction is
subject to approval by applicable governmental regulatory agencies. Approval
for this transaction under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 was received on March 8, 2004. We expect to close the acquisition in
April 2004. We expect to fund the purchase price, repayment of certain existing
indebtedness of CCS and related fees and expenses with $165.0 million of senior
unsecured notes to be issued through a private placement. We have also received
a $165.0 million bridge financing commitment from UBS Loan Finance LLC, which
will be used in the event the notes are not issued. In addition, GE Healthcare
Financial Services has committed to expanding and refinancing our existing
credit facility to a $60.0 million senior secured credit facility to support
the acquisition and our future working capital needs. The commitments are
subject to customary conditions. See "Business of CCS" below for further
information about CCS.

We were incorporated in the State of Minnesota in 1984 under the name Curatech,
Inc. We changed our name to Curative Technologies, Inc. in March, 1990, and to
Curative Health Services, Inc. in June, 1996. In August 2003, we effected a
reorganization in which we converted our operations to a holding company
structure. Our principal executive offices are located at 150 Motor Parkway,
Hauppauge, New York 11788, telephone number (631) 232-7000.


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Specialty Pharmacy Services Business Unit

Our Specialty Pharmacy Services business unit provides high cost, injectable or
infusable biopharmaceutical products to patients with chronic health conditions
for which there is no known cure and to patients with critical disease states.
The services provided by our Specialty Pharmacy Services business unit include
patient education and instruction regarding the administration of their
medications, monitoring of patient compliance with suppliers' guidelines,
specialized delivery services, including refrigerated delivery, overnight mail
or courier delivery services, patient and community advocacy and
reimbursement services for or on behalf of patients, retail pharmacies and
payors.

Our Specialty Pharmacy Services business unit purchases biopharmaceutical
products from suppliers and then contracts with insurance companies and other
payors to provide direct-to-patient distribution, injection or infusion services
and education about such products. In addition, we offer or coordinate injection
or infusion services for patients with respiratory syncytial virus and immune
system disorders. Our Specialty Pharmacy Services revenues are derived primarily
from fees paid by the payors under these contracts for the distribution of these
biopharmaceuticals and for the injection or infusion services provided. In
addition, as part of our Specialty Pharmacy Services operations, we provide
biopharmaceutical product distribution and support services under contracts with
retail pharmacies for which we receive product supply and related service fees.
Financial information with respect to the Specialty Pharmacy Services business
unit, including information concerning revenues, operating profit and total
assets may be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note N to our consolidated financial
statements included elsewhere in this memorandum.

Specialty Pharmacy Services - Disease Markets and Products

The specialty pharmacy industry has developed as the approval of new
biopharmaceutical and pharmaceutical products has expanded. These specialty
products require temperature sensitive storage and delivery, patient education,
training and monitoring in their proper use and require the patient to inject or
infuse the product. The principal patient disease states we service are
hemophilia, immune system disorders, RSV, cancer, rheumatoid arthritis,
hepatitis C, multiple sclerosis and growth hormone deficiency. The
biopharmaceutical products we provide and the injection or infusion services we
offer to treat these diseases are costly, require special dispensing and
temperature sensitive delivery and are administered by the patient or by a
nurse or physician through injections or infusions. A discussion of the disease
states we service and products we offer follows.

Hemophilia. Hemophilia is a genetically inherited and currently incurable
bleeding disorder resulting from a deficiency in the bloodstream of a plasma
protein, called factor, which helps the blood to clot. These blood-clotting
factors are essential in helping to cease the bleeding after a cut or injury and
preventing spontaneous bleeding. There are two types of hemophilia: hemophilia A
and hemophilia B. Hemophilia A, which represents approximately 80% of the
hemophiliac population, is the result of a deficiency of factor VIII, while
hemophilia B is the result of a deficiency of factor IX. The greater the
deficiency of these plasma proteins, the greater the severity of the disease,
measured as mild, moderate or severe.

It is estimated that there are 20,000 to 25,000 persons, predominantly male, in
the United States that suffer from hemophilia and that 60% suffer from a severe
form of the disease. Treatment of hemophilia involves intravenously infusing the
missing clotting factor in order to replace deficient proteins. The two types of
clotting factor currently available include non-recombinant, made from human
blood plasma, and recombinant which is laboratory produced. Patients with severe
hemophilia may require multiple injections per week of clotting factor. Patients
with less severe forms of hemophilia may only require clotting factor treatment
after bleeding starts or before participating in an activity having a high risk
of injury.


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Our Specialty Pharmacy Services business unit provides hemophilia patients with
both factor VIII and factor IX blood clotting products under prescription from a
physician. Based on a recent survey of our hemophilia patients, we received an
overall satisfaction rating of 94%. In addition, in 2003, we signed a multi-year
supply agreement with Baxter Healthcare Corporation for ADVATE(R)
(Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM for
the prevention and control of bleeding episodes in people with hemophilia A.
ADVATE(R), a fairly new therapeutic product approved by the U.S. Food and Drug
Administration ("FDA"), is the first and only factor VIII product made without
any added human or animal plasma proteins and albumin in the cell culture
process, purification and final formulation, thereby eliminating the risk of
infections caused by viruses that may be carried in these proteins.

Immune System Disorders. The immune system acts as a natural defense system that
recognizes foreign substances, such as bacteria and viruses, as being different
from the body's own tissues. A healthy immune system allows the body to fight
off infections while an unhealthy immune system, or immune system disorder, is
the failure to protect the body from things that, under healthy and normal
conditions, would be considered routine. Such a disorder occurs when the body
treats its own tissues and cells as if they were foreign, prompting the immune
system to produce antibodies that destroy those tissues and cells. Treatment of
immune disorders typically consists of intravenous immune globulins ("IVIG")
which are concentrated levels of antibodies derived from pooled human plasma
designed to strengthen the immune system. Our Specialty Pharmacy Services
business unit operates an intravenous infusion center in Texas and offers to
treat or arrange for the treatment of patients in their homes by direct or
contract nursing services.

Respiratory Syncytial Virus. RSV is a highly contagious virus that most
commonly infects infants between the ages of one and two. The virus begins with
indications similar to the common cold that progress into more severe symptoms,
affecting the lower respiratory system where bronchiolitis and pneumonia can
develop. It is estimated that approximately 100,000 children nationwide are
hospitalized each year with the virus. Synagis(R), a drug manufactured by
MedImmune Inc., is the most widely used treatment for the prevention of serious
lower respiratory tract diseases caused by RSV. The treatment is administered
through intramuscular (i.e., into the muscle) injections, at least once monthly,
during the virus' peak season (from September through April). We believe that
within the past few years, a substantially reduced number of hospitalizations
associated with the virus, as well as a decrease in the mortality rate for
infants, is due to improved treatments, including Synagis(R). Our Specialty
Pharmacy Services business unit offers Synagis(R) to patients through injections
in a location most convenient for the patient, either at a physician's office,
the patient's home or at local clinics.

Cancer. Chemotherapy, the use of drugs to treat cancer, works by seeking out and
destroying fast-growing cells. However, chemotherapy not only attacks cancer
cells, but also healthy cells which are needed for strength. One of the common
side effects of chemotherapy, and the most prevalent, is anemia which occurs
when the body does not have enough red blood cells. Red blood cells carry
hemoglobin, which transports oxygen to cells and organs. Once depleted of red
blood cells, the body is then unable to adequately transport oxygen and fatigue
results, stealing physical and emotional strength to fight cancer. Seven out of
ten chemotherapy patients develop anemia. Another side effect of chemotherapy is
a severe drop in infection-fighting white blood cells, a condition called
neutropenia. About half of cancer chemotherapy patients develop neutropenia,
placing them at risk for life-threatening infections which may require
hospitalization and can delay chemotherapy treatment and reduce its
effectiveness. Our Specialty Pharmacy Services business unit provides to
patients, under a physician's prescription, chemotherapy treatments such as
Epogen(R) and Procrit(R) to treat red blood cell deficiency and Neupogen(R) to
treat white blood cell deficiency.

Rheumatoid arthritis. Rheumatoid arthritis is a chronic inflammatory disease of
the synovium, or lining of the joint, that results in pain, stiffness, swelling,
deformity and loss of function in the joints as cartilage and bone is destroyed.
This inflammation is most common in the hands and the feet. It is estimated that
2.1 million people in the United States have rheumatoid arthritis. The treatment
of rheumatoid arthritis involves specialty biopharmaceuticals and
pharmaceuticals. Our Specialty Pharmacy Services business unit provides to
patients, under a physician's prescription, specialty anti-inflammatory
biopharmaceuticals to treat the symptoms of rheumatoid arthritis, such as
Enbrel(R), generally taken several times weekly, and Remicade(R), an infused
therapy generally taken bi-monthly and administered in a physician's office.


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Hepatitis C. Hepatitis C is a blood-borne infection that can attack and damage
the liver. The hepatitis C virus is spread predominately through contact with
infected blood and can lead to cirrhosis, liver cancer or liver failure.
Hepatitis C is the principal reason for liver transplant and affects an
estimated four million persons in the United States, of which approximately
200,000 are receiving treatment. It is characterized by a consistent elevation
of liver enzymes. There is currently no cure or vaccination for hepatitis C. Our
Specialty Pharmacy Services business unit provides to patients, under a
physician's prescription, hepatitis C treatments such as PEG-Intron(R),
Rebetron(R) and Rebetol(R).

Multiple sclerosis. Multiple sclerosis is a chronic disease of the central
nervous system for which neither a cause nor a cure is currently known. The
central nervous system is made up of nerves that act as the body's messenger
system. Nerves are protected by substances called myelin, which insulate the
nerves and aid in the transmission of nerve impulses, or messages between the
brain and other parts of the body. In patients with multiple sclerosis, the
body's immune cells enter the brain and spinal cord and attack the protective
myelin covering. Once the myelin is gone and replaced with scar tissue, a
process called demyelination, nerve impulses sent throughout the central nervous
system can become disrupted. The brain then becomes unable to properly send and
receive messages. The type and severity of multiple sclerosis varies by the
location and the extent of demyelination. It is estimated that multiple
sclerosis affects approximately 2.5 million people worldwide, including 400,000
Americans. In recent years, the FDA has approved several biopharmaceutical and
pharmaceutical products that have been shown to help slow the progression of
multiple sclerosis, including Avonex(R), Betaseron(R), Copaxone(R) and Rebif(R).
Our Specialty Pharmacy Services business unit provides these products, under
prescription from a physician, to patients with multiple sclerosis.

Growth hormone deficiency. Growth hormone deficiency occurs when the pituitary
gland produces growth hormones in inadequate amounts or not at all. There are an
estimated 15,000 children in the United States that have some form of growth
failure as the result of growth hormone deficiency. Growth hormone deficiency is
highly treatable by frequently injecting synthetic forms of growth hormones.
Growth rates are usually rapid after treatment starts, which may be noticeable
to the child and parents in three to four months. This rapid growth rate slowly
declines over time, but it continues to be greater than would occur without
treatment. Our Specialty Pharmacy Services business unit provides to patients,
under a physician's prescription, growth hormone treatments such as Humatrope(R)
and Nutropin(R).

Specialty Pharmacy Services - Product Distribution

We distribute our products by overnight mail or courier and through our retail
pharmacies. A significant portion of the biopharmaceuticals we deliver require
specialized handling, including refrigeration. The products we ship include the
drugs, educational materials and any supplies necessary for the patient to
administer the medication. Our products are shipped from our various wholesale
or retail pharmacies or from one of the retail pharmacies with which we
contract. In addition, Specialty Pharmacy Services provides or coordinates
injection or infusion services needed for certain of its products.  These
injection or infusion services are administered by nursing staff or
contracted agencies, both in a home care setting and in our infusion suite
located in Texas.

Specialty Pharmacy Services - Product Suppliers

Our Specialty Pharmacy Services business unit obtains the products it offers
directly from manufacturers and from wholesale distributors. We purchase our
hemophilia-related products from five suppliers with whom we have supply
arrangements, our Synagis(R) from a sole source supplier, MedImmune, Inc., and
our IVIG products from multiple suppliers.

Some of the products that we distribute, such as factor VIII blood clotting and
IVIG products, have experienced shortages in the past. Suppliers were unable to
increase production to meet rising global demand. This shortage has ended, and
while supply has significantly increased, demand continues to grow. Although we
cannot be certain, we believe that under our arrangements with suppliers, we
will have adequate supply of the products we offer to serve our existing
patients and to add new patients in 2004. Other non-hemophilia related
injectable products we offer are purchased directly from manufacturers or
through wholesalers.


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Specialty Pharmacy Services - Strategy

Our Specialty Pharmacy Services business unit's strategy is to achieve growth by
adding new patients both through growth at our existing operations and through
acquisitions of complementary businesses. Each year, new patients are diagnosed
with the disease states we service, thus creating market opportunity for organic
growth, and as new drugs are approved that require the specialized services we
offer, our service opportunities are potentially expanded. Additionally, many
smaller suppliers of specialty pharmaceuticals are seeking to be acquired or
enter into partnerships to better supply and service their patients. Our
Specialty Pharmacy Service business unit's strategy is to take advantage of
these opportunities as they present themselves.

On February 3, 2003, we acquired MedCare, Inc., a specialty pharmacy with
locations in Alabama, Mississippi and West Virginia, whose product lines include
Synagis(R) for the prevention of RSV, growth hormone and hemophilia clotting
factor. On April 23, 2003, we acquired the assets and specialty pharmacy
business of All Care Medical, Inc., a Louisiana-based Synagis(R) pharmacy. On
June 10, 2003, we acquired certain assets of Prescription City, Inc., a Spring
Valley, New York, specialty pharmacy business who provides such drug therapies
as chemotherapy and cancer drugs, HIV/AIDS drugs, Synagis(R), IVIG, pain
management and Remicade(R).

With the anticipated acquisition of CCS in the second quarter of 2004, we
anticipate that our market focus will shift toward the specialty infusion market
rather than the traditional specialty pharmacy market on which we are currently
focused. The combination of the two companies is expected to create a number of
strategic benefits, including (i) creating an organization with a network of 38
pharmacies in 23 states through which to drive growth in the related core
disease states that require a local clinical presence; (ii) leveraging the
approximately 450 payor contracts serviced by the combined company at the time
of the acquisition; (iii) creating a therapy offering that is essential as well
as demonstrably cost-effective for payors creating a competitive advantage in
contracting; (iv) adding exceptional clinical backbone and expertise highlighted
by CCS' accreditation by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"); and (v) creating operating leverage through the
elimination of certain redundant administrative and overhead costs.

Specialty Pharmacy Services - Marketing

We have assembled an industry-experienced sales force to affect our internal
growth strategy. The marketing and sales efforts are divided into two
categories: Hemophilia and Specialty. In connection with its hemophilia
services, Specialty Pharmacy Services had, as of December 31, 2003,
approximately 40 service representatives servicing its approximately 500
hemophilia patients. Led by a Vice President of Sales and Marketing for
Hemophilia, this group is responsible for ensuring that patients receive their
educational materials and reimbursement and other support services timely, as
well as increasing the patient base it serves. In connection with its other
specialty products, Specialty Pharmacy Services seeks to add new managed care
and other payor contracts through its business development managers and to
inform physicians of the benefits of its services through its staff of account
managers and salespersons. This group is expected to provide Specialty Pharmacy
Services with new contracting opportunities with payors and to expand the sales
of the products and services Specialty Pharmacy Services offers into new
geographies.

Specialty Pharmacy Services - Payors

In 2003, the Specialty Pharmacy Services business unit recorded the majority of
its revenues from three disease states: hemophilia (approximately 62%) for which
we provide both factor VIII and factor IX blood clotting products, RSV
(approximately 20%) for which we offer Synagis(R), and immune system disorders
(approximately 5%) which are typically treated with IVIG. As of December 31,
2003, we had contracts with 306 payors and 20 retail pharmacies. The payors we
contract with or whose patients we ship to are typically large health
maintenance organizations, major health insurers, physician practices or
government agencies. The services we provide include specialized direct shipping
of products to the patient, coverage pre-authorizations, distribution of
educational materials to help patients with their disease and other support
services.


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The following provides approximate percentages of our Specialty Pharmacy
Services' patient revenues for the years ended December 31:

                                               2003        2002
                                               ----        ----

                    Private payors             42.5%       37.1%
                    Medicaid                   51.0%       54.1%
                    Medicare                    6.5%        8.8%

Specialty Pharmacy Services - Reimbursement

The profitability of our Specialty Pharmacy Services operations depends, in
large part, on the reimbursement we (in our retail pharmacy capacity) or our
customers (in our wholesale pharmacy capacity) receive from third-party payors.
In recent years, competition for patients, efforts by traditional third-party
payors to contain or reduce health care costs and the increasing influence of
managed care payors, such as health maintenance organizations, have resulted in
reduced rates of reimbursement for health care providers and suppliers. If these
trends continue, they could harm our business. In addition, we and our customers
seek reimbursement from third-party payors for the cost of drugs and related
medical supplies that we distribute. Changes in reimbursement policies of
private and governmental third-party payors, including policies relating to
Medicare, Medicaid and other federally funded programs, could reduce the amounts
reimbursed to us or to these customers for our products and, in turn, the amount
we receive from these payors or that our customers would be willing to pay for
our products and services.

Our Specialty Pharmacy Services business unit has developed expertise in
reimbursement for the products it distributes. Prior to shipping the product,
authorization from the patient's health care payor is obtained and coverage is
determined, easing the process for the patients and avoiding billing disputes
with payors which might otherwise occur.

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

As a result of this enforcement environment, it is possible that manufacturers
and/or third-party price reporting services may lower the reported AWPs for
products that we distribute and sell. The changes occurring in the reporting of
AWPs could have a negative effect on our business.

Significantly, in December 2003, the Medicare Prescription Drug Improvement and
Modernization Act ("MMA") was enacted, which has the potential to change many
aspects of the health care system over the next several years. Prior to MMA,
Medicare reimbursement for many of the products we distribute was based on 95%
of the products' AWP. Under MMA, Medicare reimbursement for many of the products
we distribute, including most physician-administered drugs and biologicals, was
lowered to 80-85% of AWP effective January 1, 2004. This 2004 change did not
affect Medicare reimbursement for blood-clotting factors, which will to continue
to be reimbursed at 95% of AWP during 2004. Additionally, effective January 1,
2005, the Medicare reimbursement methodology for many of the products we
distribute (including blood-clotting factors) will change from an AWP-based
system to a "market-based system" to determine reimbursement. We anticipate that
the new "market-based" reimbursement will lower Medicare reimbursement as
compared to AWP-based reimbursement, and these changes could have a material
adverse effect on our financial position. It is also possible that states and/or
commercial payors may look to the new


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Medicare "market based" reimbursement methodologies in modifying their own
payment methodologies. We are in the process of evaluating the impact MMA may
have on our financial position or results of operations.

Additionally, MMA expands Medicare coverage for prescription drugs beginning in
2006, and the MMA may also increase the number of Medicare beneficiaries in
Medicare managed care plans. Some of these changes will impact us directly, and
others will have a more indirect impact on us to the extent that such changes
affect our customers and other entities with which we do business. For example,
a portion of our business that is directly paid by the Medicare program may be
shifted to private administrators under MMA, and such a shift may subject us to
differing contractual and regulatory requirements than those under which we have
been operating, as well as differing reimbursement rates for our products and
services. In addition, MMA changes the relationship between the Medicare and
Medicaid programs such that we or our customers may receive less reimbursement
in the future for individuals who receive benefits under both of these programs.

At this stage, we are continuing to assess the potential impact the MMA will
have on our business and financial operations, as well as the extent to which
the potential regulatory regime will apply to our operations, and this
assessment may require us to expend time and resources.

Specialty Pharmacy Services - Competition

The specialty pharmacy industry is highly competitive. Our competitors include
other specialty pharmacy companies, prescription benefit managers, retail chain
pharmacies, mail order and hospital based pharmacies. National competitors
include Accredo Health, Caremark Rx, Priority Healthcare, Coram Healthcare and
Express Scripts. The Specialty Pharmacy Services business unit competes in areas
such as quality of service, pricing, reliability and availability of pharmacists
and patient service representatives on an around-the-clock basis. The
competitive strategy of the Specialty Pharmacy Services business unit is to stay
close to and maintain a strong relationship with, on an individual basis, its
patient and payor customer base.

Specialty Healthcare Services Business Unit

Our Specialty Healthcare Services business unit is a leading provider of wound
care management services. Our Specialty Healthcare Services business unit
manages, on behalf of hospital clients, a nationwide network of Wound Care
Center programs that offer a comprehensive range of services for treatment of
chronic wounds. Financial information with respect to the Specialty Healthcare
Services business unit, including information concerning revenues, profit or
loss and total assets may be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note N to our consolidated
financial statements included elsewhere in this memorandum.

Specialty Healthcare Services - Market

Market Overview. Chronic wounds are common in patients with diabetes and venous
stasis disease, as well as patients who are immobilized and afflicted with
pressure sores. A chronic wound generally is a wound which shows no signs of
significant healing in four weeks or has not healed in eight weeks. The healing
of a wound is dependent upon adequate blood flow to stimulate new cell growth
and combat infection. When adequate blood flow does not occur, the healing
process is retarded, often resulting in a chronic wound that can last for months
or years. Without effective treatment, a chronic wound may lead to more severe
medical conditions, such as infection, gangrene and amputation, which are costly
to payors and impede the quality of life for the patient.

According to Chronic Wound Care: U.S. Markets for Wound Management Products
(Medical Data International, 1997), it is estimated that at least six million
people suffer from chronic wounds in the United States. Of the six million
people with chronic wounds, an estimated three million have pressure sores, over
two million have diabetic ulcers and over one million suffer from venous stasis
ulcers. Diabetic ulcers are responsible for 60,000 limb amputations each year,
accounting for more than half of all such procedures not related to trauma.
Venous stasis disease and pressure sores often afflict the elderly, who
constitute the most rapidly growing segment of the U.S. population and account
for a disproportionately large share of total U.S. health care expenditures. It
is estimated


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that the wound care segment of the U.S. health care industry generated $5
billion in expenditures in 1997. It is also anticipated that the wound care
market will continue to grow due to the aging population and the increasing
incidence of health disorders, such as diabetes, which may lead to chronic
wounds.

Traditional Approach to Chronic Wound Care. Traditional chronic wound care
treatment, which is typically administered by a primary care physician, relies
principally on cleansing and debriding the wound, controlling infection with
antibiotics and protecting the wound. For example, topical or oral antibiotics
are administered to decrease the bacterial count in the wound, protective
dressings are used to decrease tissue trauma and augment repair and various
topical agents are applied that chemically cleanse the wound and remove wound
exudate. These passive treatments do not directly stimulate the underlying wound
healing process. In many cases, the patient may have to see a number of health
care professionals before effective treatment is received. In addition, under
this traditional care model, patients must manage their own care, which often
leads to non-compliance and treatment failure which may lead to infection,
gangrene and amputation. Although wound care programs have begun to evolve to
more specialized and aggressive treatment regimens, we believe that a
significant medical need and market opportunity exists for products and services
that improve and accelerate the wound healing process.

Specialty Healthcare Services - The Curative Approach to Chronic Wound Care

Our Specialty Healthcare Services Wound Management Program is a comprehensive
array of diagnostic and therapeutic treatment regimens with all the components
of care necessary to treat chronic wounds. The Wound Management Program is
administered primarily through Specialty Healthcare Services' nationwide network
of Wound Care Center programs. We believe the Wound Management Program provides
a better approach to chronic wound management than the traditional approach,
which we believe lacks comprehensive wound programs, effective technology,
positive outcomes and cost efficiency. Each Wound Management Program offers its
patients an inter-disciplinary team of health care professionals, including a
medical director, surgeon, nurse, case manager, nutritionist and
endocrinologist.

In most cases, patients arriving at a Wound Care Center program have been
treated with traditional wound healing techniques but continue to suffer from
chronic wounds. In some cases, patients come to a Wound Care Center program
after they have received an opinion from their primary physician that limb
amputation may be required. In a retrospective review of Specialty Healthcare
Services' clinical database for the nine-year period 1991-1999, it was
determined that 15,922 patients treated under Specialty Healthcare Services'
Wound Management Program had been recommended for amputation by a physician.
After being treated under Specialty Healthcare Services' Wound Management
Program, 13,704 patients, or approximately 86%, did not require a limb
amputation. Further, the literature published on the cost of amputation
documents that an amputation and related health care costs are $43,100 to
$63,100 per patient amputation. Specialty Healthcare Services believes that this
demonstrates the impact that Specialty Healthcare Services' Wound Management
Program has on reducing health care costs and improving the quality of life.
Upon the commencement of treatment under our Wound Management Program, medical
personnel conduct a systematic diagnostic assessment of the patient. Specialized
treatment protocols are then established for the patient, based on the
underlying cause of the wound and the unique status of the patient. After the
assessment phase, the course of treatment in the Wound Management Program may
include revascularization, infection control, wound debridement, skin grafting,
nutrition, protection devices, patient education, referrals and effective
management of care through patient/provider communications.

To measure the effectiveness of our Wound Management Program, Specialty
Healthcare Services has developed a functional assessment scoring system to
measure the healing of a wound. Under this system, a chronic wound is considered
healed when (i) it is completely covered by epithelium (i.e., a membranous
cellular tissue that covers and protects a wound as it heals), (ii) maturing
skin is present in the wound, (iii) there is minimal drainage from the wound,
(iv) the wound requires only a protective dressing, and (v) the limb involved is
functional. We have a proprietary database of patient outcomes that has been
collected since 1988 containing over 444,000 patient records which indicate an
overall healing rate of approximately 85% for patients completing therapy. In a
meta-analysis entitled, "Healing of Diabetic Neuropathic Foot Ulcers Receiving
Standard Care," and published in the May, 1999, issue of "Diabetes Care,"
internationally renowned wound care experts and researchers, David J. Margolis,
M.D., and Jesse A. Berlin, S.C.D., studied a population of wound patients to
determine the percentage who could be expected to heal within a defined period,
after receiving what the authors defined as "good wound care." That study


                                       9
<PAGE>

concluded that, "After 20 weeks of good wound care, 31% of diabetic neuropathic
ulcers heal." Specialty Healthcare Services conducted a shadow analysis to
compare healing rates of patients treated at our managed Wound Care Centers
against the results of Margolis et al meta-analysis. Using the clinical
database, we replicated the methodology and stratified the data to identify and
compare patients with the same wound etiologies and treatment times as those in
the meta-analysis. Our shadow analysis concluded that the Wound Care Center
programs achieved a 61% healing outcome rate for patients with neuropathic
ulcers in 20 weeks of treatment while the healing outcome rate in the
meta-analysis was 31%. Therefore, our Wound Care Center programs were almost
twice as effective in healing wounds as compared with the results from the
meta-analysis.

Specialty Healthcare Services - Strategy

Our Specialty Healthcare Services business unit's objective is to enhance its
position as a leading disease management company in the chronic wound care
market. Specialty Healthcare Services' growth strategy is to continue to improve
and refine the Wound Management Program while broadening its delivery models to
cover the entire continuum of care for wound management. Key elements of this
strategy include:

Continue to Develop Specialty Healthcare Services' Nationwide Network of
Outpatient Wound Care Center Programs. We intend to continue pursuing additional
outpatient Wound Care Center programs on or near the campuses of acute care
hospitals. As the result of terminations and non-renewals of contracts,
Specialty Healthcare Services has seen a significant decline in the number of
Wound Care Center programs it manages. Since December 2001, the total number of
management contracts has declined from 96 to 86 as of the end of 2003. Contract
terminations have been effected for such reasons as reduced reimbursement,
financial restructuring, bankruptcies or hospital closings.  Additionally,
Specialty Healthcare Services believes that hospitals choose to terminate or
not renew contracts based upon decisions to terminate their programs or to
operate them internally. As of December 31, 2003, Specialty Healthcare Services
managed 86 outpatient Wound Care Center programs and believes there is
opportunity for growth. Specialty Healthcare Services has identified over 400
additional markets in the United States which it believes has the population
necessary to support a dedicated wound care program. We believe hospitals are
continually seeking low-cost, high-quality solutions to wound management, such
as those provided by Specialty Healthcare Services. In addition, we believe the
Wound Management Program enables its hospital clients to differentiate
themselves from their competitors through better wound care treatment outcomes,
reduced costs due to decreased inpatient lengths of stay and increased revenue
through the introduction of new patients.  As a result, we believe there is a
significant opportunity for Specialty Healthcare Services to continue to expand
its Wound Care Center operations through affiliation with acute care hospitals.

In 2002, we signed a multi-year contract with VHA, Inc. ("VHA"), a cooperative
representing more than 2,200 leading community-owned health care organizations
and their affiliated physicians. Under this agreement, we offer wound management
services to VHA members which comprise 25% of the community-owned hospitals in
the United States, including many of the nation's largest and most respected
institutions.

Develop New Service Models to Enhance Market Penetration. We are actively
developing new service models in new health care delivery settings, such as
inpatient programs for acute care hospitals and long-term care facilities (e.g.,
nursing homes and long-term acute care hospitals). These new service models are
being operated as a service to existing hospital customers. Pressure sores, the
most common form of a chronic wound, usually occur among nursing home, acute
care and home care patients due to the sedentary lifestyle associated with those
care settings. As we further develop our inpatient service models, we believe we
will become more capable of penetrating the large pressure sore market.

Provide a Comprehensive Managed Care Product. Specialty Healthcare Services
believes that wound care represents a significant cost to managed care
organizations and that Specialty Healthcare Services has the ability to provide
a variety of services to managed care payors. These services may include, among
others, case management, accreditation services and other tools necessary to
effectively manage wound care patients. With its Wound Management Program and
increasing presence in multiple health care delivery settings, Specialty
Healthcare Services can offer managed care payors a relationship which we
believe will provide better patient healing outcomes and more cost-effective
services for subscribers.


                                       10
<PAGE>

Enhance Specialty Healthcare Services' Wound Management Program. Specialty
Healthcare Services currently offers a unique Wound Management Program which
includes assessment, vascular studies, revascularization, infection control,
wound debridement, growth factor therapy, skin grafting, nutrition, protection
devices, patient education, referrals and effective management of care through
patient/provider communications. Specialty Healthcare Services is continually
exploring and seeking advances in wound care management services and products
which could enhance its current Wound Management Program. Specialty Healthcare
Services is actively pursuing such advances through the continuous development
of its current services and co-marketing arrangements with other providers of
wound care products and services. Specialty Healthcare Services' current service
offerings include furnishing hyperbaric oxygen services to interested hospital
partners, forming alliances with companies marketing new wound care technologies
and developing clinical research capabilities for the wound care center network.

Specialty Healthcare Services - Wound Care Operations

Specialty Healthcare Services' wound care operations offer health care providers
the opportunity to create specialty wound care departments designed to meet the
needs of chronic wound patients. The initial focus of Specialty Healthcare
Services' wound care operations has been hospital outpatient Wound Care Center
programs. Specialty Healthcare Services is currently expanding its programmatic
approach to wound care to inpatient settings, such as acute care hospitals and
long-term care facilities. In these settings, Specialty Healthcare Services
offers an inter-disciplinary approach to the treatment of chronic wounds in the
inpatient settings to complement existing hospital Wound Care Center programs.

Hospital Outpatient Wound Care Centers. Outpatient Wound Care Center programs,
located on or near the campuses of acute care hospitals, represent Specialty
Healthcare Services' core business. A typical hospital outpatient Wound Care
Center consists of approximately 2,500 square feet of space, comprised of four
to eight exam rooms, a nursing station and physician and administrative offices.
These Wound Care Center programs are designed to deliver all necessary
outpatient services for the treatment of chronic wounds, with the hospital
providing any inpatient care such as revascularization or surgical debridement.

Specialty Healthcare Services currently offers its hospital clients two
outpatient Wound Care Center models: a management model and an "under
arrangement" model, with a primary focus on developing management models. The
differences between these two models relate primarily to the employment of the
clinical staff at the Wound Care Center program and the basis for the management
fees paid to Specialty Healthcare Services. In the management model, generally
our only employee at the Wound Care Center program is the center's Program
Director, and Specialty Healthcare Services generally receives a fixed monthly
management fee or a combination of a fixed monthly management fee and a variable
case management fee. In the "under arrangement" model, we employ all of the
clinical and administrative staff (other than physicians) at the Wound Care
Center program, and Specialty Healthcare Services generally receives fees based
on the services provided to each patient. In all other material respects, the
two models are identical. In both models, physicians remain independent, and
Specialty Healthcare Services recruits and trains the physicians and staff
associated with the Wound Care Center program. The physicians providing services
at a Wound Care Center program are recruited by Specialty Healthcare Services
primarily from among the doctors who work at the hospital and practice in
related areas. In addition, in both models, Specialty Healthcare Services' field
support departments provide the staff at each Wound Care Center program with
clinical oversight, quality assurance, reimbursement consulting, sales and
marketing and general administrative support services. The terms of Specialty
Healthcare Services' contract with each hospital are negotiated individually.
Generally, in addition to the management fees described above, the contracts
provide for development fees charged to the hospital. In both models, the
hospital and the physician bill the patient for the services provided and are
responsible for seeking reimbursement from insurers or other third-party payors.

The first Wound Care Center program opened in 1988, and, as of December 31,
2003, there were 86 hospital outpatient Wound Care Center programs in operation
in approximately 30 states. Specialty Healthcare Services has entered into
contracts with eight hospitals to open additional Wound Care Center
programs. Specialty Healthcare Services' hospital client base ranges from
medium-sized community-based hospitals to large hospitals affiliated with
national chains and not-for-profit hospitals in local markets. Specialty
Healthcare Services selects hospital clients based on a number of criteria. A
suitable hospital client typically can accommodate at least 200 inpatient beds,
offers services which complement the Wound Management Program, including
physician specialists


                                       11
<PAGE>

in the areas of general, plastic and vascular surgery, endocrinology and
diabetes, is financially stable and has a solid reputation in the community it
serves. Of Specialty Healthcare Services' 86 hospital outpatient Wound Care
Center programs, 81 are management model centers and five are "under
arrangement" model centers. We anticipate that two of the existing under
arrangement models will be converted to management models in 2004 because of
pending reimbursement changes (see "Third-Party Reimbursement").

In expanding its product offering, Specialty Healthcare Services furnishes
hyperbaric oxygen therapy ("HBO") services to interested hospital partners
operating outpatient wound care centers. These services generally include
furnishing HBO chambers and managing the program. As of December 31, 2003,
Specialty Healthcare Services managed 11 HBO programs complementing existing
hospital outpatient Wound Care Center programs, and such HBO programs accounted
for approximately 2.5% of Specialty Healthcare Services' revenue.

Inpatient Wound Care Programs. Specialty Healthcare Services is addressing the
needs of the inpatient wound care market through the development of new
inpatient programs. These patients often have pressure sores resulting from
inactivity. While not typically as severe as diabetic or venous stasis ulcers,
pressure sores represent the largest segment of the chronic wound market.
Specialty Healthcare Services has developed an inpatient program for its
affiliated acute care hospitals that is directed at assisting those hospitals in
identifying and managing inpatients in the acute care hospital that are at risk
or who suffer from chronic wounds. The program is primarily directed at reducing
the length of stay of those patients in the acute care setting. Specialty
Healthcare Services has also developed a Wound Outreach Programsm, whereby a
nurse practitioner or physician assistant from an affiliated outpatient Wound
Care Center program provides wound related services to long-term care facilities
in surrounding areas. As of December 31, 2003, Specialty Healthcare Services had
contracts to manage 35 such inpatient programs at existing acute-care hospital
customers of which 19 were operating. Further, Specialty Healthcare Services has
contracts to manage 24 programs that provide outreach wound care services to
local long-term care facilities. We cannot assure you that these programs will
be successful in the future.

Contracts Terms and Renewals. Substantially all of the revenues of Specialty
Healthcare Services are derived from management contracts with acute care
hospitals. The contracts generally have initial terms of three to five years and
many have automatic renewal terms unless specifically terminated. During the
year ending December 31, 2004, the contract terms of 36 of Specialty Healthcare
Services' management contracts will expire, including 24 contracts which provide
for automatic one-year renewals. The contracts often provide for early
termination either by the client hospital, if specified performance criteria are
not satisfied, or by Specialty Healthcare Services under various other
circumstances. Historically, some contracts have expired without renewal, and
others have been terminated by Specialty Healthcare Services or the client
hospital for various reasons prior to their scheduled expiration. During 2003,
three hospital contracts expired without renewal, and an additional eight
hospital contracts were terminated by the client hospital prior to their
scheduled expiration. Generally, Specialty Healthcare Services elects to
negotiate a mutual termination of a management contract if a client hospital
desires to terminate the contract prior to its stated term. Specialty Healthcare
Services believes that there were a number of reasons why hospitals chose to
terminate their contract, including hospital financial difficulties and the
Medicare reimbursement changes which reduced hospital revenues. The continued
success of Specialty Healthcare Services is subject to its ability to renew or
extend existing management contracts and obtain new management contracts. We
believe that hospitals choose to terminate or not to renew contracts based on
decisions to terminate their programs or to convert their programs from
independently-managed programs to programs operated internally. There can be no
assurance that any hospital will continue to do business with Specialty
Healthcare Services following the expiration of its management contract or
earlier, if such management contract is terminable prior to expiration. In
addition, any changes in the Medicare program or third-party reimbursement
levels, which generally have the effect of limiting or reducing reimbursement
levels for health services provided by programs managed by Specialty Healthcare
Services, could result in the early termination of existing management contracts
and would adversely affect the ability of Specialty Healthcare Services to renew
or extend existing management contracts and to obtain new management contracts.
The termination or non-renewal of a material number of management contracts
could harm our business.


                                       12
<PAGE>

Managed Care Operations. Specialty Healthcare Services' managed care strategy is
currently focused on marketing Wound Care Center program services to local
managed care organizations ("MCOs") in concert with its hospital clients'
efforts to promote all hospital-based services to such MCOs. Specialty
Healthcare Services seeks to establish relationships with MCOs and other disease
management companies to provide wound care services. Specialty Healthcare
Services' contractual arrangements with MCOs and other disease management
companies, which will vary based upon the needs of the particular customer, are
expected to provide for Specialty Healthcare Services to receive compensation on
a fee-for-service, fixed-case rate or at-risk capitation basis. While Specialty
Healthcare Services anticipates that most of its managed care contracts will be
fee-for-service or case-rate contracts, it expects that at-risk capitation could
become a contracting method.

Specialty Healthcare Services has developed tools to help MCOs and other disease
management companies assess their current wound care experiences (both clinical
results and costs) against Specialty Healthcare Services' Wound Management
Program in order to demonstrate that a wound care carve-out product can provide
added value. To date, Specialty Healthcare Services has been unsuccessful in
establishing managed care or disease management relationships.

Specialty Healthcare Services' managed care operations have been limited.
Although Specialty Healthcare Services or its hospital clients have been
reimbursed for wound treatment by a number of MCOs on a case-by-case basis,
Specialty Healthcare Services currently has no contracts that require or offer
incentives to subscribers to use Specialty Healthcare Services' wound care
services. There can be no assurance that Specialty Healthcare Services will be
able to successfully expand its managed care operations.

Specialty Healthcare Services - Community Education and Marketing

Specialty Healthcare Services' community education and marketing strategy
consists of a two-fold approach involving the development of new wound care
programs as well as the growth in operating Wound Care Center programs. The
professional community education component is locally managed and conducted by
the Wound Care Center Program Directors under the supervision of the Regional
Managers. The primary community education efforts are directed at physicians and
other health care professionals to expand community awareness of the Wound Care
Center program services.

In addition, community education marketing plans are developed each year at each
Wound Care Center program. The development and execution of the plan is the
responsibility of the Program Director at the Wound Care Center along with the
Corporate Marketing Department. The plan details the anticipated marketing for
the year and may include radio and print advertising as well as professional
symposiums and other community education. Specialty Healthcare Services markets
the Wound Care Center program concept to hospitals as a therapeutic "Center of
Excellence." Specialty Healthcare Services believes that having a Wound Care
Center program can differentiate a hospital from its competitors and can
increase the hospital's revenues through the introduction of new patients, which
leads to an increase in appropriate ambulatory surgeries, X-rays, laboratory
tests and inpatient surgeries such as debridements, vascular surgeries and
plastic surgeries.

Specialty Healthcare Services' efforts to develop new wound management programs
is headed by a Senior Vice President. This individual is responsible for the
activities of the Directors of Business Development, whose primary role is the
development of new wound care programs with acute care hospitals. As of December
31, 2003, Specialty Healthcare Services had three Directors of Business
Development.


                                       13
<PAGE>

Specialty Healthcare Services - Third-Party Reimbursement

Specialty Healthcare Services, through its wound care operations, provides
contractual management services for fees to acute care hospitals and other
health care providers. These providers, in turn, seek reimbursement from
third-party payors, such as Medicare, Medicaid, health maintenance organizations
and private insurers, for clinical services rendered to patients insured by
these payors. The availability of reimbursement from such payors has been a
significant factor in Specialty Healthcare Services' ability to increase its
revenue streams and will be important for future growth.

Each third-party payor formulates its own coverage and reimbursements policies.
Although we have not, and we believe that our clients have not, in general
experienced difficulty in securing third-party reimbursement for Wound Care
Center program services, some hospitals have experienced denials, delays and
difficulties in obtaining such reimbursement. To our knowledge, no widespread
denials have been received by hospitals regarding reimbursement for Wound Care
Center program clinical services. We discuss coverage and reimbursement issues
with our hospital clients and third-party payors on a regular basis. Such
discussions will continue as we seek to assure sufficient payments from
third-party payors to our hospital customers for services managed by us so that
our hospital customers and potential customers find it financially feasible to
renew contracts or enter into contracts with Specialty Healthcare Services.
Although no individual coverage and reimbursement decision is material to us, a
widespread denial of reimbursement coverage for clinical services provided in
the Wound Care Center programs could have a material adverse effect on our
business, financial position and results of operations.

As a result of the Balanced Budget Act of 1997, Centers for Medicare & Medicaid
Services ("CMS") implemented the Outpatient Prospective Payment System ("OPPS")
for all hospital outpatient department services furnished to Medicare patients
beginning August 2000. Under the system, a predetermined rate is paid to
hospitals for clinic services rendered, regardless of the hospital's cost. The
new payment system does not provide comparable reimbursement for previously
reimbursed services, and the payment rates for many services are insufficient
for many of Specialty Healthcare Services' hospital customers, resulting in
revenue and income shortfalls for the Wound Care Center program operations
managed by Specialty Healthcare Services on behalf of the hospitals. As a
result, Specialty Healthcare Services has renegotiated and modified most of its
management contracts which has resulted in reduced revenue and income to
Specialty Healthcare Services from the modified contracts and, in some cases,
contract termination. Specialty Healthcare Services expects that contract
renegotiation and modification with many of its hospital customers will
continue, which could result in further reduced revenues and income to Specialty
Healthcare Services from those contracts and even contract terminations. The
results could have a material effect on Specialty Healthcare Services' business,
financial condition and results of operations.

The Wound Care Center programs managed by Specialty Healthcare Services on
behalf of acute care hospitals are generally treated as "provider based
entities" for Medicare reimbursement purposes. This designation is required for
the hospital based program to be covered under the Medicare outpatient
reimbursement system. With OPPS, Medicare published criteria for determining
when programs may be designated "provider based entities." Programs that existed
prior to October 1, 2000 are grandfathered by CMS to be "provider based
entities" until the start of their next cost reporting period beginning on or
after July 1, 2003. At that time, the hospital may submit an attestation to the
appropriate Regional Office, attesting that the program meets all the
requirements for provider based designation. Programs that started on or after
October 1, 2000 can voluntarily apply for provider based designation status. We
timely advised each of our hospital clients of the application procedures.
Although we believe that the remainder of the programs we manage substantially
meet the current criteria to be designated "provider based entities," a
widespread denial of such designation could harm our business.

Specialty Healthcare Services - Competition

Our principal competition in the chronic wound care market consists of specialty
clinics that have been established by some hospitals or physicians.
Additionally, there are a number of private companies which provide wound care
services through an HBO program format. In the market for disease management
products and services, we face competition from other disease management
entities, general health care facilities and service providers,
biopharmaceutical companies, pharmaceutical companies and other competitors.
Many of these companies have substantially greater capital resources, marketing
staffs and experience in commercializing products and services


                                       14
<PAGE>

than we have. In addition, recently developed technologies, or technologies that
may be developed in the future, are or may be the basis for products which
compete with our chronic wound program. There can be no assurance that we will
be able to enter into co-marketing arrangements with respect to these products
or that we will be able to compete effectively against such companies in the
future.

Government Regulation

Our operations and the marketing of our services are subject to extensive
regulation by numerous governmental authorities in the United States, both
federal and state. We believe that we are currently in substantial compliance
with applicable laws, regulations and rules. However, we cannot assure you that
a governmental agency or a third party will not contend that certain aspects of
our business are subject to or are not in compliance with such laws, regulations
or rules or that the state or federal regulatory agencies or courts would
interpret such laws, regulations and rules in our favor. The sanctions for
failure to comply with such laws, regulations or rules could include denial of
the right to conduct business, significant fines and criminal and civil
penalties. Additionally, an increase in the complexity or substantive
requirements of such laws, regulations or rules could have a material adverse
effect on our business.

Any change in current regulatory requirements or related interpretations by, or
positions of, state officials where we operate could adversely affect our
operations within those states. In states where we are not currently located, we
intend to utilize the same approaches adopted elsewhere for achieving state
compliance. However, state regulatory requirements could adversely affect our
ability to establish operations in such other states.

Various state and federal laws and agencies regulate providers of health care
services and suppliers of biopharmaceutical and pharmaceutical products,
including the products and services that we distribute and sell. These laws
include, but are not limited to, the following:

Licensure and Registration

We are required by various states to be licensed as an in-state pharmacy and,
within most other states where we distribute prescription drugs, we are required
to be licensed as an out-of-state pharmacy.

In addition, federal controlled substance laws mandate that we register our
pharmacy and repackaging locations with the federal Drug Enforcement
Administration as well as conform with recordkeeping, labeling and security
regulations when dispensing controlled substances.

We believe that we are currently in substantial compliance with all state
licensing and registration laws applicable to our business. However, if we are
found to not be in compliance, we could be subject to fines and penalties which
could have an adverse effect on our business.

Fraud and Abuse Laws

These laws, specifically the Anti-Kickback laws, include the fraud and abuse
provisions and referral restrictions of the Medicare and Medicaid statutes, as
well as other federally funded programs, which prohibit the solicitation,
payment, receipt or offering of any direct or indirect remuneration for the
referral of Medicare and Medicaid patients or for purchasing, arranging for or
recommending the purchasing, leasing or ordering of Medicare or Medicaid covered
services, items or equipment.

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
created violations for fraudulent activity applicable to both public and private
health care benefit programs and prohibits inducements to Medicare or Medicaid
eligible patients.

The Office of Inspector General ("OIG") from time to time publishes its
interpretations on various fraud and abuse issues and about fraudulent or
abusive activities OIG deems suspect and potentially in violation of the federal
laws, regulations and rules. If our actions are found to be inconsistent with
OIG's interpretations, such actions could have a material adverse effect on our
business.


                                       15
<PAGE>

Due to the complexity of such anti-kickback laws, the Department of Health and
Human Services ("HHS") has established certain safe harbor regulations whereby
various payment practices are protected from criminal or civil penalties.
However, an activity that is outside a safe harbor is not necessarily deemed
illegal.

Violations of these fraud and abuse laws may result in fines and penalties as
well as civil or criminal penalties for individuals or entities, including
exclusion from participation in the Medicare or Medicaid programs. Several
states have adopted similar laws that cover patients in both private and
government programs. Because the anti-fraud and abuse laws have been broadly
interpreted, they limit the manner in which we can operate our business and
market our services to, and contract for services with, other health care
providers.

The Stark Law

Federal and some state laws impose restrictions on the relationships between
providers of health care services or products and other persons or entities,
such as physicians and other clinicians, including with respect to employment or
service contracts, investment relationships and referrals for certain designated
health services. Outpatient prescription drugs are one of the designated
services. There is considerable uncertainty about some facets of these laws,
especially the federal law, since only the first of two phases of final
regulations has been issued and as it is unclear as to when the second phase
will be published. We believe we have structured our operations in an attempt to
comply with these provisions. Periodically, there are efforts to expand the
scope of these referral restrictions from its application to government health
care programs to all payors and to additional health care services. Certain
states are considering adopting similar restrictions or expanding the scope of
existing restrictions. We cannot assure you that the federal government, or
other states in which we operate, will not enact similar or more restrictive
legislation or restrictions or interpret existing laws and regulations in a
manner that could harm our business.

Professional Fee Splitting

The laws of many states prohibit physicians from sharing professional fees with
non-physicians and prohibit non-physician entities, such as us, from practicing
medicine and from employing physicians to practice medicine. The laws in most
states regarding the corporate practice of medicine have been subjected to
judicial and regulatory interpretation.

Pharmacy Operation Laws

Our pharmacies are subject to various state laws relating to pharmacy operation,
including requirements regarding licensure and handling, securing, storing,
labeling, dispensing, record-keeping and reporting for pharmaceutical products,
as well as patient confidentiality requirements and prohibitions on
fee-splitting by pharmacies. Additionally, many state boards of pharmacy require
pharmacies to provide counseling to customers. Our pharmacy business marketing
activities may also be regulated by the FDA, including with respect to any
promotion of off-label uses of products (for indications which have been
approved by the FDA). We believe we are in substantial compliance with these
requirements. However, if we are found to not be in compliance, we could be
subject to fines and penalties which could have an adverse effect on our
business.

Professional Licenses

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


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<PAGE>

False Claims Act

Federal and some state laws impose requirements in connection with the
submission of claims for payment for health care services and products,
including prohibiting the knowing submission of false or fraudulent claims and
submission of false records or statements. Such requirements would apply to the
operations of our pharmacies and to the hospital customers to which we provide
wound care management services. Not only are government agencies active in
investigating and enforcing actions with respect to applicable health laws, but
also health care providers are often subject to actions brought by individuals
on behalf of the government. As such "whistleblower" lawsuits are generally
filed under seal with a court to allow the government adequate time to
investigate and determine whether it will intervene in the action, health care
providers affected are often unaware of the suit until the government has made
its determination and the seal is lifted.

HIPAA - Administrative Simplification

The Administrative Simplification Provisions of HIPAA require HHS to adopt
standards to protect the security and privacy of health-related information. In
February 2002, HHS issued final rules concerning the security standards, do not
require the use of specific technologies (e.g., no specific hardware or software
is required), but instead require health plans, health care clearinghouses and
health care providers to comply with certain minimum security procedures in
order to protect data integrity, confidentiality and availability. The
compliance deadline will occur in April 2005, and we are in the process of
reviewing these final regulations to ensure that our systems meet these security
standards.

With respect to the privacy standards, HHS published final rules in December
2000 which were modified on August 14, 2002. All health care providers were
required to be compliant with the new federal privacy requirements no later than
April 14, 2003. HIPAA privacy standards contain detailed requirements regarding
the use and disclosure of individually identifiable health information. Improper
use or disclosure of identifiable health information covered by HIPAA privacy
regulations can result in the following fines and/or imprisonment: (i) civil
money penalties for HIPAA privacy violations are $100 per incident, up to
$25,000, per person, per year, per standard violated; (ii) a person who
knowingly and in violation of HIPAA privacy regulations obtains individually
identifiable health information or discloses individually identifiable health
information to another person may be fined up to $50,000 and imprisoned up to
one year, or both; (iii) if the offense is committed under false pretenses, the
fine may be up to $100,000 and imprisonment for up to five years; and (iv) if
the offense is done with the intent to sell, transfer or use individually
identifiable health information for commercial advantage, personal gain or
malicious harm, the fine may be up to $250,000 and imprisonment for up to ten
years.

HIPAA also required HHS to adopt national standards establishing electronic
transaction standards that all health care providers must use when submitting or
receiving certain health care transactions electronically. Although these
standards were to become effective October 2002, Congress extended the
compliance deadline until October 2003 for organizations, such as ours, that
submitted a request for an extension. We have taken the appropriate actions to
ensure that patient data kept on our computer networks are in compliance with
these regulations. We believe that we are now substantially in compliance with
the HIPAA electronic standards and are capable of delivering HIPAA standard
transactions electronically. In addition, if we choose to distribute drugs
through new distribution channels, such as the Internet, we will have to comply
with government regulations that apply to those distribution channels, which
could harm our business. In addition to HIPAA, a number of states have adopted
laws and/or regulations applicable to the use and disclosure of patient health
information.

If we were found to have violated one of these state laws, we could be subject
to fines, penalties and other actions which could have an adverse effect on our
business.


                                       17
<PAGE>

Confidentiality

Under federal and state laws, we must adhere to stringent confidentiality
regulations intended to protect the confidentiality of patient records.

Ongoing Investigations

Federal and state investigations and enforcement actions continue to focus on
the health care industry, scrutinizing a wide range of items such as joint
venture arrangements, referral and billing practices, product discount
arrangements, home health care services, dissemination of confidential patient
information, promotion of off-label drug indications use, clinical drug research
trials and gifts for patients or referral sources. We believe our current and
planned activities are substantially in compliance with applicable legal
requirements. We cannot assure you, however, that a governmental agency or a
third party will not contend that certain aspects of our business are subject
to, or are not in compliance with, such laws, regulations or rules, or that
state or federal regulatory agencies or courts would interpret such laws,
regulations and rules in our favor, or that future interpretations of such laws
will not require structural or organizational modifications of our existing
business or have a negative impact on our business. Applicable laws and
regulations are very broad and complex, and, in many cases, the courts interpret
them differently, making compliance difficult. Although we try to comply with
such laws, regulations and rules, a violation could result in denial of the
right to conduct business, significant fines and criminal penalties.
Additionally, an increase in the complexity or substantive requirements of such
laws, regulations or rules, or reform of the structure of health care delivery
systems and payment methods, could have a material adverse effect on our
business.

Intellectual Property

Our success depends in part on our ability to maintain trade secret protection
and operate without infringing on or violating the proprietary rights of third
parties. In addition, we also rely, in part, on trade secrets, proprietary
know-how and technological advances which we seek to protect by measures, such
as confidentiality agreements with our employees, consultants and other parties
with whom we do business. We cannot assure you that these agreements will not be
breached, that we will have adequate remedies for any breach or that our trade
secrets and proprietary know-how will not otherwise become known, be
independently discovered by others or found to be unprotected.

Wound Care Center(R), Wound Management Program(TM) and our logo with our name,
Curative Health Services(R), are our trademarks. This report also includes
trade names and marks of other companies.

Employees

As of December 31, 2003, we employed 371 full-time employees, of which 175 were
in the Specialty Pharmacy Services business unit, 135 employees were in the
Specialty Healthcare Services business unit and 61 were in various support
departments. We expect to add additional personnel to our business units in the
next year. We believe that our relations with our employees are good.

Available Information

Our filings with the Securities and Exchange Commission ("SEC"), including our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments and exhibits to those reports are available free of
charge through our Internet website (http://www.curative.com) as soon as
reasonably practicable after these materials are electronically filed, or
furnished, with the SEC.


                                       18
<PAGE>

BUSINESS OF CCS

Overview

Critical Care Systems, Inc. ("CCS") was founded in 1991 and is a leading
national provider of specialty infusion services. CCS focuses on delivering
selected therapies (hemophilia clotting factor, IVIG, TPN and antibiotics) that
are best managed and delivered on a local basis to patients in their homes
through its network of 28 branch pharmacy operations in 17 states. By operating
a branch network that responds to local market needs - supported by regional and
corporate resources - CCS provides substantial benefits to patients, payors and
physicians. CCS currently serves a monthly census of more than 4,000 patients.
It has approximately 150 payor contracts and about 700 employees. To date, CCS'
growth has been entirely organic - driven by same-store revenue gains as well as
its successful expansion program. Since 2000, CCS has opened 16 branches and
closed one branch, primarily in major metropolitan markets.

Strategic Focus on Therapies Offered

CCS focuses on its four core infusion therapies, which accounted for 75% of its
net revenue in 2003. In order to accommodate certain referral sources, however,
the typical branch offers a total of 15-20 therapies delivered intravenously or
via injection to patients in their homes. Over the past few years, CCS has been
successful in increasing net revenue derived from its four core therapies.

Hemophilia Factor Products (Factor). Because this therapy is required for an
entire lifetime, the patient (or their care-takers) learns to administer their
own blood clotting factor products. Factor patients infuse the therapy
approximately three times per week. Although most blood therapy patients can
self-infuse and do not require frequent nurse oversight, CCS will often send a
company-employed nurse to visit the patient on a monthly basis in order to
better monitor the patient. Oversight from a consistent clinical team can help
to reduce adverse effects and increase protocol compliance.

Intravenous Immunoglobin Therapy (IVIG). Patients receiving IVIG therapy for
primary immune deficiencies usually receive the therapy for life. Depending on
the severity of their condition, patients receiving IVIG therapy for autoimmune
disorders are treated intermittently over a period of months. CCS focuses on
patients suffering from chronic conditions, and, accordingly, a majority of CCS'
patients require long-term treatment. Nurse visitation is necessary for each
treatment due to the high toxicity levels and the potential for a negative
reaction.

Total Parental Nutrition (TPN). TPN is a solution that contains one or more of
the following: amino acids, dextrose, fatty acids, electrolytes, trace elements,
minerals and vitamins. Accordingly, TPN is mixed for each patient specifically
and requires a high degree of pharmacy manipulation. Patients requiring these
life-sustaining nutrients suffer from conditions such as inflammatory bowel
disease, short bowel syndrome, pancreatitis or other gastrointestinal illnesses
that prohibit oral digestion. TPN therapy is also utilized to augment the
nutritional status of patients with cancer, hyperemesis, AIDS/HIV and eating
disorders. Accordingly, certain patients require TPN for life, while others may
only need short-term therapy. CCS currently provides TPN to approximately 270
patients (average monthly census) that require on average 72 days of treatment.
Approximately 50% of CCS' patients require long-term treatment. A nurse will
visit the patient periodically during the course of this therapy in order to
take blood samples and monitor the patient.

Anti-infective Therapy. Anti-infective therapy involves the infusion of
antibiotic medications for the treatment of a variety of infectious episodes,
such as osteomyelitis (bone infections), bacterial endocarditis (infection of
the heart valves), wound infections, infections associated with HIV/AIDS,
cancer, post-kidney transplant treatment protocols and infections of the kidneys
and urinary tract. Anti-infective drugs are more effective when infused directly
into the patient's blood as compared to oral formulation. A vast majority of
CCS' patients utilizing the anti-infect therapy have recently been discharged
from a hospital and require daily treatment for an average of 24 days. During
this time period, a CCS nurse will visit the patient's home five times on
average to educate, train and monitor the patient.


                                       19
<PAGE>

Other Therapies. In the first half of 2003, approximately 25% of CCS' net
revenue was derived from sales of inotropics, antifungal/antiviral therapies,
cell stimulator, pain management, hydration, chemotherapy, enteral nutrition,
solumedrol and growth hormone. No single therapy in the other category
represented more than 4% of net revenue.

Branch Operations

CCS' branches focus on fostering relationships with patients, physicians,
hospitals and payors through a strong local presence. Accordingly, a typical
branch is staffed with 10-20 clinical and operational professionals who
collectively are responsible for every aspect of the branch's operations. These
activities range from marketing to local referral sources to compounding,
delivering and assisting in the administration of a patient's therapy. Each of
CCS' branches is responsible for the following: (i) patient intake and
admission; (ii) mixing and/or compounding therapies; (iii) clinical pharmacy,
nursing and nutrition services; (iv) clinical monitoring; (v) delivery of
therapies to the patient; (vi) reimbursement verification and assistance; (vii)
sales and marketing activities; (viii) billing and collection; and (ix) patient
inventory management.

Each of CCS' branches utilizes a comprehensive approach to delivering care
designed to achieve superior outcomes by helping patients restore their
independence and reduce unnecessary healthcare costs. One of the primary
advantages of a local presence is the ability to closely manage and track the
patient with a consistent clinical team. In fact, in emergency situations, CCS
will facilitate an emergency room visit or, if necessary, will arrange an
immediate visit to the home from a nurse. In order to be responsive to its
patients, CCS places nurses and pharmacists on call 24 hours a day, seven days a
week.

Sales and Marketing

CCS has implemented a two-pronged sales and marketing strategy that focuses on
establishing and expanding relationships with managed care payors and local
referral sources, including physicians and hospital discharge planners. Each
market that CCS services differs relative to the major source of referrals.
Generally, CCS has found that metropolitan areas where several payors exist are
more payor-driven, whereas more rural areas where fewer payors exist are
physician/hospital discharge-driven. As such, CCS modifies its specific local
calling effort in each geography. CCS' key selling point is its ability to
deliver superior clinical outcomes through its locally based clinical experts.

Patients requiring infusion therapies are typically referred to CCS upon being
discharged from a hospital or upon diagnosis by a physician with a specific
disease or condition. The treating physician determines if the patient is a good
candidate for home infusion and works with the patient and their payor to
determine the service provider. While the patient ultimately has the ability to
choose a service provider, the decision is often heavily influenced by the
hospital discharge planner, the physician or the patient's payor. This makes
CCS' local capabilities critical in its ability to attract new business.

CCS' sales force of 37 representatives is comprised of 32 branch-based
representatives and five regional/corporate employees. The local sales
representatives are completely integrated into the day-to-day branch operations
and call on local physicians, hospitals and payors. CCS' vice president of
sales, in conjunction with CCS' four area vice presidents and four
regional/corporate sales representatives, oversee its sales and marketing
program. This vice president is responsible for sales training, setting and
implementing sales strategies, marketing support (brochures, press releases,
etc.) and establishing/enhancing contractual relationships with national payors.
The four regional/corporate sales representatives are comprised of a marketing
manager and three managed care specialists who provide support to the local
sales representatives and oversee the relationships and contracts with payors.

New Market Expansion

CCS had targeted three to five new geographic markets to enter each year. CCS
has in the past been able to open branches that achieve profitability on average
within three to four quarters. The ability to successfully enter new markets and
drive profitability is attributable to CCS' ability to leverage corporate
resources and its clinical reputation in order to rapidly establish a local
presence, win payor contracts and develop referral sources. CCS typically
targets markets that are contiguous to existing branches to take advantage of
existing local resources and reputation. CCS has identified 15 new sites that it
plans to open over the next three to four years, 80% of which are in contiguous
markets. New branches typically involve an initial investment of $150,000 to
$200,000 in fixed costs, depending on the complexity of the build-out.


                                       20
<PAGE>

BRANCH GROWTH

                            1997   1998   1999   2000   2001   2002   2003
                            ----   ----   ----   ----   ----   ----   ----
      Beginning               10     11     12     13     17     24     26
      New                      1      1      1      4      7      2      3
      Closed                   0      0      0      0      0      0      1
                              --     --     --     --     --     --     --
      Ending                  11     12     13     17     24     26     28

Customers, Contracts and Reimbursement

CCS derives the substantial majority of its net revenue from third-party payors,
including managed care organizations and Medicare and Medicaid programs. CCS
currently has approximately 150 payor contracts covering services throughout the
nation. One reason that payors select CCS is because its provides valuable
services to the payors such as weekly census and clinical reports. These
detailed reports are shared with the local branch and the payor in order to help
find opportunities for cost reduction and improvement in the level of service
being provided. Billing and reimbursement for non-Medicare payors is conducted
at the branch, so that CCS can develop strong local relationships with its
payors. Medicare billing is performed at the corporate level.

CCS' managed care contracts typically cover a specific geographic region
(usually a single state) and outline pricing and services to be offered. Each
contract specifies the therapies CCS will provide. Contracts are typically for a
renewable one-year term with a 30- to 90-day notice for termination. CCS has a
well-diversified base of managed care payors. CCS has a high contract retention
rate. Typically, when a contract is not renewed, it is because CCS cancels the
contract because it is not meeting its profitability objectives.

CCS receives reimbursement for, and its net revenue is comprised of, the cost of
the pharmaceuticals sold, nursing visits and a per diem (which covers clinical
services, supplies and overhead). Historically, payors have varied in their
reimbursement methodologies, with some paying a per diem and drug charge; others
paying separately for drugs, supplies, nursing visits and per diems; and others
paying only for drugs and supplies. The specific reimbursement methodology also
differs according to the therapy. Typically, pharmaceuticals have been
reimbursed at a percentage discount from the published average wholesale price
("AWP"), an amount provided by manufacturers, or on a unit price basis (for
example, with factor and IVIG). CCS is currently in the process of updating its
contracts with payors to comply with the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). HIPAA requires standardized coding, which
consists of charges for drugs, nursing visits and per diems. This coding will
greatly simplify CCS' contracts.

Manufacturer and Supplier Relationships

CCS sources its products from a variety of suppliers. Its products are generally
generic in nature and can be sourced through more than one supplier. In 2002,
CCS purchased the majority of its pharmaceuticals (other than factor and IVIG)
from one distributor. Most of its factor, IVIG and medical supplies were
purchased from another supplier. In 2003, CCS continued to reduce its product
acquisition costs due to its increased purchase volumes. CCS' contract to
purchase pharmaceuticals is a two year contact expiring in August 2005. The
contract for factor, IVIG and medical supplies is for three years and expires in
February 2006. These two contracts account for approximately 90% of CCS' cost of
materials. It also has other contracts for factor and IVIG, and it could enter
into different wholesale pharmaceutical contracts at any time.

Government Regulation

CCS operates in a regulatory environment that is substantially the same as the
environment in which Curative operates. See "Business of Curative - Government
Regulation."


                                       21
<PAGE>

Facilities

CCS' branches are generally 5,000 square feet in size and located in
light-industrial areas or office parks. The facilities have both warehouse and
general office space. Each of CCS' branches serves a population within a 50-150
mile radius, but in certain circumstances branch personnel will travel farther
to see patients. CCS has approximately 11,000 square feet of corporate office
space located in Nashua, New Hampshire and Lake Forest (20 minutes outside of
Chicago), Illinois. CCS leases its facilities for three to six year terms. CCS
requires each of its branch locations to be JCAHO-accredited. Newly opened
branches have provisional accreditation prior to their JCAHO survey.

Item 2. Properties

Our headquarters are located in Hauppauge, Long Island, New York. We lease this
30,000 square foot facility under a lease through 2005. Additionally, through
our Specialty Pharmacy Services business unit, we lease office, pharmacy and
warehouse space in various states. We believe that our facilities are adequate
and suitable for our operation. Our Specialty Healthcare Services business unit
operates hospital outpatient Wound Care Center programs in facilities which are
owned or leased by the hospitals.

Item 3. Legal Proceedings

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

A search warrant issued by a U.S. Magistrate Judge, Southern District of New
York, relating to a criminal investigation was executed on November 4, 2003 at
our Prescription City pharmacy in Spring Valley, New York. The Government has
informed us that we are not a target of the investigation. We were served with
the search warrant on Tuesday, November 4, 2003 while we were conducting our
own compliance review at the Spring Valley pharmacy. We intend to cooperate
fully with the U.S. Attorney's Office in its investigation. Based on information
known as of November 5, 2003, we terminated Paul Frank, the former principal
shareholder of Prescription City, Inc. We also hired outside counsel in
connection with this investigation. Certain assets of Prescription City, Inc.
were purchased by us in June 2003. The purchase was structured as an asset
purchase with our being provided indemnifications, representations and
warranties by the seller. We are currently considering our remedies available
under the purchase agreement (including without limitation, rescission of our
acquisition of these assets).

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

None.







                                       22


<PAGE>

                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The Company's common stock is traded on the Nasdaq Stock Market under the symbol
"CURE." As of March 1, 2004, there were 171 holders of record of the Company's
common stock. The Company has not paid any cash dividends since its inception,
nor does it currently intend to pay cash dividends in the foreseeable future.
The Company intends to retain all earnings, if any, for use in its business
operations.

The following table sets forth, for the fiscal periods indicated, the range of
high and low sales prices of the common stock as quoted on the Nasdaq National
Market System:

                  2003                         High           Low
                  ----                       -------        -------
                  Fourth Quarter             $ 18.44        $ 12.25
                  Third Quarter                18.86          16.02
                  Second Quarter               19.27          12.20
                  First Quarter                19.38          15.41

                  2002
                  ----
                  Fourth Quarter             $ 17.74        $ 10.90
                  Third Quarter                17.97          10.00
                  Second Quarter               16.78          10.25
                  First Quarter                22.75           9.20

The closing sale price for the common stock as quoted on the Nasdaq National
Market System on March 1, 2004 was $12.14.






                                       23


<PAGE>

Item 6.  Selected Consolidated Financial Data

The following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as the
consolidated financial statements and notes thereto contained elsewhere in this
Annual Report on Form 10-K.

Five year selected consolidated financial data of Curative Health Services, Inc.
and Subsidiaries for the years ended December 31 is as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                 2003             2002          2001          2000          1999
                                              ----------       ----------    ----------    ----------    ----------
<S>                                           <C>              <C>           <C>           <C>           <C>
Statement of Operations Data:
Total revenues                                $  214,741       $  139,229    $   81,638    $   77,691    $  101,209
Costs and operating expenses:
   Costs of products sales and services          148,673           89,297        55,666        51,073        59,945
   Selling, general and administrative            44,544           26,401        51,466        29,441        26,273
                                              ----------       ----------    ----------    ----------    ----------
   Total costs and operating expenses            193,217          115,698       107,132        80,514        86,218
                                              ----------       ----------    ----------    ----------    ----------

Income (loss) from operations                     21,524           23,531       (25,494)       (2,823)       14,991

Interest (expense) income, net                    (2,280)          (1,111)          816         2,609         2,037
Other income                                       2,327            1,907            --            --            --
                                              ----------       ----------    ----------    ----------    ----------

Income (loss) before income taxes                 21,571           24,327       (24,678)         (214)       17,028
Income tax provision (benefit)                     8,496            9,682        (2,473)          (86)        6,566
                                              ----------       ----------    ----------    ----------    ----------

Net income (loss)                             $   13,075       $   14,645    $  (22,205)   $     (128)   $   10,462
                                              ==========       ==========    ==========    ==========    ==========

Net income (loss) per common share, basic     $     1.04       $     1.30    $    (3.09)   $    (0.01)   $     0.99
                                              ==========       ==========    ==========    ==========    ==========

Net income (loss) per common share, diluted   $      .96(i)    $     1.20    $    (3.09)   $    (0.01)   $     0.97
                                              ==========       ==========    ==========    ==========    ==========

Denominator for basic earnings per share,
weighted average common shares                    12,546           11,280         7,193         8,780        10,559
                                              ==========       ==========    ==========    ==========    ==========

Denominator for diluted earnings per share,
weighted average common shares assuming
conversions                                       13,826           12,207         7,193         8,780        10,756
                                              ==========       ==========    ==========    ==========    ==========

Balance Sheet Data:
Working capital                               $   25,468       $   17,353    $    2,525    $   44,394    $   55,456
Total assets                                     233,938          186,886        76,439        75,166        87,910
Long-term liabilities                             40,906           26,153         6,000            --            --
Retained earnings                                 30,118           17,043         2,398        24,603        24,731
Stockholders' equity                             143,720          120,901        36,004        55,570        71,600


(i)  Calculated under the "as if converted" method.  See Note O of Notes to Consolidated Financial Statements.



                                       24

</TABLE>


<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Overview

Curative Health Services, Inc. ("Curative" or the "Company"), through its two
business units, Specialty Pharmacy Services and Specialty Healthcare Services,
seeks to deliver high-quality care and clinical results that result in high
patient satisfaction for patients experiencing serious or chronic medical
conditions. Through its Specialty Pharmacy Services business unit, the Company
provides biopharmaceutical products to patients with chronic and critical
disease states and related clinical services to assist these patients with
their intensive disease management needs. In its Specialty Pharmacy
operations, the Company purchases various biopharmaceutical products, including
hemophilia clotting factor, intravenous immune globulins, or "IVIG", MedImmune
Inc.'s Synagis(R) and Centocor, Inc.'s Remicade(R), from suppliers and then
contracts with insurance companies and other payors to provide direct-to-patient
distribution of, education about, reimbursement and other support services,
including the provision or coordination of injection or infusion services,
related to these biopharmaceutical products. The Company's Specialty Pharmacy
revenues are derived primarily from fees paid by insurance companies and other
payors for the purchase and distribution of these biopharmaceuticals and for
injection or infusion services provided. Further, as part of its Specialty
Pharmacy operations, the Company provides biopharmaceutical product distribution
and support services under contract with retail pharmacies for which it receives
product supply and related service fees. The biopharmaceutical products
distributed and the injection or infusion therapies offered by the Company are
used by patients with chronic or severe conditions such as hemophilia, immune
system disorders, respiratory syncytial virus, cancer, rheumatoid arthritis,
hepatitis C, multiple sclerosis and growth hormone deficiency. At December 31,
2003, the Company had 306 payor contracts and 20 retail pharmacy
contracts and provided services or products in at least 40 states. The Specialty
Pharmacy Services business unit provides services directly to patients and
caregivers and delivers its products via overnight mail or courier and through
its retail pharmacies.

The period-to-period comparability of the Company's financial statements is
affected by its acquisition activity. The Company entered the Specialty Pharmacy
Services business with its acquisition of eBioCare.com, Inc. ("eBioCare") in
March 2001, which was its first acquisition of a specialty pharmacy services
business. The Company completed ten specialty pharmacy acquisitions
(including the acquisition of eBioCare).

The Specialty Healthcare Services business unit contracts with hospitals to
manage outpatient Wound Care Center programs. These Wound Care Center programs
offer a comprehensive range of services that enable the Specialty Healthcare
Services business unit to provide patient specific wound care diagnosis and
treatments on a cost-effective basis. Specialty Healthcare Services currently
operates two types of Wound Care Center programs with hospitals: a management
model and an "under arrangement" model.

In the management model, Specialty Healthcare Services provides management and
support services for a chronic wound care facility owned or leased by the
hospital and staffed by employees of the hospital, and generally receives a
fixed monthly management fee or a combination of a fixed monthly management fee
and a variable case management fee. In the "under arrangement" model, Specialty
Healthcare Services provides management and support services, as well as the
clinical and administrative staff, for a chronic wound care facility owned or
leased by the hospital, and generally receives fees based on the services
provided to each patient. In both models, physicians remain independent.
Specialty Healthcare Services offers assistance in recruiting and provides
training in wound care to the physicians and staff associated with the Wound
Care Center programs.


                                       25

<PAGE>

Holding Company Reorganization

In August 2003, the Company effected a holding company reorganization in which
each share of the registrant's outstanding common stock was deemed to have been
exchanged for one share of common stock in a newly formed corporation (the "new
holding company"). Pursuant to Section 302A.626 (subd. 7) of the Minnesota
Business Corporation Act, the articles of incorporation, bylaws and name of the
new holding company, and the authorized capital stock of the new holding company
(including the designations, rights, powers and preferences of such capital
stock and the qualifications, limitations and restrictions thereof) are all
consistent with those of the registrant as it existed prior to the
reorganization. In addition, the directors and executive officers of the new
holding company were the same individuals who were directors and executive
officers, respectively, of the registrant prior to the reorganization. The terms
"Curative" and the "Company" as used in this report refer, for periods prior to
the reorganization, to the corporation that was the registrant prior to the
reorganization, and, for periods after the reorganization, to the new holding
company.


Critical Accounting Policies and Estimates

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

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

Trade receivables. Considerable judgment is required in assessing the ultimate
realization of receivables, including the current financial condition of the
customer, age of the receivable and the relationship with the customer. The
Company estimates its allowances for doubtful accounts using these factors. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g.,
bankruptcy filings), a specific reserve for bad debts is recorded against
amounts due to reduce the receivable to the amount the Company reasonably
believes will be collected. For all other customers, the Company has reserves
for bad debt based upon the total accounts receivable balance. At December 31,
2003, the Company's reserve for accounts receivable was approximately 7% of
total receivables.


                                       26

<PAGE>


Inventories. Inventories are carried at the lower of cost or market on a first
in, first out basis. Inventories consist of high cost biopharmaceutical and
pharmaceutical products that, in many cases, require refrigeration or other
special handling. As a result, inventories are subject to spoilage or shrinkage.
On a quarterly basis, the Company performs a physical inventory and determines
whether any shrinkage or spoilage adjustments are needed. Although the Company
believes its inventories balances at December 31, 2003 are reasonably accurate,
there can be no assurances that spoilage or shrinkage adjustments will not be
needed in the future. The recording of any such reserve may have a negative
impact on the Company's operating results.

Deferred taxes. The Company had approximately $3.0 million in net deferred tax
assets at December 31, 2003 to record against future taxable income and
approximately $2.3 million in deferred tax liabilities. The Company does not
have a valuation allowance against its assets as it believes it is more likely
than not that the tax assets will be realized. The Company has considered future
income expectations and prudent tax strategies in assessing the need for a
valuation allowance. In the event the Company determines in the future that it
needs to record a valuation allowance, an adjustment to deferred tax assets
would be charged against income in the period of determination.

Goodwill and Intangibles. Goodwill represents the excess of purchase price over
the fair value of net assets acquired. Intangibles consist of the separately
identifiable intangibles, such as pharmacy and customer relationships and
covenants not to compete. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," which requires goodwill and intangible assets with
indefinite lives no longer be amortized but rather be reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives.

In assessing the recoverability of the Company's goodwill and intangibles, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or assumptions change in the future, the Company may need to record an
impairment charge for these assets. An impairment charge would reduce operating
income in the period it was determined that the charge was needed.

Recently Issued Accounting Standards

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," which
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 establishes fair
value as the objective for initial measurement of liabilities related to exit or
disposal activities and requires that such liabilities be recognized when
incurred. The Company adopted SFAS No. 146 effective January 1, 2003. See Note H
of Notes to Consolidated Financial Statements. The adoption of this standard did
not have a material effect on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The adoption of this
standard did not have a material effect on the Company's consolidated financial
statements.


                                       27

<PAGE>

Key Performance Indicators

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

<TABLE>
<CAPTION>
                                           2003        2002      $ Change   % Change    2002       2001      $ Change   % Change
                                         --------    --------    --------   --------  --------   --------    --------   --------
<S>                                      <C>         <C>         <C>        <C>         <C>        <C>         <C>        <C>
Specialty Pharmacy revenues              $185,843    $104,550    $ 81,293      78%    $104,550   $ 35,104    $ 69,446     198%
Specialty Healthcare revenues              28,898      34,679      (5,781)    (17%)     34,679     46,534     (11,855)    (25%)
                                         --------    --------    --------             --------   --------    --------
Total revenues                           $214,741    $139,229    $ 75,512      54%    $139,229   $ 81,638    $ 57,591      71%

Specialty Pharmacy revenues to total          87%         75%                              75%        43%
Specialty Healthcare revenues to total        13%         25%                              25%        57%
                                         --------    --------                         --------   --------
Total                                        100%        100%                             100%       100%

Specialty Pharmacy gross margin          $ 50,394    $ 30,145    $ 20,249      67%    $ 30,145   $  5,325    $ 24,820     466%
Specialty Healthcare gross margin          15,674      19,787      (4,113)    (21%)     19,787     20,647         860      (4%)
                                         --------    --------    --------             --------   --------    --------
Total gross margin                       $ 66,068    $ 49,932    $ 16,136      32%    $ 49,932   $ 25,972    $ 23,960      92%

Specialty Pharmacy gross margin %             27%         29%                              29%        15%
Specialty Healthcare gross margin %           54%         57%                              57%        44%
Total gross margin %                          31%         36%                              36%        32%

Specialty Pharmacy - SG&A                $ 19,280    $  8,801    $ 10,479     119%    $  8,801   $  4,935    $  3,866      78%
Specialty Healthcare - SG&A                 4,641       5,054        (413)     (8%)      5,054      7,348      (2,294)    (31%)
Corporate - SG&A                           20,623      12,546       8,077      64%      12,546     39,183     (26,637)    (68%)
                                         --------    --------    --------             --------   --------    --------
Total SG&A                               $ 44,544    $ 26,401    $ 18,143      69%    $ 26,401   $ 51,466    $(25,065)    (49%)

Operating margin                         $ 21,524    $ 23,531    $ (2,007)     (9%)   $ 23,531   $(25,494)   $ 49,025    (192%)
Operating margin %                            10%         17%                              17%       (31%)
</TABLE>


Results of Operations

Fiscal Year 2003 vs. Fiscal Year 2002

Revenues. The Company's revenues increased $75.5 million, or 54%, to $214.7
million for the fiscal year ended December 31, 2003 compared to $139.2 million
for the fiscal year ended December 31, 2002. The increase in revenues was the
result of the Specialty Pharmacy acquisitions the Company completed in 2003 and
2002 and organic growth in certain products, offset by a reduction in service
revenues in the Specialty Healthcare Services business unit.

Product revenues, attributed entirely to the Specialty Pharmacy Services
business unit, increased $81.3 million, or 78%, to $185.8 million in 2003 from
$104.6 million in 2002. The increase in product revenues was primarily
attributed to the inclusion of the Specialty Pharmacy acquisitions completed in
2003 and 2002 and organic growth of 13.5% in hemophilia patient revenues, 17.5%
in IVIG and infusible revenues and a 16.6% increase in fourth quarter 2003
Synagis(R) revenues, as compared to the fourth quarter of 2002.


                                       28

<PAGE>

Product revenues for the years ended December 31 included the following:

<TABLE>
<CAPTION>
                                           2003                    2002
                                    --------------------    --------------------
                                                 % of                    % of
                                               Specialty               Specialty
                                       In      Pharmacy        In      Pharmacy
                                    millions   Revenues     millions   Revenues
                                    --------------------    --------------------
<S>                                 <C>        <C>          <C>        <C>
Hemophilia                           $115.3        62%       $ 83.2        80%
IVIG injectables, infusables(1)        19.3        10%          8.3         8%
Synagis(R)                             37.1        20%          7.6         7%
Oncology(2)                             7.5         4%           --        --%
Other(3)                                6.6         4%          5.5         5%
                                     ------      -----       ------      -----
Total Specialty Pharmacy revenues    $185.8       100%       $104.6       100%
                                     ======      =====       ======      =====
</TABLE>

(1)   Includes IVIG, Remicade(R) and growth hormone products
(2)   The Company entered the Oncology market in 2003
(3)   Other includes, but is not limited to, products such as oral medications,
      Avonex(R), Rebetron(R), Betaseron(R), Rebif(R) and Enbrel(R)

The decrease in hemophilia sales as a percentage of Specialty Pharmacy Services'
revenues was due to the Company adding product lines through acquisitions and
organic growth in existing products.

As respiratory syncytial virus occurs primarily during the winter months, the
major portion of the Company's Synagis(R) sales may be higher during the first
and fourth quarters of the calendar year which may result in significant
fluctuations in the Company's quarterly operating results.

Service revenues, attributed entirely to the Specialty Healthcare Services
business unit, decreased 17% to $28.9 million in 2003 from $34.7 million in
2002. The service revenues decrease of $5.8 million was attributed to contract
terminations, contract renegotiations resulting in lower revenues and the
conversion of three under arrangement programs to management service programs
where revenues and expenses are lower. Additionally, in 2003, the Company
operated an average of 87 programs as compared to an average of 96 programs
operating in 2002. For the fiscal year ended 2003, the Company signed 13 new
contracts and had 11 contracts terminated. The improvement in the total number
of contracts signed in 2003 versus contracts terminated was the result of a more
favorable climate for outsourcing within the hospital market as well as improved
financial stability of hospitals generally. Program terminations by client
hospitals have been effected for such reasons as reduced reimbursement,
financial restructuring, layoffs, bankruptcies, hospital closings or a
hospital's decision to maintain a wound care center without external management.
The continued termination, non-renewal or renegotiation of a material number of
management contracts could result in a continued decline in the Specialty
Healthcare Services business unit's revenue. The Specialty Healthcare Services
business unit has a number of initiatives to counter the decline in revenue,
although there can be no assurance that the initiatives will be successful.
These initiatives include new product offerings such as inpatient wound care
programs at acute care hospitals focusing on pressure sores, and wound outreach
programs whereby nurse practitioners or physicians from affiliated Wound Care
Centers provide related services to long term-care facilities in surrounding
areas. All of these programs are currently being offered to hospitals.


                                       29

<PAGE>


Cost of product sales. Cost of product sales, attributed entirely to the
Specialty Pharmacy Services business unit, increased $61.0 million, or 82%, to
$135.4 million in 2003 from $74.4 million in 2002. The increase was attributed
to the internal growth of hemophilia patient revenues and the inclusion of the
Specialty Pharmacy acquisitions completed in 2003 and 2002. As a percentage of
product sales, cost of product sales in 2003 was 73% compared to 71% in 2002.
The increase in cost of product sales as a percentage of revenue is the result
of different product revenue mix in 2003.

Cost of Services. Cost of services, attributed entirely to the Specialty
Healthcare Services business unit, decreased $1.7 million, or 11%, to $13.2
million in 2003 from $14.9 million in 2002. The decrease was attributed to the
operation of an average of 87 programs in 2003 as compared to an average of 96
programs operating in 2002. As a percentage of service revenues, cost of
services in 2003 was 46% compared to 43% in 2002.

Gross Margin. Gross margin increased $16.1 million, or 32%, to $66.1 million in
2003 from $49.9 million in 2002. Specialty Pharmacy Services gross margin
improved to $50.4 million in 2003 from $30.1 million in 2002, an increase of
$20.2 million, or 67%. The increase in gross margin was attributed to the
internal growth of hemophilia patient revenues and the inclusion of the
Specialty Pharmacy acquisitions completed in 2003 and 2002. As a percent of
revenues, Specialty Pharmacy Services gross margin was 27% in 2003 as compared
to 29% in 2002. The decrease in gross margin as a percentage of sales was the
result of a higher mix of lower margin product revenues in 2003 as compared to
2002. Specialty Healthcare Services gross margin decreased to $15.7 million in
2003 from $19.8 million in 2002, or 21%. The decrease was attributed to contract
terminations, contract renegotiations and the operation of an average of 87
programs in 2003 as compared to an average of 96 programs in 2002. As a
percentage of sales, Specialty Healthcare gross margin was 54% in 2003 as
compared to 57% in 2002. The decrease was attributed to contract renegotiations
and the conversion of three under arrangement contracts to management services
contracts.

Selling, General and Administrative. Selling, general and administrative
expenses increased $18.1 million, or 69%, to $44.5 million in 2003 from $26.4
million in 2002 and consisted of $19.3 million related to the Specialty Pharmacy
Services business (including $1.6 million in charges), $4.6 million related to
the Specialty Healthcare Services business and $20.4 million related to
corporate services (including $5.1 million in charges). The total 2003 charges
of $6.7 million included the following:


<TABLE>
<CAPTION>
                                                                                      In    Quarter
Charge                                                                           Millions   Recorded
----------------------------------------------------------------------------------------------------
<S>                                                                              <C>        <C>
Consolidation of pharmacy operations in California                               $    1.6   First
Settlement of executive departures in March 2002                                      1.1   First
Early termination cost of previous credit line                                         .6   Second
Legal and other costs associated with corporate legal structure reorganization         .2   Second
Convertible note offering not completed                                                .7   Third
Severance costs related to the terminations of certain executives                      .5   Third
Acquisition not completed                                                              .3   Third
Additional costs related to corporate legal structure reorganization                   .3   Third
Acquisition not completed                                                             1.1   Fourth
Write-off of equipment                                                                 .3   Fourth
                                                                                 --------
   Total charges                                                                 $    6.7
                                                                                 ========
</TABLE>


                                       30

<PAGE>

The increase of $18.1 million was primarily due to an increase of $8.0 million
of Specialty Pharmacy Services expenses attributed to the Specialty Pharmacy
acquisitions completed in 2003 and 2002 and costs related to the 2003
non-hemophilia sales force hires and new business development efforts, increased
costs of $3.0 million related to additional corporate staff to support these
acquisitions, $.4 million attributed to the Specialty Healthcare business and
the $6.7 million in charges. As a percentage of revenues, selling, general and
administrative expenses were 21% in 2003 compared to 19% in 2002. Excluding the
$6.7 million in charges, selling, general and administrative expenses increased
$11.4 million, or 43%, and accounted for 18% of revenues.

Interest income (expense). Net interest in 2003 was $2.3 million as compared to
$1.1 million in 2002. The increase in interest expense was the result of the
increased borrowings and uses of notes payable and debt to partially fund the
Special Pharmacy acquisitions (see Note D of Notes to Consolidated Financial
Statements).

Other income. Other income for 2003 was $2.3 million as compared to $1.9 million
in 2002 and represents the Company's sale of its interest in Accordant Health
Services, Inc. ("Accordant") (see Note C of Notes to Consolidated Financial
Statements).

Net Income. Net income was $13.1 million, or $.96 per diluted share (calculated
under the "as if" converted method; see Note O of Notes to Consolidated
Financial Statements), in 2003 compared to net income of $14.6 million, or $1.20
per diluted share, in 2002. The decrease of $1.6 million, or 11%, was primarily
due to the 2003 charges of $6.7 million, the costs related to hiring a sales
force for the Specialty Pharmacy Services business unit, increased investment in
information technology systems and corporate hires to support acquisition
growth. Excluding these charges, net income would have increased by
approximately $5.1 million, primarily attributable to the inclusion of the
Specialty Pharmacy acquisitions completed in 2002 and included for a full year
in 2003 versus a partial year in 2002 and the acquisitions completed in 2003.


Fiscal Year 2002 vs. Fiscal Year 2001

Revenues. The Company's revenues increased $57.6 million, or 71%, to $139.2
million for the fiscal year ended December 31, 2002 compared to $81.6 million
for the fiscal year ended December 31, 2001.

Product revenues, attributed entirely to the Specialty Pharmacy Services
business unit, increased $67.8 million, or 184%, to $104.6 million in 2002 from
$36.8 million in 2001. The increase in product revenues was primarily attributed
to the growth of hemophilia patient revenues, the inclusion of eBioCare for 12
months in 2002 versus nine months in 2001, and the inclusion of the Specialty
Pharmacy acquisitions done or completed in 2002, offset by a reduction in
Procuren(R) revenues of $1.7 million as the result of the Company no longer
offering Procuren(R) and a reduction of $11.3 million in Specialty Pharmacy
Services unprofitable injectable product sales. In 2002, product revenues
included $83.2 million of hemophilia related products and $21.4 million of other
injectable products.

Service revenues, attributed entirely to the Specialty Healthcare Services
business unit, decreased 23% to $34.7 million in 2002 from $44.9 million in
2001. The service revenues decrease of $10.2 million was attributed to the
operation of an average of 96 Wound Care Center programs in 2002 as compared to
an average of 114 in 2001 as the result of contract terminations and
renegotiations of existing contracts to lower fee structures. Program
terminations by client hospitals have been affected for such reasons as reduced
reimbursement, financial restructuring, layoffs, bankruptcies, hospital closings
or a hospital's decision to maintain a wound care center without external
management. The termination, non-renewal or renegotiation of a material number
of management contracts could result in a continued decline in the Specialty
Healthcare Services business unit's revenue. The Specialty Healthcare Services
business unit has and expects that it will continue to modify its management
contracts with many of its hospital customers which could result in reduced
revenue to the Company or even contract terminations. The Specialty Healthcare
Services business unit has a number of initiatives to counter the decline in
revenue, although there can be no assurance that the initiatives will be
successful. These initiatives include new product offerings such as inpatient
wound care programs at acute care hospitals focusing on pressure sores, and
wound outreach programs whereby nurse practitioners or physicians from
affiliated Wound Care Centers provide related services to long term-care
facilities in surrounding areas. All of these programs are currently being
offered to hospitals.


                                       31

<PAGE>

Cost of product sales. Cost of product sales, attributed entirely to the
Specialty Pharmacy Services business unit, increased $44.6 million, or 150%, to
$74.4 million in 2002 from $29.8 million in 2001. The increase was attributed to
the growth of hemophilia patient revenues, the Specialty Pharmacy acquisitions
in 2002, and the inclusion of 12 months of costs related to eBioCare in 2002
versus nine months in 2001, offset by the reduction in Procuren(R) related costs
of $1.9 million as the result of the elimination of Procuren(R) sales, and a
reduction in sales of Specialty Pharmacy Services unprofitable injectable
products. As a percentage of product sales, cost of product sales in 2002 was
71% compared to 81% in 2001. This improvement was attributed to a higher mix of
hemophilia and IVIG related product sales in the Specialty Pharmacy Services
business unit and the elimination of Procuren(R) sales.

Cost of Services. Cost of services, attributed entirely to the Specialty
Healthcare Services business unit, decreased $11.0 million, or 42%, to $14.9
million in 2002 from $25.9 million in 2001. The decrease was attributed to
reduced staffing and operating expenses of approximately $3.6 million related to
the operation of an average of 96 programs in 2002 as compared to an average of
114 programs operating in 2001. Additionally, there were eight fewer
under-arrangement programs in operation at the end of fiscal year 2002 as
compared to fiscal year 2001, at which the services component of costs is higher
than at the Company's other centers due to the additional clinical staffing and
expenses that these models require. In 2002, the reduction in the number of
under-arrangement programs accounted for approximately $3.1 million of the
decrease in cost of services. As a percentage of service revenues, cost of
services in 2002 was 43% compared to 58% in 2001. This improvement was primarily
attributed to contract renegotiations and the reorganization done by the Company
in the fourth quarter of 2001.

Selling, General and Administrative. Selling, general and administrative
expenses decreased $25.1 million, or 49%, to $26.4 million in 2002 from $51.5
million in 2001. Selling, general and administrative expenses in 2001 included
costs of $17.0 million for the Department of Justice ("DOJ") settlement, $6.5
million for settlement of the shareholder lawsuit previously disclosed, $4.1
million for a reorganization of the Company's business and $1.7 million in
goodwill amortization not required in 2002 (see Note A of Notes to Consolidated
Financial Statements). Excluding these charges, selling, general and
administrative expenses increased $2.5 million due to an increase of $3.4
million in Specialty Pharmacy Services expenses attributed to the 2002
acquisitions and increased costs related to additional corporate staff, offset
by a decrease in expenses related to Specialty Healthcare Services of $2.3
million. As a percentage of revenues, selling, general and administrative
expenses were 19% in 2002 compared to 63% in 2001. The improvement was due to
the increased revenue base and lower Specialty Healthcare Services expenses in
2002 and the elimination of the DOJ and shareholder lawsuit settlement costs,
reorganization charges and goodwill amortization.

Interest income (expense). Interest income in 2002 was $.07 million as compared
to $.8 million in 2001. The decline in interest income was the result of the
Company utilizing its available cash for its acquisition strategy. Interest
expense was $1.2 million in 2002 as compared to zero in 2001. The increase in
interest expense was the result of the amounts payable to the DOJ and increased
borrowings and uses of notes payable to partially fund the Special Pharmacy
acquisitions (see Note D of Notes to Consolidated Financial Statements).

Other income. Other income for 2002 included $1.9 million related to the
Company's sale of its interest in Accordant (see Note C of Notes to Consolidated
Financial Statements).

Net Income. Net income was $14.6 million, or $1.20 per diluted share, in 2002
compared to a net loss of $22.2 million, or $(3.09) per diluted share, in 2001.
The 2001 loss included expenses of $17.0 million for the DOJ settlement, $6.5
million for settlement of the shareholder lawsuit, $4.1 million for a
reorganization of the Company's business units and $1.7 million in goodwill
amortization not required in 2002 (see Note A of Notes to Consolidated Financial
Statements). Excluding these costs, the increase in earnings of $7.5 million in
2002 was primarily attributed to the inclusion of the 2002 results related to
the Specialty Pharmacy acquisitions, the elimination of Procuren(R) product
sales and a reduction of Specialty Healthcare Services' selling, general and
administrative costs.


                                       32

<PAGE>

Liquidity and Capital Resources

Working capital was $25.5 million at December 31, 2003 compared to $17.4 million
at December 31, 2002. Total cash and cash equivalents at December 31, 2003 were
$1.1 million. The ratio of current assets to current liabilities was 1.5 to 1 at
December 31, 2003 and 1.4 to 1 at December 31, 2002.

Cash flows provided by operating activities for the year ending December 31,
2003 totaled approximately $7.4 million, primarily attributable to the $13.1
million in net income, $2.8 million in depreciation and amortization, a decrease
of $3.3 million in other operating assets, net, and an increase of $3.5 million
in accounts payable and accrued expenses, offset by the $2.3 million gain from
the Company's 2002 sale of its equity investment in Accordant and an increase of
$16.9 million in accounts receivable, net. The increase in accounts receivable
is the result of an increase in the Company's revenues and an increase in days
sales outstanding to 78 days at December 31, 2003 from 65 days at December 31,
2002.

Cash flows used in investing activities totaled $32.8 million, attributed to
$6.6 million used in fixed asset purchases and $27.7 million used in the
acquisitions which was offset by $1.5 million in proceeds received from accounts
receivable, indemnification and other claims related to the purchases of
eBioCare and Apex Therapeutic Care, Inc. ("Apex"), transactions which were
recorded as purchase price adjustments in the first quarter of 2003.

Cash flows provided by financing activities totaled $23.9 million, attributed to
proceeds of $34.0 million in borrowings from the Company's credit facilities,
$4.0 million in proceeds from the exercise of stock options and $.8 million in
proceeds from repayment of notes receivable - stockholders, offset by $1.5
million of cash used for the repurchase of stock used in the purchase of
Hemophilia Access, Inc. ("HAI") and $13.4 million used in repayments of debt
obligations.

During 2003, the Company experienced a net increase in accounts receivable of
$18.8 million, attributed to the Specialty Pharmacy acquisitions, growth in
specialty pharmacy revenues and an increase in accounts receivable days sales
outstanding. Days sales outstanding were 78 days at December 31, 2003, as
compared to 62 days at December 31, 2002. At December 31, 2003, days sales
outstanding for the Specialty Pharmacy Services business unit was 79 days and
for the Specialty Healthcare Services business unit, days sales outstanding was
70 days.  The Company's increase in days sales outstanding was primarily
attibuted to an increase of approximately 27 days in receivables from the State
of California's Medicaid program, MediCal, at December 31, 2003 as compared to
December 31, 2002.  As a percentage of total, the Company's accounts receivable
from MediCal was 29.4% and 30.9%, respectively, at December 2003 and 2002.

At December 31, 2003, the Company's current portion of long-term liabilities of
$7.9 million included $4.0 million representing the current portion of the
Company's borrowings from its commercial lender, $2.0 million representing the
current portion of the DOJ obligation, $.9 million representing the current
portion of a convertible note payable used in connection with the purchase of
Apex in February 2002, and a $1.0 million note payable used in connection with
the purchase of certain assets of Prescription City, Inc. ("Prescription City")
in June 2003.

At December 31, 2003, the Company's long-term liabilities included long-term
obligations of $39.6 million and consisted of $2.0 million representing the
long-term portion of the DOJ obligation, $2.2 million representing the long-term
portion of the convertible note payable related to the purchase of Apex, $1.2
million in convertible notes payable related to the purchase of Infinity
Infusion Care, Ltd. ("Infinity") in June 2002, $3.0 million in a convertible
note payable related to the purchase of Home Care of New York, Inc. ("Home
Care") in October 2002 and $31.2 million in borrowed funds from the Company's
commercial lender.

The Company's longer term cash requirements include working capital for the
expansion of its Specialty Pharmacy Services and Specialty Healthcare Services
businesses, acquisitions and the repayment of debt obligations. Other cash
requirements are anticipated for capital expenditures in the normal course of
business, including the acquisition of software, computers and equipment related
to the Company's management information systems. On June 9, 2003, the Company
completed a new senior secured credit facility with General Electric Capital
Corporation ("GE Capital"). Under the credit agreement, the Company obtained a
secured revolving credit facility of up to $15.0 million, of which it can
utilize up to $5.0 million as a letter of credit subfacility and up to $5.0
million as a swingline subfacility (i.e., a short-term loan advance facility),
and a $20.0 million secured term loan which was subsequently increased to $25.0
million, for a total facility of $40.0 million. The Company used the funds
available under this new credit facility to immediately pay all of its
outstanding borrowings, accrued interest and termination fees under its credit
facility with Healthcare Business Credit Corporation ("HBCC") and to finance its
acquisition of certain assets of Prescription City.


                                       33

<PAGE>

The Company entered into a definitive agreement to acquire the capital stock of
Critical Care Systems, Inc. ("CCS"), a leading national provider of specialty
infusion pharmaceuticals and comprehensive clinical services, for a total
consideration of approximately $150.0 million in cash. The transaction is
subject to approval by applicable governmental regulatory agencies. Approval for
this transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
was received on March 8, 2004. The acquisition is expected to close in April
2004. The Company expects to fund the purchase price, repayment of certain
existing indebtedness of CCS and related fees and expenses with $165.0 million
of senior unsecured notes to be issued through a private placement. The Company
has also received a $165.0 million bridge financing commitment from UBS Loan
Finance LLC, which will be used in the event the notes are not issued. In
addition, GE Healthcare Financial Services has committed to expanding and
refinancing the Company's existing credit facility to a $60.0 million senior
secured credit facility, which will replace the Company's existing facility, to
support the acquisition and its future working capital needs. The commitments
are subject to customary conditions.

At December 31, 2003, the Company had a $4.0 million obligation, payable
quarterly through February 2006, to the DOJ related to the settlement of its
litigation previously disclosed, as well as bank debt and convertible and
promissory notes totaling $43.5 million payable over various periods through
2007 that were used in the Specialty Pharmacy acquisitions (see Note J of Notes
to Consolidated Financial Statements). In addition, the Company has contractual
obligations under various operating leases.

The following table details total future payments under these obligations at
December 31, 2003 (in thousands):

<TABLE>
<CAPTION>
                                           Less                             More
                                           than       1 - 3      3 - 5     than 5
                                Total     1 year      years      years      years
                              --------   --------   --------   --------   --------
<S>                           <C>        <C>        <C>        <C>        <C>
Long-term debt:
  Term loan                   $ 24,000   $  4,000   $  8,000   $ 12,000   $    --
  Revolving loan                11,253         --         --     11,253        --
  DOJ obligation                 4,040      2,040      2,000         --        --
  Convertible and
   promissory notes payable      8,217      1,871      4,742      1,604        --
Operating leases                 6,409      2,119      2,526      1,513       251
Purchase obligations (a)       101,370     45,558     55,812         --        --
                              --------   --------   --------   --------   -------
Total                         $155,289   $ 55,588   $ 73,080   $ 26,370   $   251
                              ========   ========   ========   ========   =======
</TABLE>

(a)The Company's Volume Commitment Agreement with Baxter Healthcare Corporation
   terminates on December 31, 2006, unless terminated earlier pursuant to the
   provisions of the Agreement. Thereafter, the Agreement can be renewed at the
   option of the Company for up to two (2) successive one (1) year terms, unless
   terminated earlier pursuant to the provisions of the Agreement.

At December 31, 2003, the Company was in compliance with its debt covenants.

During 2003, the Company paid $2.0 million to the DOJ as part of its 2001
settlement agreement and used cash for the Specialty Pharmacy acquisitions of
$26.2 million, net of cash acquired and purchase price adjustments. The Company
believes that, based on its current business plan, its existing cash and cash
equivalents and available credit will be sufficient to satisfy its working
capital, acquisitions and other needs at least through December 31, 2004, with
the exception of the planned acquisition of CCS which the Company expects to
purchase for a total consideration of approximately $150.0 million in cash.
The Company expects to fund the purchase price, repayment of certain existing
indebtedness of CCS and related fees and expenses with $165.0 million of senior
unsecured notes to be issued through a private placement. The Company received a
$165.0 million financing commitment from UBS Loan Finance LLC which will be used
in the event the notes are not issued. In addition, GE Healthcare Financial
Services has committed to a $60.0 million senior secured credit facility, which
will replace the existing facility to support the acquisition and the Company's
future working capital needs. The commitments are subject to customary
conditions.

The effect of inflation risk is considered immaterial.


                                       34

<PAGE>

Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information without fear of litigation so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. The Company desires to
take advantage of these "safe harbor" provisions and is filing its "Risk
Factors" as Exhibit 99.1 in order to do so. Accordingly, the Company identifies
important factors which could cause its actual results to differ materially from
any such results which may be projected, forecasted, estimated or budgeted by
the Company in forward-looking statements made by the Company from time to time
in reports, proxy statements, registration statements and other written
communications, or in oral forward-looking statements made from time to time by
the Company's officers and agents. The Company does not intend to update any of
these forward-looking statements after the date of this Form 10-K to conform
them to actual results.


Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The Company does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolios. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines. The Company does not expect any material
loss with respect to its investment portfolio or exposure to market risks
associated with interest rates.  The Company is subject to interest rate risk
under its current credit facilities.


Item 8.  Consolidated Financial Statements and Supplementary Data

The information required by this item is incorporated herein by reference to the
Consolidated Financial Statements listed in Item 15(a) of Part IV of this
Report.

The following table sets forth the financial results of the Company for the
eight quarters ended December 31, 2003 (in thousands, except per share data):

                                                     Income Per   Income Per
                                                       Common       Common
                        Total     Gross       Net      Share,       Share,
                      Revenues    Profit    Income     Basic      Diluted(i)
                      --------   --------   -------  ----------   ----------
Quarter Ended
   2003
   December 31        $ 65,445   $ 17,185   $ 4,382   $ 0.34        $ 0.32
   September 30         46,587     15,589     1,765     0.14          0.13
   June 30              44,689     16,139     3,533     0.29          0.26
   March 31             58,020     17,155     3,395     0.28          0.25

   2002
   December 31        $ 47,694   $ 15,970   $ 5,830   $ 0.48        $ 0.45
   September 30         36,851     13,978     3,934     0.33          0.31
   June 30              31,920     11,476     2,831     0.25          0.23
   March 31             22,764      8,508     2,050     0.21          0.19


(i) Calculated in 2003 under the "as if converted" method.  See Note O of Notes
    to Consolidated Financial Statements.



                                       35
<PAGE>


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

None.

Item 9a. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to us (or our consolidated subsidiaries) required
to be included in the reports we file or submit under the Exchange Act.

Changes in Internal Controls

During the fiscal quarter ended December 31, 2003, there has been no change in
our internal control over financial reporting (as defined in Rule 13 a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.



                                       36

<PAGE>


                                    PART III


The information required by Part III of this Form 10-K is omitted from this
Report in that the Registrant will file a definitive proxy statement pursuant to
Regulation 14(a) for its 2004 Annual Meeting of Shareholders (the "Proxy
Statement") not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included therein is incorporated herein by
reference.

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item is incorporated by reference to the
sections "Election of Directors," "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement. The
Company has adopted a Code of Ethics that applies to the Company's Chief
Executive Officer and senior financial officers. The text of such Code of Ethics
has been posted on the Company's website at www.curative.com. Any amendment to,
or waiver from, a provision of such Code of Ethics shall be posted on the
Company's website at www.curative.com. In addition, the Company has adopted a
Code of Business Practices as part of its compliance program, and a copy of such
Code of Business Practices is available upon written request to the Company.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to the
sections "Executive Compensation" and "Election of Directors - Compensation of
Directors" of the Company's Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Shareholder Matters

The information required by this Item is incorporated by reference to the
sections "Stock Ownership of Certain Beneficial Owners and Management" and
"Equity Compensation Plan Information" of the Company's Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference to the
section "Certain Transactions" of the Company's Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated by reference to the
section "Ratification of Appointment of Independent Auditors" of the Company's
Proxy Statement.



                                       37

<PAGE>


                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)   The following documents are included with the filing of this report:

      1.   Index to Financial Statements                                    Page
                                                                            ----
           Report of Independent Auditors                                    F-1

           Consolidated Balance Sheets at December 31, 2003 and 2002         F-2

           Consolidated Statements of Operations for the years ended
               December 31, 2003, 2002 and 2001                              F-3

           Consolidated Statements of Stockholders' Equity for the
               years ended December 31, 2003, 2002 and 2001                  F-4

           Consolidated Statements of Cash Flows for the years ended
               December 31, 2003, 2002 and 2001                              F-5

           Notes to Consolidated Financial Statements                        F-6

      2.   Financial Statement Schedules

           Schedule II - Consolidated Schedule - Valuation and
           Qualifying Accounts                                               S-1

           All other schedules are omitted because they are not
           applicable, or not required, or because the required
           information is included in the consolidated financial
           statements or notes thereto.

      3.   Exhibits

           The list of exhibits, entitled "Exhibits," immediately
           following the financial statement schedules accompanying
           this report is incorporated herein by reference.

(b)   Reports on Form 8-K

           Form 8-K filed October 10, 2003, furnishing under Item 12
           a press release announcing that the Company had revised its
           financial outlook for the third quarter ended September 30, 2003
           and for fiscal years 2003 and 2004.

           Form 8-K filed November 5, 2003 furnishing under Item 12
           a press release announcing the Company's results of
           operations and financial condition for the completed
           fiscal quarter ended September 30, 2003.



                                       38

<PAGE>



SIGNATURES

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

                                    CURATIVE HEALTH SERVICES, INC.

                                    By: /s/ Joseph Feshbach
                                        -------------------
                                            Joseph Feshbach
                                            Chief Executive Officer and Chairman
                                            (Principal Executive Officer)

Date: March 15, 2004

                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph Feshbach, Thomas Axmacher and Nancy Lanis,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                     Title                                             Date
---------                     -----                                             ----
<S>                           <C>                                               <C>
/s/  Joseph Feshbach          Chief Executive Officer and Chairman              March 15, 2004
--------------------          (Principal Executive Officer)
     Joseph Feshbach

/s/  Thomas Axmacher          Chief Financial Officer                           March 15, 2004
--------------------          (Principal Financial and Accounting Officer)
     Thomas Axmacher

s/   John C. Prior            President, Specialty Healthcare Services          March 15, 2004
------------------            Director
     John C. Prior

/s/  Paul S. Auerbach, MD     Director                                          March 15, 2004
-------------------------
     Paul S. Auerbach, MD

/s/  Daniel E. Berce          Director                                          March 15, 2004
--------------------
     Daniel E. Berce

/s/  Lawrence English         Director                                          March 15, 2004
---------------------
     Lawrence English

/s/  Gerard Moufflet          Director                                          March 15, 2004
--------------------
     Gerard Moufflet

/s/  Timothy I. Maudlin       Director                                          March 15, 2004
-----------------------
     Timothy I. Maudlin

/s/  Peter M. DeComo          Director                                          March 15, 2004
--------------------
     Peter M. DeComo
</TABLE>


<PAGE>


                         Report of Independent Auditors




Board of Directors and Stockholders
Curative Health Services, Inc.

We have audited the accompanying consolidated balance sheets of Curative Health
Services, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Curative Health
Services, Inc. and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed in Note A to the accompanying consolidated financial statements, in
2002, the Company changed its method of accounting for goodwill and other
intangible assets.


                                         /s/ Ernst & Young LLP



Melville, New York
February 13, 2004



                                      F-1

<PAGE>


                CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                     December 31,
                                                               ------------------------
                                                                  2003          2002
                                                               ----------    ----------
<S>                                                            <C>           <C>
ASSETS
Current assets:
Cash and cash equivalents                                      $    1,072    $    2,643
Accounts receivable (less allowance of $4,022 and $2,954
    at December 31, 2003 and 2002, respectively)                   55,217        36,438
Inventories                                                        11,237        12,766
Prepaids and other current assets                                   4,270         2,212
Deferred tax assets                                                 2,984         3,126
                                                               ----------    ----------
    Total current assets                                           74,780        57,185

Property and equipment, net                                         7,890         3,284
Intangibles subject to amortization, net                            1,463         1,652
Intangibles not subject to amortization (trade names)                 682           636
Goodwill                                                          147,895       122,877
Other assets                                                        1,228         1,252
                                                               ----------    ----------

    Total assets                                               $  233,938    $  186,886
                                                               ==========    ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                               $   28,892    $   21,786
Accrued expenses                                                   11,502        11,579
Deferred taxes                                                      1,007           365
Current portion of long-term liabilities                            7,911         6,102
                                                               ----------    ----------
    Total current liabilities                                      49,312        39,832

Long-term liabilities                                              39,599        26,076
Deferred tax liabilities                                            1,307            77
                                                               ----------    ----------
    Total long-term liabilities                                    40,906        26,153

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value per share; 10,000,000 shares
    authorized, none issued                                            --            --
Preferred stock, Series A Junior Participating, par value
    $.01 per share, 500,000 shares authorized, none issued             --            --
Common stock, $.01 par value per share; 50,000,000 shares
    authorized, 12,831,288 shares issued and outstanding
    (12,142,106 shares in 2002)                                       127           121
Additional paid in capital                                        115,082       106,124
Retained earnings                                                  30,118        17,043
Notes receivable - stockholders                                    (1,607)       (2,387)
                                                               ----------    ----------
    Total stockholders' equity                                    143,720       120,901
                                                               ----------    ----------

    Total liabilities and stockholders' equity                 $  233,938    $  186,886
                                                               ==========    ==========
</TABLE>

                             See accompanying notes


                                      F-2
<PAGE>


                CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (All amounts in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                       -----------------------------------------

                                                          2003             2002          2001
                                                       ----------       ----------    ----------
<S>                                                    <C>              <C>           <C>
Revenues:
   Products                                            $  185,843       $  104,550    $   36,776
   Services                                                28,898           34,679        44,862
                                                       ----------       ----------    ----------
     Total revenues                                       214,741          139,229        81,638

Costs and operating expenses:
   Cost of product sales                                  135,449           74,405        29,779
   Cost of services                                        13,224           14,892        25,887
   Selling, general and administrative                     44,544           26,401        51,466
                                                       ----------       ----------    ----------
     Total costs and operating expenses                   193,217          115,698       107,132
                                                       ----------       ----------    ----------

Income (loss) from operations                              21,524           23,531       (25,494)

Interest income                                                20               70           816
Other income                                                2,327            1,907            --
Interest expense                                           (2,300)          (1,181)           --
                                                       ----------       ----------    ----------

Income (loss) before income taxes                          21,571           24,327       (24,678)

Income tax provision (benefit)                              8,496            9,682        (2,473)
                                                       ----------       ----------    ----------

Net income (loss)                                      $   13,075       $   14,645    $  (22,205)
                                                       ==========       ==========    ==========

Net income (loss) per common share, basic              $     1.04       $     1.30    $    (3.09)
                                                       ==========       ==========    ==========

Net income (loss) per common share, diluted            $      .96(i)    $     1.20    $    (3.09)
                                                       ==========       ==========    ==========

Denominator for basic earnings per share,
    weighted average common shares                         12,546           11,280         7,193
                                                       ==========       ==========    ==========

Denominator for diluted earnings per share, weighted
    average common shares assuming conversions             13,826           12,207         7,193
                                                       ==========       ==========    ==========


(i) Calculated under the "as if converted" method.  See Note O of Notes to Consolidated Financial Statements
</TABLE>


                             See accompanying notes

                                      F-3

<PAGE>


                CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                         Common          Common      Additional                       Notes           Total
                                         Stock           Stock         Paid-In       Retained       Receivable    Stockholders'
                                         Shares          Amount        Capital       Earnings      Stockholders      Equity
                                       -----------    -----------    -----------    -----------    ------------   -------------
<S>                                      <C>          <C>            <C>            <C>            <C>            <C>
Balance, December 31, 2000               7,196,439    $        71    $    30,896    $    24,603    $        --    $    55,570
  Exercise of options and restricted
    stock awards, net of
    stockholder loans                      525,282              5          3,159             --           (488)         2,676
  Shares repurchased and retired          (180,800)            (1)        (1,116)            --             --         (1,117)
  Tax benefit from stock option
    exercises                                   --             --          1,080                            --          1,080
  Net loss for 2001                             --             --             --        (22,205)            --        (22,205)
                                       -----------    -----------    -----------    -----------    -----------    -----------

Balance, December 31, 2001               7,540,921             75         34,019          2,398           (488)        36,004
  Exercise of options, net of
    stockholder loans                    1,139,348             11          7,510             --         (1,899)         5,622
  Shares issued in private placement     1,059,000             11         16,451             --             --         16,462
  Shares issued in acquisition           1,981,793             20         38,380             --             --         38,400
  Shares issued for shareholder
    lawsuit settlement                     421,044              4          6,496             --             --          6,500
  Tax benefit from stock option
    exercises                                   --             --          3,268             --             --          3,268
  Net income for 2002                           --             --             --         14,645             --         14,645
                                       -----------    -----------    -----------    -----------    -----------    -----------

Balance, December 31, 2002              12,142,106            121        106,124         17,043         (2,387)       120,901
  Exercise of options                      485,863              4          8,964             --             --          8,968
  Exercise of rights under
    convertible notes                      300,389              3             --             --             --             3
  Tax benefit from stock option
    exercises                                   --             --          1,517             --             --          1,517
  Repayment of notes receivable-
     stockholders                               --             --             --             --            780            780
  Shares repurchased and retired           (97,070)            (1)        (1,523)            --             --         (1,524)
  Net income for 2003                           --             --             --         13,075             --         13,075
                                       -----------    -----------    -----------    -----------    -----------    -----------

Balance, December 31, 2003              12,831,288    $       127    $   115,082    $    30,118    $    (1,607)   $   143,720
                                       ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

                             See accompanying notes


                                      F-4
<PAGE>


                CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                                    --------------------------------

                                                                      2003        2002        2001
                                                                    --------    --------    --------
<S>                                                                 <C>         <C>         <C>
OPERATING ACTIVITIES:
Net income (loss)                                                   $ 13,075    $ 14,645    $(22,205)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
   Depreciation and amortization                                       2,797       2,226       4,069
   Provision for doubtful accounts                                     3,291       1,044       2,371
   Equity in operations of investee                                       --        (184)        380
   Gain on sale of equity investment                                  (2,327)     (1,907)         --
   Deferred income taxes                                               2,423       3,797      (2,754)
   Tax benefit from stock option exercises                             1,517       3,268       1,080
Changes in operating assets and liabilities, net of effects from
Specialty Pharmacy acquisitions:
   Accounts receivable                                               (20,221)     (9,116)      3,983
   Inventories                                                         2,252      (1,222)     (3,655)
   Prepaids and other                                                  1,053         699         779
   Accounts payable and accrued expenses                               3,498      (1,273)     14,663
                                                                    --------    --------    --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                    7,358      11,977      (1,289)

INVESTING ACTIVITIES:
Specialty Pharmacy acquisitions, net of cash acquired                (26,154)    (60,264)    (38,648)
Sale of (investment in) Accordant Health Services, Inc. and other         --       4,496        (165)
Purchase of property and equipment                                    (6,653)     (1,206)     (1,127)
Disposal of property and equipment and other                              --         248       2,257
Sales of marketable securities held to maturity                           --          --      26,978
Proceeds from disposal of assets available for sale                       --          --       3,683
                                                                    --------    --------    --------
NET CASH USED IN INVESTING ACTIVITIES                                (32,807)    (56,726)     (7,022)

FINANCING ACTIVITIES:
Proceeds from private placement, net of fees                              --      16,462          --
Shares repurchased and retired                                        (1,524)         --      (1,117)
Proceeds from exercise of stock options                                3,989       5,298       2,676
Proceeds from repayment of notes receivable - stockholders               780          --          --
Credit facilities borrowings                                          34,001      13,368          --
Credit facilities repayments                                         (13,368)         --          --
                                                                    --------    --------    --------

NET CASH PROVIDED BY FINANCING ACTIVITIES                             23,878      35,128       1,559
                                                                    --------    --------    --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                             (1,571)     (9,621)     (6,752)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                         2,643      12,264      19,016
                                                                    --------    --------    --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                            $  1,072    $  2,643    $ 12,264
                                                                    ========    ========    ========
</TABLE>

                             See accompanying notes


                                      F-5
<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization. The Company was organized under the laws of the State of Minnesota
in October 1984. In August 2003, the Company effected a holding company
reorganization in which each share of the registrant's outstanding common stock
was deemed to have been exchanged for one share of common stock in a newly
formed corporation (the "new holding company"). Pursuant to Section 302A.626
(subd. 7) of the Minnesota Business Corporation Act, the articles of
incorporation, bylaws and name of the new holding company, and the authorized
capital stock of the new holding company (including the designations, rights,
powers and preferences of such capital stock and the qualifications, limitations
and restrictions thereof) are all consistent with those of the registrant as it
existed prior to the reorganization. In addition, the directors and executive
officers of the new holding company were the same individuals who were directors
and executive officers, respectively, of the registrant prior to the
reorganization. The terms "Curative" and the "Company" as used in these
financial statements and accompanying footnotes refer, for periods prior to the
reorganization, to the corporation that was the registrant prior to the
reorganization, and, for periods after the reorganization, to the new holding
company.

The Company, through its two business units, Specialty Pharmacy Services and
Specialty Healthcare Services, seeks to deliver high-quality care and clinical
results that result in high patient satisfaction for patients experiencing
serious or chronic medical conditions. Through its Specialty Pharmacy Services
business unit, the Company provides biopharmaceutical products to patients with
chronic and critical disease states and related clinical services to assist
these patients with their intensive disease management needs. Through its
Specialty Pharmacy Services business unit, the Company purchases various
biopharmaceutical products from suppliers and then contracts with insurance
companies and other payors, as well as retail pharmacies, to provide
direct-to-patient distribution of these products. In addition to distribution,
the Company also provides other support services, including education,
reimbursement and provision or coordination of injection or infusion services,
related to these biopharmaceutical products. The biopharmaceutical products
distributed and the injection or infusion therapies offered by the Company are
used by patients with chronic or severe conditions such as hemophilia, immune
system disorders, RSV, cancer, rheumatoid arthritis, hepatitis C, multiple
sclerosis or growth hormone deficiency. Examples of biopharmaceuticals products
used by the Company's patients include hemophilia clotting factor and
intravenous immune globulins (or "IVIG"), MedImmune Inc.'s Synagis(R) and
Centocor, Inc.'s Remicade(R). As of December 31, 2003, the Company had
306 payor contracts and 20 retail pharmacy contracts and operated
in at least 40 states. Our Specialty Pharmacy Services business unit provides
services directly to patients and caregivers and delivers its products via
overnight mail or courier and through its retail pharmacies.

The Specialty Healthcare Services business unit is a leading disease management
company in chronic wound care management. The Specialty Healthcare Services
business unit manages, on behalf of hospital clients, a nationwide network of
Wound Care Center programs that offer a comprehensive range of services for
treatment of chronic wounds. The Company's Wound Management Program consists of
diagnostic and therapeutic treatment procedures that are designed to meet each
patient's specific wound care needs on a cost-effective basis. The treatment
procedures are designed to achieve positive results for wound healing based on
the Company's significant experience in the field. The Company maintains a
proprietary database of patient results that it has collected since 1988
containing over 440,000 patient cases. The treatment procedures, which are based
on the Company's extensive patient data, have allowed the Company to achieve an
overall rate of healing of approximately 85% for patients completing therapy. As
of December 31, 2003, the Wound Care Center network consisted of 86 outpatient
clinics located on or near campuses of acute care hospitals in approximately 30
states.

Significant Accounting Policies

Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Significant
intercompany balances and transactions have been eliminated in consolidation.


                                      F-6

<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

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

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB No. 28, "Interim Financial Reporting," to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. The Company adopted SFAS No. 148 effective December 31,
2002.

The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation:

<TABLE>
<CAPTION>
                                                          2003            2002         2001
                                                       ----------      ----------   ----------
<S>                                                    <C>             <C>          <C>
Net income (loss), as reported                         $   13,075      $   14,645   $  (22,205)
Deduct:  Total stock-based employee compensation
    expense determined under fair value based method
    for all awards, net of related tax effects              4,654           3,489        2,695
                                                       ----------      ----------   ----------
Pro forma net income (loss)                            $    8,421      $   11,156   $  (24,900)
                                                       ==========      ==========   ==========

Earnings (loss) per share:
    Basic - as reported                                $     1.04      $     1.30   $    (3.09)
    Basic - pro forma                                         .67             .99        (3.46)

    Diluted - as reported                              $      .96(i)   $     1.20   $    (3.09)
    Diluted - pro forma                                       .61             .91        (3.46)
</TABLE>


(i) Calculated under the "as if converted" method.  See Note O.


Reclassifications. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year
classifications.

Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

Net Income (Loss) Per Share.  Basic and diluted income (loss) per share are
calculated in accordance with SFAS No. 128, "Earnings Per Share."  See Note O.


                                      F-7


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Property and Equipment. Property and equipment are recorded at cost.
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives (generally four to seven years). Leased
equipment capitalized and leasehold improvements are amortized over the life of
the lease or the useful life of the related asset, whichever is shorter.

Inventories. Inventories, which consist of biopharmaceutical and pharmaceutical
products held for sale, are stated at the lower of cost (first in, first out
method) or market.

Goodwill and Intangibles. Goodwill represents the excess of purchase price over
the fair value of net assets acquired. Intangibles consist of the separately
identifiable intangibles, such as pharmacy and customer relationships and
covenants not to compete. Effective January 1, 2002, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets," which requires goodwill and
intangible assets with indefinite lives no longer be amortized but rather be
reviewed annually, or more frequently if impairment indicators arise, for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. During
2003, the Company completed its annual goodwill impairment tests and, based on
its results, no impairment was identified during the year ended December 31,
2003. Prior to the adoption of SFAS No. 142, goodwill and intangibles were
amortized using the straight-line method with various lives from three to twenty
years.

Cash and Cash Equivalents. Cash and cash equivalents consist of demand deposits
with banks, certificates of deposit with maturities of less than three months at
the time of purchase and highly liquid money market fund investments.

Concentration of Credit Risk. The Company's revenues are generated from its
Specialty Pharmacy Services business unit's sales of biopharmaceuticals and
pharmaceuticals and from its Specialty Healthcare Services business unit's Wound
Care Center programs, which have been established as cooperative ventures with
acute care hospitals. Specialty Pharmacy Services' receivables consist of
amounts due from various payors, including government programs, insurance
companies, retail pharmacies and self-pay patient accounts. Credit is extended
based upon a pre-authorization of coverage check or contractual arrangement.
Payment terms are generally thirty days from date of invoice. The Specialty
Healthcare Services' receivables are from its hospital partners under
contractual management services contracts. Credit is extended based on an
evaluation of the hospital's financial condition. Payment terms are generally 30
to 90 days from date of invoice. For 2003, 2002 and 2001, the Company derived
approximately 30%, 35% and 13%, respectively, of consolidated revenue from one
payor.  As a percentage of toal, the Company's accounts receivable from its
largest payor was 29.4% and 30.9%, respectively, at December 31, 2003 and 2002.

The Company evaluates the collectibility of accounts receivable based on
numerous factors, including past transaction history with payors and their
credit worthiness. The Company estimates an allowance for doubtful accounts
primarily based on cash collection history. This estimate is periodically
adjusted when the Company becomes aware of a specific payor's inability to meet
its financial obligations (e.g., bankruptcy, etc.) or as a result of changes in
the overall aging of accounts receivable.

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

The current Medicare, Medicaid and other third party-payor programs in which the
Company participates are based upon extremely complex laws and regulations that
are subject to interpretation. Noncompliance with such laws and regulations
could result in fines, penalties and/or exclusion from such programs. The
Company is not aware of any allegations of noncompliance that could have a
material adverse effect on the accompanying consolidated financial statements
and believes it is in substantial compliance with all applicable laws and
regulations.


                                      F-8
<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Advertising. Advertising and community education costs are expensed when
incurred.  The Specialty Pharmacy Services business unit's advertising and
community education expenses were approximately $.9 million, $.4 million and
$.02 million in 2003, 2002 and 2001, respectively. The Specialty Healthcare
Services business unit's advertising and community education costs were
approximately $1.7 million, $1.6 million and $3.7 million in 2003, 2002 and
2001, respectively.

Income Taxes.  Income taxes have been provided using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes."

Shipping and Handling. Outbound shipping and handling charges were approximately
$.9 million in 2003, $.5 million in 2002 and $.4 million in 2001 and are
included in cost of product sales in the accompanying consolidated statements of
operations.

Financial Instruments. The carrying values of the Company's financial
instruments, including cash and cash equivalents, approximate fair value because
of the short maturity of these instruments. The fair value of the Company's
debt, including current maturities, are estimated based on quoted market prices
for the same or similar issues or on current rates offered to the Company for
debt of the same remaining maturities. The carrying amounts of the Company's
debt at December 31, 2003 and 2002 approximate their fair values.

Supplemental Cash Flow Information. Supplemental information with respect to the
Company's cash flows for the years ended December 31 is as follows (in
thousands):

                                            2003      2002      2001
                                           ------    ------    ------
    Interest paid                          $2,119    $  631    $   --
    Income taxes paid                      $5,231    $1,543    $  347

Supplemental information pertaining to non-cash investing and financing
activities included the following:

 a) Proceeds from exercise of stock options excludes $1.9 million and $.5
    million in 2002 and 2001, respectively, in loans given to officers and/or
    directors for the exercise of options in 2002 and 2001. The proceeds from
    the 2002 exercise of stock options excluded $.3 million in option repricing.

 b) In July 2003, certain selling shareholders of Infinity exercised their
    rights under convertible notes and converted approximately $4.8 million of
    such notes into 300,389 shares of the Company's common stock.

Recently Issued Accounting Standards

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which nullifies Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities initiated after December 31,
2002. SFAS No. 146 establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities and requires
that such liabilities be recognized when incurred. The Company adopted SFAS No.
146 effective January 1, 2003. See Note H. The adoption of this standard did not
have a material effect on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective


                                      F-9


<PAGE>

               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of this standard did not have a material effect
on the Company's consolidated financial statements.


NOTE B - SALE OF PROCUREN(R) BUSINESS

On January 2, 2001, the Company sold the assets of its Procuren(R) business for
approximately $3.8 million to Cytomedix, Inc. ("Cytomedix"). Under the
agreement, Cytomedix became the exclusive manufacturer of Procuren(R), and the
Company became the exclusive distributor of Procuren(R) solution in the United
States. The Company also receives royalties based on the sales of products that
were developed from the associated patents on sales outside the United States.
The Company recognizes these royalties when they are received. The consideration
received by the Company was $2.1 million in cash, $1.7 million in a convertible
secured promissory note, and a warrant certificate to purchase 600,846 shares of
Cytomedix common stock at a purchase price of the lesser of $.50 per share or a
price per share equal to the average of the three lowest intraday sales prices
as reported by a reliable reporting service during the 20 trading days preceding
the date on which the warrant is exercised.

In 2001, the Company received $1.3 million in proceeds related to the $1.7
million convertible secured promissory note in the form of cash payments from
Cytomedix, exercise and sale of warrant shares, and conversion and sale of
shares of the convertible promissory note. Also during 2001, the Company
recorded a charge of $.2 million related to the unpaid balance of the promissory
note. At December 31, 2001, the Company did not carry any balance due on this
promissory note. In May 2001, Cytomedix informed the Company that it would
exercise its right under the sale agreement to cease the production of
Procuren(R) in June 2001. In July 2001, Cytomedix filed for Chapter 11
protection under the United States Bankruptcy Code. As a result, the Company has
had to pay for certain lease obligations it guaranteed. During 2001, the Company
paid $.4 million under these guarantees, and at December 31, 2001, the Company
maintained liabilities of $.4 million related to these guarantees. The Company
did not have a related liability at and for the years ended December 31, 2003
and 2002.


NOTE C - INVESTMENT IN ACCORDANT

On June 4, 1998, the Company signed an agreement with Accordant under which the
Company agreed to invest $4.0 million in Accordant preferred stock. At December
31, 2001, the Company had an 8.6% interest in Accordant which was accounted for
using the equity method of accounting, as the Company had significant influence
over the operations of Accordant. The Company's share of Accordant's net loss
was approximately $.4 million in 2001. At December 31, 2001, the Company's
investment in Accordant exceeded its underlying equity in such investment by
$2.8 million. Such excess was being amortized over twenty years. At December 31,
2001, the total investment in Accordant was $3.4 million.

In October 2002, the Company sold its interest in Accordant for an initial sale
price of approximately $5.5 million which resulted in the Company recording a
gain of approximately $1.9 million. Approximately $1.0 million of the sale price
was placed in escrow subject to customary indemnification obligations being
satisfied.

In November 2003, approximately $.5 million of the escrow amount was received by
the Company. The balance of approximately $.5 million remains in escrow and is
scheduled to be released in November 2004. In addition, the sale agreement
provided for an earn-out payment if Accordant achieved certain 2003 operating
goals. Accordant achieved the 2003 operating goals, and in January 2004, the
Company received approximately $2.3 million related to this earn-out and has
recorded this as other income in its 2003 financial statements. The Company is
not entitled to any other funds related to this transaction other than the
remaining escrow balance.


                                      F-10


<PAGE>



               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE D - SPECIALTY PHARMACY SERVICES ACQUISITIONS

On March 30, 2001, the Company purchased all of the outstanding capital stock of
eBioCare for $32.3 million in cash and the assumption and repayment of
approximately $5.0 million in debt and approximately $1.3 million in
acquisition-related accruals. Approximately $3.1 million of the funds used to
purchase eBioCare was put in escrow to cover any potential future purchase price
disputes. The balance in the escrow account was approximately $3.1 million at
December 31, 2002. On March 20, 2003, the Company entered into a Stipulation of
Settlement (the "Settlement") with the former shareholders of eBioCare related
to the Company's indemnification claims against the former shareholders for
breach of certain representations and warranties made by such former
shareholders. Under the Settlement, the Company received proceeds of
approximately $1.3 million, which was recorded as a reduction to purchase price
and goodwill. eBioCare is a specialty pharmacy which contracts with insurance
companies and other payors to provide direct-to-patient distribution of
biopharmaceutical products. The acquisition was accounted for as a stock
purchase and, therefore, operating results of eBioCare have been included in the
accompanying financial statements from the date of acquisition. Purchase price
allocations have been completed in accordance with the provisions of APB Opinion
No. 16. Prior to adoption of SFAS No. 142, goodwill resulting from the
acquisition was being amortized using a 20-year period, and identifiable
intangibles are amortized over various lives ranging from 3 to 20 years. A final
purchase price allocation based on fair market value of acquired assets and
liabilities has been completed.

On February 28, 2002, the Company acquired all of the outstanding shares of
Apex, a California-based leading provider of biopharmaceutical products,
therapeutic supplies and services to people with hemophilia and related bleeding
disorders, for an aggregate purchase price of $60.0 million plus
acquisition-related accruals of approximately $.8 million. Approximately $40.0
million of the purchase price was paid in shares of the Company's common stock
with the remainder paid in cash and a $5.0 million promissory note bearing
interest at the rate of 4.4% per annum and maturing on February 28, 2007. The
Company acquired approximately $18.1 million of Apex's assets, including $1.6
million in cash, $9.4 million in accounts receivable, $4.8 million in inventory,
$1.6 million in other current assets, $.2 million in property and equipment and
$.5 million in other assets. The Company also assumed $3.8 million of Apex's
liabilities. The excess of the acquisition cost over the fair value of
identifiable net assets acquired was approximately $46.5 million, consisting of
approximately $.9 million in covenants not to compete, which are being amortized
over four years from the date of purchase, and trade name and goodwill of
approximately $.3 million and $45.3 million, respectively, which are not being
amortized for book purposes per SFAS No. 142 (see Note A). The Company and the
former shareholders of Apex amended and restated the promissory note on May 30,
2002 to change the terms relating to the business performance criteria, add a
convertible feature and ultimately adjust the principal amount of the promissory
note to $3.7 million, of which a balance of $3.0 million remained at December
31, 2003 (see Note J). The amended and restated promissory note is convertible
at a price per share of $20.10 into a maximum of 184,080 shares of the Company's
common stock. A final purchase price allocation based on fair market value of
acquired assets and liabilities has been completed.

On June 28, 2002, the Company purchased Infinity, a Houston, Texas, based
distributor of specialty pharmaceuticals and a provider of infusion therapy
services. Infinity focuses on the specialty infusion market, primarily in immune
globulin therapy (prescribed for individuals whose immune systems cannot
function sufficiently to fight infectious or inflammatory diseases). The
aggregate purchase price was $24 million, which consisted of $18 million in cash
and $6 million in promissory notes, which bear interest at a rate of 3% per
annum, mature on June 28, 2007, and are convertible at a price per share of
$16.08 into an aggregate of 373,111 shares of the Company's common stock. The
cash portion of the consideration was funded in part by cash on hand and in part
by borrowing from the Company's line of credit. Purchase acquisition-related
accruals were approximately $.1 million. The Company acquired approximately $2.4
million of Infinity's assets including $.1 million in cash, $1.8 million in
accounts receivable, $.4 million in inventory and $.1 million in property and
equipment. The Company also assumed $.7 million of Infinity's liabilities. The
excess of the acquisition cost over the fair value of identifiable net assets
acquired was approximately $22.4 million, consisting of approximately $.3
million in covenants not to compete, which are being


                                      F-11


<PAGE>



               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE D - SPECIALTY PHARMACY SERVICES ACQUISITIONS (continued)

amortized over four years from the date of purchase, and goodwill of
approximately $22.1 million which is not being amortized for book purposes per
SFAS No. 142 (see Note A). In July 2003, certain selling shareholders of
Infinity exercised their rights under the convertible notes and converted
approximately $4.8 million of such notes into 300,389 shares of the Company's
common stock, bringing the balance of the promissory notes to $1.1 million at
December 31, 2003 (see Note J). A final purchase price allocation based on fair
market value of acquired assets and liabilities has been completed.

On October 23, 2002, the Company acquired the specialty pharmacy business and
certain related assets of Home Care, a Scotia, New York, based specialty
pharmacy and home infusion company that specializes in the provision of
Synagis(R) for the prevention of respiratory syncytial virus, the most common
cause of lower respiratory infections in infants and children worldwide. In
addition, the Company entered into an agreement to purchase certain assets of
Home Care related to its home health agency business, subject to applicable
governmental approvals. The aggregate purchase price of approximately $12.0
million includes $9.0 million in cash and a $3.0 million convertible note which
bears interest at a rate of 3% per annum, matures on October 23, 2005 and is
convertible at a price per share of $16.00 into an aggregate of 187,500 shares
of the Company's common stock. The cash portion of the consideration was funded
in part by cash on hand and in part by borrowing from the Company's line of
credit. Acquisition-related accruals were approximately $.1 million. The Company
acquired approximately $1.9 million of Home Care's assets, including $1.7
million in accounts receivable, $.1 million in inventory and $.1 million in
property and equipment and other assets. The Company also assumed $1.2 million
of Home Care's liabilities. The excess of the acquisition cost over the fair
value of identifiable net assets acquired was approximately $11.4 million,
consisting of approximately $.1 million in covenants not to compete, which are
being amortized over four years from the date of purchase, and trade name and
goodwill of approximately $.1 million and $11.2 million, respectively, which are
not being amortized for book purposes per SFAS No. 142 (see Note A). The
convertible notes balance of $3.0 million remained at December 31, 2003 (see
Note J). A final purchase price allocation based on fair market value of
acquired assets and liabilities has been completed.

On November 20, 2002, the Company acquired OptCare Plus, Inc. ("OptCare") for
approximately $10.5 million in cash. OptCare is a specialty pharmacy dispensing
biological medications such as hemophilia clotting factors. OptCare's focus is
on persons affected by bleeding disorders. In addition, OptCare coordinates
infusion nursing and provides complete pharmacy services and clinical and
reimbursement support services to chronic disease communities. The cash portion
of the consideration was funded in part by cash on hand and in part by borrowing
from the Company's line of credit (see Note J). Acquisition-related accruals
were approximately $.1 million. The Company acquired approximately $2.8 million
of OptCare's assets, including $1.2 million in accounts receivable, $1.5 million
in inventory and $.1 million in property and equipment and other assets. The
Company also assumed $.1 million of OptCare's liabilities. The excess of the
acquisition cost over the fair value of identifiable net assets acquired was
approximately $7.9 million, consisting of approximately $.1 million in covenants
not to compete, which are being amortized over four years from the date of
purchase, and trade name and goodwill of approximately $.1 million and $7.7
million, respectively, which are not being amortized for book purposes per SFAS
No. 142 (see Note A). A final purchase price allocation based on fair market
value of acquired assets and liabilities has been completed.


                                      F-12


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE D - SPECIALTY PHARMACY SERVICES ACQUISITIONS (continued)

On February 3, 2003, the Company acquired MedCare, Inc. ("MedCare"), a specialty
pharmacy with locations in Alabama, Mississippi and West Virginia. MedCare's
primary product line is Synagis(R) for the prevention of respiratory syncytial
virus, while other product lines include growth hormone and hemophilia clotting
factor. The purchase price for MedCare was $6.6 million, of which $5.5 million
was paid in cash, $.6 million in cash was placed into escrow for purposes of
providing for any indemnifications due to the Company and $.5 million in cash
which was withheld pending delivery of agreed-upon working capital. In May 2003,
the working capital agreement was settled and in July 2003, approximately $.2
million out of the $.5 million in cash withheld was paid to the former
shareholder, which effectively reduced the purchase price to $6.3 million.
Acquisition-related accruals were approximately $.2 million. The Company
acquired approximately $1.8 million of MedCare's assets, including $1.5 million
in accounts receivable and $.3 million in inventory. The Company also assumed
$1.6 million of MedCare's liabilities. The excess of the acquisition cost over
the fair value of identifiable net assets acquired was approximately $6.3
million, consisting of approximately $.3 million in covenants not to compete,
which are being amortized over three years from the date of acquisition, and
goodwill of approximately $6.0 million, which is not being amortized for book
purposes per SFAS No. 142 (see Note A). A final purchase price allocation based
on fair market value of acquired assets and liabilities has been completed.

On April 23, 2003, the Company acquired the assets and specialty pharmacy
business of All Care Medical, Inc. ("All Care"), a Louisiana-based Synagis(R)
pharmacy. The purchase price of All Care was $2.1 million, of which $1.0 million
was paid in cash at closing and $1.1 million was paid in cash in July 2003 which
consisted of approximately $.8 million paid to the sellers and approximately $.3
million to be held in escrow for 18 months until indemnifications rights under
the purchase agreement expire. Acquisition-related accruals were approximately
$.2 million. The Company acquired approximately $.7 million of All Care's
assets, including $.6 million in accounts receivable, $.06 million in inventory
and $.04 million in fixed assets. The Company also assumed $.1 million of All
Care's liabilities. The excess of the acquisition cost over the fair value of
identifiable net assets acquired was approximately $1.7 million, consisting of
approximately $.05 million in covenants not to compete, which are being
amortized over two years from the date of acquisition, and trade name and
goodwill of approximately $.02 million and $1.6 million, respectively, which are
not being amortized for book purposes per SFAS No. 142 (see Note A). A final
purchase price allocation based on fair market value of acquired assets and
liabilities has been completed.

On June 9, 2003, the Company acquired certain assets of Prescription City, Inc.,
a Spring Valley, New York, specialty pharmacy business specializing in the
provision of chemotherapy and cancer drugs. Prescription City's service area
includes southern New York and some areas of northeastern Pennsylvania. Drug
therapies provided by Prescription City include chemotherapy, HIV/AIDS drugs,
Synagis(R), IVIG, pain management and Remicade(R). The purchase price for
Prescription City was $17.5 million, of which $16.5 million was paid in cash and
$1.0 million in a one-year note bearing interest at a rate of 3% and maturing on
June 9, 2004 (see Note J). The $1.0 million note is being held in escrow.
Approximately $.5 million was to have been released but the Company has made an
indemnification claim and such amount has not been released. Acquisition-related
accruals were approximately $.1 million. The Company acquired approximately $.4
million of Prescription City's inventory, none of its accounts receivables and
assumed none of its liabilities. The excess of the acquisition cost over the
fair value of identifiable net assets acquired was approximately $17.2 million,
consisting of approximately $.1 million in covenants not to compete, which are
being amortized over two years from the date of acquisition, and trade name and
goodwill of approximately $.02 million and $17.1 million, respectively, which
are not being amortized for book purposes per SFAS No. 142. Fair market
valuations have not yet been finalized and, as such, the allocation of the
purchase price is preliminary, pending receipt of a formal valuation and the
outcome of any action the Company may take.


                                      F-13


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE D - SPECIALTY PHARMACY SERVICES ACQUISITIONS (continued)

A search warrant issued by a U.S. Magistrate Judge, Southern District of New
York, relating to a criminal investigation was executed on November 4, 2003 at
the Company's Prescription City pharmacy in Spring Valley, New York. The
Government has informed the Company that it is not a target of the
investigation. The Company was served with the search warrant on Tuesday,
November 4, 2003 while it was conducting its own compliance review at the Spring
Valley pharmacy. The Company intends to cooperate fully with the U.S. Attorney's
Office in its investigation. Based on information known as of November 5, 2003,
the Company terminated Paul Frank, the former principal shareholder of
Prescription City. The Company also hired outside counsel in connection with
this investigation. Certain assets of Prescription City were purchased by the
Company in June 2003. The purchase was structured as an asset purchase with the
Company being provided indemnifications, representations and warranties by the
seller. The Company is currently considering its remedies available under the
purchase agreement (including without limitation, rescission of its acquisition
of these assets).

The acquisitions described above, as well as the Company's 2001 acquisition of
eBioCare (collectively the "Specialty Pharmacy acquisitions") were consummated
for purposes of expanding the Company's Specialty Pharmacy Services business and
were accounted for using the purchase method of accounting. The accounts of the
Specialty Pharmacy acquisitions and related goodwill and intangibles are
included in the accompanying consolidated balance sheets. The operating results
of the Specialty Pharmacy acquisitions are included in the accompanying
consolidated statements of operations from the dates of acquisition.

Unaudited pro forma amounts for the years ended December 31, 2003, 2002 and
2001, assuming the Specialty Pharmacy acquisitions had occurred on January 1,
2001, are as follows (in thousands, except per share data):

                                                    Years ended December 31,
                                                 ------------------------------
                                                   2003       2002       2001
                                                 --------   --------   --------
Revenues                                         $227,355   $207,834   $201,917
Net income (loss)                                $ 14,115   $ 20,080   $(12,483)
Net income (loss) per common share, diluted      $   1.02   $   1.59   $  (1.74)

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


NOTE E - GOODWILL AND OTHER INTANGIBLE ASSETS

Acquired intangible assets subject to amortization consisted of the following at
December 31 (in thousands):

<TABLE>
<CAPTION>
                                             2003                            2002
                                -----------------------------   -----------------------------
                                Gross Carrying   Accumulated    Gross Carrying   Accumulated
                                    Amount       Amortization       Amount       Amortization
                                --------------   ------------   --------------   ------------
<S>                                 <C>            <C>              <C>              <C>
Injectable customers                $   220        $   121          $   220        $    77
Licenses                                 39              2               39              1
Pharmacy relationships                   20             11               20              7
Website                                 177             99              175             62
Covenants not to compete              2,185            945            1,705            360
                                    -------        -------          -------        -------
                                    $ 2,641        $ 1,178          $ 2,159        $   507
                                    =======        =======          =======        =======
</TABLE>


                                      F-14


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE E - GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

The weighted average amortization period for all intangible assets is
approximately 7 to 8 years at December 31, 2003. Amortization period by
intangible asset class is as follows:

           Asset Class                        Amortization Period
           -----------                        -------------------
           Injectable customers                       5 years
           Licenses                                  20 years
           Pharmacy relationships                     5 years
           Website                                3 - 5 years
           Covenants not to compete               2 - 5 years

The aggregate amortization expense was approximately $.7 million and $.4 million
for the years ended December 31, 2003 and 2002, respectively, and the estimated
amortization for future years ended December 31 is as follows (in thousands):

                       2004               $   666
                       2005                   597
                       2006                   169
                       2007                    29
                       2008                     1
                       Thereafter               1
                                             ----
                          Total           $ 1,463
                                            =====

The change in the carrying amount of goodwill for the year ended December 31,
2003 is as follows (in thousands):

      Balance as of January 1, 2003                           $ 122,877
      Goodwill acquired during the year                          26,301
      Adjustments related to accounts receivable,
        indemnification and other claims (eBioCare and Apex)     (1,487)
      Other adjustments                                             204
                                                                 ------
      Balance as of December 31, 2003                         $ 147,895
                                                                =======

All of the Company's goodwill at December 31, 2003 is related to the Specialty
Pharmacy Services segment. Approximately $46.8 million of the Company's December
31, 2003 goodwill is deductible for tax purposes on a straight line basis over
15 years.


                                      F-15


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE E - GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

The following table sets forth the pro forma net income (loss) and earnings
(loss) per share for the current and corresponding prior years as if SFAS No.
142 had been adopted in the prior years (in thousands, except per share data):

                                          2003            2002         2001
                                       ----------      ----------   ----------

Reported net income (loss)              $ 13,075        $ 14,645     $(22,205)
Add back:  Goodwill amortization              --              --        1,715
                                        --------        --------     --------
Adjusted net income (loss)              $ 13,075        $ 14,645     $(20,490)
                                        ========        ========     ========

Basic earnings (loss) per share:
   Reported net income (loss)           $   1.04        $   1.30     $  (3.09)
   Goodwill amortization                      --              --         0.24
                                        --------        --------     --------
   Adjusted net income (loss)           $   1.04        $   1.30     $  (2.85)
                                        ========        ========     ========

Diluted earnings (loss) per share:
   Reported net income (loss)           $    .96(i)     $   1.20     $  (3.09)
   Goodwill amortization                      --              --         0.24
                                        --------        --------     --------
   Adjusted net income (loss)           $    .96        $   1.20     $  (2.85)
                                        ========        ========     ========

Weighted shares, basic                    12,546          11,280        7,193
Weighted shares, diluted                  13,826          12,207        7,193

(i) Calculated under the "as if converted" method.  See Note O.

As certain of the Company's acquisitions were accounted for as stock purchases,
goodwill amortization related to those acquisitions is not tax deductible.


NOTE F - PROPERTY AND EQUIPMENT

A summary of property and equipment and related accumulated depreciation and
amortization at December 31 follows (in thousands):

                                                          2003       2002
                                                       --------    --------
    Property and equipment                             $ 16,602    $ 10,124
    Leasehold improvements                                2,810       2,685
                                                       --------    --------
    Total                                                19,412      12,809
    Less accumulated depreciation and amortization       11,522       9,525
                                                       --------    --------
                                                       $  7,890    $  3,284
                                                       ========    ========


                                      F-16


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE G - ACCRUED EXPENSES

A summary of accrued expenses at December 31 follows (in thousands):

                                                  2003         2002
                                                --------     --------
      Incentive compensation and benefits       $  2,496     $  3,230
      Professional fees                            2,176        1,321
      Other                                        6,830        7,028
                                                --------     --------
      Total                                     $ 11,502     $ 11,579
                                                ========     ========


 NOTE H - EMPLOYEE AND FACILITY TERMINATION COSTS

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

The following provides a reconciliation of the related accrued costs associated
with the pharmacy consolidation, which are included in Selling, General and
Administrative expenses in the accompanying consolidated financial statements at
and for the year ended December 31, 2003 (in thousands):


<TABLE>
<CAPTION>
                                 Beginning   Costs Charged     Costs Paid or     Ending
                                  Balance     To Expense     Otherwise Settled   Balance
                                 ---------   -------------   -----------------   -------
<S>                                <C>         <C>               <C>              <C>
Employee termination costs         $  --       $    871          $    832         $   39
Facility termination costs            --            759               328            431
                                   -----       --------          --------         ------
                                   $  --       $  1,630          $  1,160         $  470
                                   =====       ========          ========         ======
</TABLE>

In 2004, the Company expects to pay out approximately $.3 million of these
accrued costs and the remainder in subsequent years.


                                      F-17


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE I - LEASES

The Company entered into several non-cancelable operating leases for the rental
of certain office space expiring in various years through 2008. Additionally,
through the Specialty Pharmacy Services business unit, the Company leases
office, pharmacy and warehouse space in various states. The principal lease for
office space provides for monthly rent of approximately $60,000. As these leases
expire, it can be expected that in the normal course of business, they will be
renewed or replaced. In addition, certain lease agreements contain renewal
options and rent escalation clauses. The following is a schedule of future
property and other lease payments, by year and in the aggregate, under
non-cancelable operating leases with initial or remaining terms of one year or
more at December 31, 2003 (in thousands):


                     2004                        $ 2,119
                     2005                          1,437
                     2006                          1,089
                     2007                            883
                     2008                            630
                     Thereafter                      251
                                                 -------
                     Total                       $ 6,409
                                                 =======

Rent expense for all operating leases was approximately $1.4 million, $1.0
million and $.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.


NOTE J - LONG-TERM LIABILITIES

Long-term liabilities consisted of the following at December 31 (in thousands):

                                                           2003       2002
                                                         --------   --------
    Term loan facility                                   $ 24,000   $ 10,000
    Revolving loan facility                                11,253      3,368
    Note Payable - DOJ Settlement                           4,040      6,060
    Convertible note used in purchase of Apex               3,048      3,750
    Convertible note used in purchase of Infinity           1,169      6,000
    Convertible note used in purchase of Home Care          3,000      3,000
    Note payable used in purchase of Prescription City      1,000         --
                                                         --------   --------
                                                           47,510     32,178
    Less amounts due within one year                        7,911      6,102
                                                         --------   --------
    Total                                                $ 39,599   $ 26,076
                                                         ========   ========

In December 2001, the Company entered into a settlement agreement with the DOJ
related to whistleblower actions brought against the Company. The settlement
agreement called for payments to be made to the DOJ totaling $16.5 million, with
an initial payment of $9.0 million and the $7.5 million balance paid over four
years, payable in 12 quarterly installments of $.5 million, followed by four
quarterly installments of $.4 million, all bearing interest at a rate of 6% per
annum. The final installment under this agreement is due in February 2006.


                                      F-18


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE J - LONG-TERM LIABILITIES (continued)

In January 2002, the Company entered into a $25 million revolving credit
agreement with HBCC which was to expire in May 2006. In May 2002, the Company
amended and restated the agreement to add a $10.0 million term loan facility.
The revolving credit facility bore interest at varying rates based upon prime
rate or the London Interbank Offered Rate ("LIBOR") plus a varying margin,
dependent upon the Company's debt service coverage ratio as defined in the
agreement. The use of prime rate or LIBOR in determining the applicable interest
rate was at the Company's discretion. The term loan facility bore interest at a
varying rate of prime plus 2.5%. The term loan amortized in monthly installments
of approximately $.2 million beginning in January of 2003 and ending in May
2006. The amended and restated agreement included financial covenants which,
among other things, required the Company to maintain certain debt service
coverage ratios. In addition, there were significant fees in the event of early
termination of either of the facilities. The revolving credit facility was
secured by substantially all of the Company's accounts receivable, and the term
loan facility was secured by the stock of Apex. The Company terminated this
facility in June 2003 and replaced it with the facility with GE Capital (see
below).

On February 28, 2002, in connection with the purchase of Apex, the Company
entered into a $5.0 million promissory note that bore interest at the rate of
4.4% per annum and matures on February 28, 2007. This note was subject to Apex
meeting certain operating targets. The Company and the former shareholders of
Apex amended and restated the promissory note on May 30, 2002 to change the
terms relating to the business performance criteria, add a convertible feature
and ultimately adjust the principal amount of the promissory note to $3.7
million. The amended and restated promissory note is convertible at a share
price of $20.10 into a maximum of 184,080 shares of the Company's common stock.
The Company makes quarterly principal payments against this note which commenced
in April 2003. In 2003, the Company made approximately $.7 million in principal
payments.

On June 28, 2002, in connection with the purchase of Infinity, the Company
entered into $6.0 million in convertible promissory notes, which bear interest
at a rate of 3% per annum, mature on June 28, 2007, and are convertible at a
price per share of $16.08 into an aggregate of 373,111 shares of the Company's
common stock. In 2003, certain selling shareholders of Infinity exercised their
righted under the convertible notes and converted approximately $4.8 million of
such notes into 300,389 shares of the Company's common stock.

On October 23, 2002, in connection with the purchase of Home Care, the Company
entered into a $3.0 million convertible note which bears interest at a rate of
3% per annum, matures on October 23, 2005 and is convertible at a price per
share of $16.00 into an aggregate of 187,500 shares of the Company's common
stock.

On June 9, 2003, the Company completed a new senior secured credit facility with
GE Capital. Under the credit agreement, the Company obtained a secured revolving
credit facility of up to $15.0 million, of which it can utilize up to $5.0
million as a letter of credit subfacility and up to $5.0 million as a swingline
subfacility (i.e., a short-term loan advance facility), and a $20.0 million
secured term loan which was subsequently increased to $25.0 million, for a total
facility of $40.0 million. The Company used the funds available under this new
credit facility to immediately pay all of its outstanding borrowings, accrued
interest and termination fees under its credit facility with HBCC and to finance
its acquisition of certain assets of Prescription City. If GE Capital, using its
best efforts, is able to syndicate this credit facility with other lenders, then
funds available to the Company under the credit facility may be increased by up
to $45.0 million to fund future acquisitions.


                                      F-19


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE J - LONG-TERM LIABILITIES (continued)

The revolving credit facility matures on July 15, 2007. The Company will pay all
accrued interest on outstanding LIBOR loans on the last day of the applicable
LIBOR period, provided in the case of any LIBOR period greater than three months
in duration, interest shall be payable at three month intervals and on the last
day of such LIBOR period. All accrued interest on outstanding revolving credit
LIBOR loan advances which bears interest at an annual rate equal to the LIBOR
rate plus an additional amount based on the borrowers' senior leverage ratio,
which additional amounts may range from 3% to 3.5%. At December 31, 2003, the
applicable margin for revolving credit loan advances was LIBOR plus 3.5%, or
4.62%. For outstanding base rate loans, the Company will pay all accrued
interest on the first business day of each calendar quarter. All accrued
interest on outstanding revolving credit base rate loans bears interest at an
annual rate equal to the base rate plus an additional amount based on the
borrower's senior leverage ratio, which additional amounts may range from 1.75%
to 2.25% for the revolving credit base rate loans.

The term loan matures on July 15, 2007. Accrued interest on the term loan bears
interest at an annual rate equal to the applicable LIBOR rate plus an additional
amount based on the borrowers' senior leverage ratio, which additional amounts
may range from 3.5% to 4.0%. All accrued interest outstanding on base rate term
loans bears interest at an annual rate equal to the base rate plus an additional
amount based on the borrower's senior leverage ratio, which additional amounts
may range from 2.25% to 2.75% for the term base rate loan. At December 31, 2003,
the interest rate was LIBOR plus 4%, or 5.12%.

In the credit agreement, the Company has made certain representations and
warranties to GE Capital and is subject to certain reporting requirements and
financial and other covenants. The credit facility restricts the Company's
ability to incur or to permit any of its properties or assets to be encumbered
by liens. The credit facility also restricts the Company's ability to make
certain types of payments relating to its capital stock, including the
declaration or payment of dividends. Consolidations, mergers, sales of assets
and the creation of additional subsidiaries are also restricted, as is the
Company's ability to purchase assets and to make investments. The Company may
purchase other businesses that are preferred health care provider organizations
or are otherwise related to its line of business as long as the price for any
particular such acquisition does not exceed $25.0 million and the aggregate
purchase price for all such acquisitions during any fiscal year does not exceed
$40.0 million. Acquisitions that do not comply with the covenant can be made
only with the consent of GE Capital. The covenants also restrict transactions
with the Company's affiliates and require the Company to maintain certain levels
with respect to its total leverage ratio, senior leverage ratio and fixed charge
coverage ratio. At December 31, 2003, the Company was in compliance with its
debt covenants.

On June 10, 2003, in connection with the purchase of certain assets of
Prescription City, the Company entered into a $1.0 million one-year note which
bears interest at a rate of 3% and matures on June 9, 2004.

Principal maturities of long-term liabilities are as follows at December 31 (in
thousands):

                 2004                   $  7,911
                 2005                      9,496
                 2006                      5,246
                 2007                     24,857
                 2008                          -
                                        --------
                 Total                  $ 47,510
                                        ========


                                      F-20


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE K - STOCKHOLDERS' EQUITY

Director Share Purchase Program. The Company maintains a Director Share Purchase
Program (the "Program") to encourage ownership of its common stock by its
directors. Under the Program, each non-employee director can elect to forego
receipt of cash payments for director's annual retainer and meeting fees and, in
lieu thereof, receive shares of common stock at market value equal to the cash
payment. The Program authorized the issuance of up to 120,000 shares of the
Company's common stock at market value. At each year ended December 31, 2003 and
2002, 118,406 shares of common stock were reserved for future issuance under the
Program.

Stock Repurchase Plans. Since February 1999, the Company has announced stock
repurchase plans authorizing repurchases of 7.5 million shares. At December 31,
2003, a total of 5,874,195 shares had been repurchased at a cost of $52.3
million.

Repurchase of Common Stock. On January 29, 2003, the selling shareholder of HAI
exercised a put option right under the Stock Purchase Agreement of HAI,
requiring the Company to repurchase shares issued to acquire HAI. The Company
repurchased 97,070 of such shares of common stock for approximately $1.5
million.

Notes Converted into Common Stock. In July 2003, certain selling shareholders of
Infinity exercised their rights under convertible notes and converted
approximately $4.8 million of such notes into 300,389 shares of the Company's
common stock.

Restricted Stock Awards Plans. During 1999, the Company implemented a Restricted
Stock Award Plan ("the Plan") for certain key executives. The total shares to be
granted under the Plan are 73,000 shares at a price of $5.41 per share. The
shares vest over a three-year period. During 2001, 25,000 shares were granted
under the Plan.

Rights Plan. On October 25, 1995, the Board of Directors of the Company declared
a dividend of one preferred share purchase right per share for each outstanding
share of common stock of the Company. The dividend was paid on November 6, 1995
to shareholders of record on that date. Under certain circumstances, each right
may be exercised to purchase one-one hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01, of the Company for $65. The
rights, which are redeemable by the Company at $.01 per right, expire in
November 2005. The purchase right issued under the Company's Rights Agreement
dated October 22, 1995 provides the holder in the event of (i) the acquisition
of 15% or more of the Company's outstanding common stock by an Acquiring Person
(as defined in the Rights Agreement), (ii) the commencement of a tender offer or
exchange offer which results in a person or group owning 15% or more of the
Company's common stock, to exercise each right (other than rights held by an
Acquiring Person) to purchase common stock of the Company or a successor company
with a market value of twice the $65 exercise price.


NOTE L - STOCK BASED COMPENSATION PLANS

The Company has stock option plans which provide for the granting of
non-qualified, incentive options, or restricted stock awards to employees and
directors. The plans authorize granting of up to 8,394,595 shares of the
Company's common stock at the market value at the date of such grants. All
options are exercisable at times as determined by the Board of Directors, not to
exceed ten years after the grant date.


                                      F-21


<PAGE>



               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE L - STOCK BASED COMPENSATION PLANS (continued)

Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, "Accounting for Stock Based Compensation,"
and has been determined as if the Company has accounted for its stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions at December 31, 2003, 2002 and
2001, respectively: risk-free interest rate of 1.0%, 1.32% and 1.8%; no dividend
yields; volatility factor of the expected market price of the Company's common
stock of 70.0%, 71.8% and 69.1%; and a weighted-average expected life of the
options of four years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.

A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:


<TABLE>
<CAPTION>
                                    2003                    2002                     2001
                              Weighted Average        Weighted Average         Weighted Average
                            ---------------------   ----------------------   ---------------------
                                         Exercise                 Exercise                Exercise
                             Options      Price      Options       Price      Options      Price
                            ---------------------   ----------------------   ---------------------
<S>                         <C>          <C>         <C>          <C>        <C>          <C>
Outstanding at
   beginning of year        3,454,963    $  12.51    3,738,089    $  11.13   3,460,220    $  17.57
     Granted                  873,850       16.35    2,298,600       14.76   1,278,409        7.88
     Exercised               (457,863)       8.71   (1,139,348)       6.32    (500,282)       5.82
     Cancelled               (584,501)      13.47   (1,442,378)      17.40    (500,258)      10.27
                            ---------               ----------               ---------
Outstanding at
   end of year              3,286,449       13.89    3,454,963       12.51   3,738,089       11.13
                            =========               ==========               =========
Exercisable at
   end of year              1,682,645       11.92      968,697       10.45   1,522,645       10.72
Weighted average
   fair value of options
   granted                               $   8.74                 $   7.98                $   4.23

</TABLE>


                                      F-22


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE L - STOCK BASED COMPENSATION PLANS (continued)

The following table summarizes information about stock options outstanding at
December 31, 2003:


                         Options Outstanding             Options Exercisable
                  ----------------------------------    --------------------
                               Weighted
                                Average     Weighted                Weighted
                               Remaining    Average                 Average
                              Contractual   Exercise                Exercise
Exercise Prices     Shares       Life        Price       Shares      Price
---------------   ---------   -----------   --------    ---------   --------
$ 4.81 - $ 7.22     669,894    6.71 years   $   5.62      656,641   $   5.62
  7.22 -  10.83     218,500    8.09 years       9.26      123,850       9.28
 10.83 -  16.25   1,165,397    8.63 years      13.88      482,885      13.70
 16.25 -  24.38   1,055,479    8.58 years      17.40      302,090      17.57
 24.38 -  32.00     177,179    3.69 years      29.09      117,179      28.18
                  ---------                             ---------
                  3,286,449    7.92 years               1,682,645
                  =========                             =========

At December 31, 2003, 1,496,300 shares of common stock were reserved for future
issuance, excluding shares reserved for options outstanding.


NOTE M - INCOME TAXES

Significant components of the Company's deferred tax assets and liabilities for
the years ended December 31 are as follows (in thousands):


                                                      2003        2002
                                                    --------    --------
      Deferred tax assets:
      Bad debt reserve                              $  2,808    $  2,428
      Installment sale                                    --         691
      Book over tax depreciation                          --         418
      Accrued expenses                                   286         109
                                                    --------    --------
          Total deferred tax assets                    3,094       3,646

      Deferred tax liabilities:
      State tax                                         (463)       (364)
      Goodwill and intangible assets amortization       (965)        (78)
      Tax over book depreciation                        (348)         --
      Installment sale                                  (538)         --
                                                    --------    --------
          Total deferred tax liabilities              (2,314)       (442)
                                                    --------    --------
      Net deferred tax assets                       $    780    $  3,204
                                                    ========    ========


                                      F-23


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE M - INCOME TAXES (continued)

Total net long-term deferred tax assets of $110,000 and $520,000 are included in
other assets in the accompanying balance sheets for the years ended December 31,
2003 and 2002, respectively.

Significant components of the provision (benefit) for income taxes for the years
ended December 31 are as follows (in thousands):

                                               2003       2002       2001
                                             --------   --------   --------
      Current:
          Federal                            $  4,998   $  4,801   $    224
          State                                 1,075      1,084         57

      Deferred:
          Federal                               2,325      3,160     (2,583)
          State                                    98        637       (171)
                                             --------   --------   --------
      Total income tax provision (benefit)   $  8,496   $  9,682   $ (2,473)
                                             ========   ========   ========

A reconciliation of income tax computed at the U.S. Federal statutory tax rate
to income tax expense (benefit) for the years ended December 31 is as follows:

                                                2003     2002    2001
                                                ----     ----    ----
      Federal statutory tax rate                35.0%    35.0%  (35.0%)
      State income taxes net
          of Federal tax benefit                 4.6%     4.6%   (0.3%)
      Non-deductible Department of Justice
          settlement costs                        --       --    23.4%
      Other                                     (0.2%)     .2%    1.9%
                                                ----     ----    ----
      Effective tax rate                        39.4%    39.8%  (10.0%)
                                                ----     ----    ----


                                      F-24


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE N - SEGMENT INFORMATION

The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company operated under one
segment prior to the acquisition of eBioCare in March 2001. Effective April
2001, the Company has two reportable segments: Specialty Pharmacy Services and
Specialty Healthcare Services. In its Specialty Pharmacy Services, the Company
contracts with insurance companies and other payors to provide direct-to-patient
distribution of biopharmaceutical and pharmaceutical products. In its Specialty
Healthcare Services, the Company contracts with hospitals to manage outpatient
Wound Care Center programs. The Company evaluates segment performance based on
income (loss) from operations. The accounting policies of the reportable
segments are the same as those described in the significant accounting policies
footnote. Intercompany transactions are eliminated to arrive at consolidated
totals.

The following table presents the results of operations and total assets of the
reportable segments of the Company at and for the years ended December 31, 2003,
2002 and 2001 (in thousands):

                                    At and for the Year Ended December 31, 2003
                                    -------------------------------------------
                                     Specialty      Specialty
                                     Pharmacy       Healthcare        Total
                                     ----------     ----------      ----------
      Revenues                       $ 185,843       $ 28,898       $ 214,741
      Income from operations         $  18,946       $  2,578       $  21,524
      Total assets                   $ 208,358       $ 25,580       $ 233,938


                                    At and for the Year Ended December 31, 2002
                                    -------------------------------------------
                                     Specialty      Specialty
                                     Pharmacy       Healthcare        Total
                                     ----------     ----------      ----------
      Revenues                       $ 104,550       $ 34,679       $ 139,229
      Income from operations         $  15,450       $  8,081       $  23,531
      Total assets                   $ 165,189       $ 21,697       $ 186,886


                                    At and for the Year Ended December 31, 2001
                                    -------------------------------------------
                                     Specialty      Specialty
                                     Pharmacy       Healthcare        Total
                                     ----------     ----------      ----------
      Revenues                       $  35,104      $  46,534       $  81,638
      Income (loss) from operations  $   2,087      $ (27,581)      $ (25,494)
      Total assets                   $  36,507      $  39,932       $  76,439


                                      F-25


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE O - EARNINGS PER SHARE

Net income per common share, basic, is computed by dividing the net income by
the weighted average number of common shares outstanding. Net income per common
share, diluted, is computed by dividing adjusted net income (see below) by the
weighted average number of shares outstanding plus dilutive common share
equivalents. The following table sets forth the computation of weighted average
shares, basic and diluted, used in determining basic and diluted earnings per
share for the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
                                                               2003     2002     2001
                                                              ------   ------   ------
<S>                                                           <C>      <C>       <C>
Denominator:
    Denominator for basic earnings per share, weighted
    average shares                                            12,546   11,280    7,193

Effect of dilutive employee stock options
    and convertible notes (a)                                  1,280      927       --
                                                              ------   ------   ------
Denominator:
    Denominator for diluted earnings per share, adjusted
    weighted average shares assuming conversions              13,826   12,207    7,193
                                                              ======   ======   ======
</TABLE>

(a)  Potentially dilutive employee and director stock options that have been
     excluded from this amount because they are anti-dilutive amounted to
     approximately 2,006,000, 2,528,000 and 3,738,000 in 2003, 2002 and 2001,
     respectively.

Adjusted net income (loss) and net income (loss) per common share, diluted, for
the years ended December 31 were computed as follows (in thousands, except per
share data):


<TABLE>
<CAPTION>
                                                                   2003       2002       2001
                                                                 --------   --------   --------
<S>                                                              <C>        <C>        <C>
Net income (loss), as reported                                   $ 13,075   $ 14,645   $(22,205)
Add back interest related to convertible notes, net of tax            212         --         --
                                                                 --------   --------   --------
Adjusted net income (loss)                                       $ 13,287   $ 14,645   $(22,205)
                                                                 ========   ========   ========

Net income (loss) per common share, diluted                      $    .96   $   1.20   $  (3.09)
                                                                 ========   ========   ========

Weighted average shares, diluted                                   13,826     12,207      7,193
                                                                 ========   ========   ========
</TABLE>

In accordance with SFAS No. 128, "Earnings Per Share," net income per common
share, diluted, for the year ended December 31, 2003 was calculated under the
"as if converted" method, which requires adding shares related to convertible
notes that have no contingencies to the denominator for diluted earnings per
share and adding to net income, the numerator, tax effected interest expense
relating to those convertible notes.


                                      F-26


<PAGE>


               CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003


NOTE P - EMPLOYEE BENEFITS

The Company maintains a qualified Employee Savings Plan (the "Plan") for
eligible employees under Section 401(k) of the Internal Revenue Code. The Plan
provides for voluntary employee contributions through salary reductions and
employer contributions at the discretion of the Company. The Company had
previously authorized employer contributions of 25% of employees' contribution
up to 1% of the employees' compensation. As of July 1, 2003, the Company amended
the Plan to reflect employer contributions of 50% of employees' contribution up
to 2% of the employees' compensation. The Company's contribution match was $.3
million in 2003 and $.1 million in 2002 and 2001.


NOTE Q - RELATED PARTY TRANSACTIONS

During 2002, the Company advanced approximately $1.9 million to certain officers
and directors of the Company. The Company received promissory notes payable with
maturity dates ranging from February 19, 2004 to March 1, 2005 for such
advances, which bear interest at an annual rate of 2.46% payable on the maturity
date. At December 31, 2003 and 2002, principal amounts outstanding under these
promissory notes are included in notes receivable - stockholders in the
accompanying consolidated balance sheets.


NOTE R - LEGAL PROCEEDINGS

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


NOTE S - SUBSEQUENT EVENTS

On February 25, 2004, the Company announced that it entered into a definitive
agreement to acquire the capital stock of Critical Care Systems, Inc., a leading
national provider of specialty infusion pharmaceuticals and comprehensive
clinical services, for a total consideration of approximately $150.0 million in
cash. CCS focuses on delivering four principal therapies: hemophilia clotting
factor, IVIG, Total Parenteral Nutrition and anti-infective therapies. These
core therapies represent the essential components of Specialty Infusion, as
distinct from Home Infusion, and account for approximately 75% of CCS' revenue.
The Company expects to fund the purchase price, repayment of certain existing
indebtedness of CCS and related fees and expenses with $165.0 million of senior
unsecured notes to be issued through a private placement. The Company received a
$165.0 million financing commitment from UBS Loan Finance LLC which will be used
in the event the notes are not issued. In addition, GE Healthcare Financial
Services has committed to a $60.0 million senior secured credit facility, which
will replace the Company's existing facility, to support the acquisition and the
Company's future working capital needs. The commitments are subject to customary
conditions. The transaction will be subject to approval by applicable
governmental regulatory agencies and is expected to close early in the second
quarter of 2004.


                                      F-27


<PAGE>



                                                                     SCHEDULE II

                 CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
COL. A                                     COL. B                     COL. C                     COL. D            COL. E
-----------------------------------    ---------------    -------------------------------    ----------------    ------------
                                                                    Additions
                                                          -------------------------------
                                         Balance at         Charged to       Charged to                          Balance at
                                         Beginning          Costs and           Other                                End
Description                               of Year            Expenses         Accounts         Deductions          of Year
-----------------------------------    ---------------    ---------------    ------------    ----------------    ------------
<S>                                      <C>                <C>              <C>             <C>                 <C>
Year ended December 31, 2003:
Allowance for doubtful accounts          $2,954,000         $3,291,000       $        --     $2,223,000 (1)      $4,022,000

Year ended December 31, 2002:
Allowance for doubtful accounts          $3,504,000         $1,044,000       $        --     $1,594,000 (1)      $2,954,000

Year ended December 31, 2001:
Allowance for doubtful accounts          $2,046,000         $2,371,000       $        --     $  913,000 (1)      $3,504,000
</TABLE>

(1)   Accounts written off.


                                      S-1
<PAGE>



                                INDEX TO EXHIBITS


Exhibit No.  Description                                          Ref. No.
-----------------------------------------------------------------------------

    2.1      Plan of Merger, dated as of August 15, 2003, by      (28)
             and among Curative Health Services, Inc.,
             Curative Holding Co., and Curative Health
             Services Co.

    3.1      Amended and Restated Articles of Incorporation       (29)
             of Curative Health Services, Inc.

    3.2      By-Laws of Curative Health Services, Inc.            (30)

    4.1      Rights Agreement, dated as of October 25, 1995        (4)
             between Curative Technologies, Inc. and Wells
             Fargo Bank Minnesota, National Association, as
             Rights Agent

  4.1.1      Stock Purchase Agreement, dated July 6, 1989,        (1) (Ex.
             among the Company and certain investors named          4.2)
             therein

   10.1      [Omitted]

   10.2      [Omitted]

   10.3      Form of Wound Care Center(R)Contract                  (9)

   10.4      Lease Agreement dated June 30, 1997, and              (9)
             amended Lease Agreement dated November 13,
             1997, between New York Life Insurance Company
             and the Company

   10.5      Employment Agreement, dated as of September 1,        (6)**
             1997 between John C. Prior and the Company

   10.6      1991 Stock Option Plan                             (1)(Ex.10.27)**

   10.7      Amendment No. 4 to the 1991 Stock Option Plan         (9)**

   10.8      [Omitted]

   10.9      Curative Health Services, Inc., Director Share        (2)**
             Purchase Program

  10.10      [Omitted]

  10.11      Curative Health Services, Inc. Employee 401(k)        (3)**
             Savings Plan, as amended and restated

  10.12      [Omitted]

  10.13      [Omitted]

  10.14      [Omitted]

  10.15      [Omitted]


<PAGE>


Exhibit No.  Description                                          Ref. No.
-----------------------------------------------------------------------------

  10.16      [Omitted]

  10.17      [Omitted]

  10.18      [Omitted]

  10.19      Curative Technologies, Inc. Non-Employee              (5)**
             Director Stock Option Plan

 10.19.1     Amendment No. 1 to Curative Technologies, Inc.      (8) (Ex.
             Non-Employee Director Stock Option Plan             10.19)**

 10.19.2     Amendment to the Non-Employee Director Stock         (10)**
             Option Plan

  10.20      [Omitted]

  10.21      Amended Employment Agreement dated December 17,       (7)**
             1997 between
             William Tella and the Company

  10.22      [Omitted]

  10.23      [Omitted]

  10.24      Curative Health Services, Inc. 2000 Stock            (14)**
             Option Plan

  10.25      Asset Purchase Agreement among Cytomedix, Inc.,      (13)
             Cytomedix, N.V., CHS Services, Inc. and
             Curative Health Services, Inc. dated as of
             October 12, 2000.

  10.26      [Omitted]

  10.27      [Omitted]

  10.28      Form of Restricted Stock Award Agreement             (11)**

  10.29      Non-Employee Director Severance Plan                 (12)**

  10.30      Stock Purchase Agreement dated March 19, 2001,       (15)
             among Curative Health Services, Inc. and
             certain stockholders of eBioCare.com

  10.31      Form of Stockholder Purchase Agreement, between      (16)
             Curative Health Services, Inc. and all other
             stockholders of eBioCare.com

  10.32      Form of Option/Warrant Repurchase and Surrender      (17)
             Agreement between eBioCare.com and the holders
             of options and warrants to purchase common
             Stock of eBioCare.com

  10.33      Employment Agreement dated as of June 25, 2001       (18)**
             between Nancy Lanis and the Company


<PAGE>


Exhibit No.  Description                                          Ref. No.
-----------------------------------------------------------------------------

  10.34      [Omitted]

  10.35      [Omitted]

  10.36      [Omitted]

  10.37      Curative Health Services, Inc. 2001 Broad-Based      (20)**
             Stock Incentive Plan

  10.38      Curative Health Services, Inc. Non-Qualified         (20)**
             Stock Option Agreement

  10.39      Purchase Agreement, dated as of June 10, 2002,       (22)
             by and among Curative Health Services, Inc.,
             Infinity Infusion, LLC and Infinity Infusion
             II, LLC, and IIC GP, LLC, Azar I. Delpassand,
             Dr. Ebrahim Delpassand, Tara Imani, Maryam
             Panahi and Yassamin Norouzian

  10.40      Amendment No. 1 to Purchase Agreement dated as       (24)
             of June 28, 2002, by and among Curative Health
             Services, Inc., Infinity Infusion, LLC and
             Infinity Infusion II, LLC and Bijan Imani, as
             Sellers' Representative on behalf of the
             Sellers

  10.41      Amended and Restated Loan and Security               (23)
             Agreement by and among Curative Health
             Services, Inc., eBioCare.com, Inc., Hemophilia
             Access, Inc., Apex Therapeutic Care, Inc. and
             Healthcare Business Credit Corporation, dated
             as of May 17, 2002

  10.42      Employment agreement dated as of July 24, 2002       (25)**
             between Joseph Feshbach and the Company

  10.43      Employment agreement dated as of March 13, 2002      (26)**
             between Thomas Axmacher and the Company

  10.44      Stock Purchase Agreement by and among Curative       (21)
             Health Services, Inc. and the stockholders of
             Apex Therapeutic Care, Inc., dated as of
             January 27, 2002

  10.45      Registration Rights and Lock-Up Agreement,           (27)
             dated as of February 28, 2002, by and among
             Curative Health Services, Inc. and the
             stockholders of Apex Therapeutic Care, Inc.

  10.46      Amendment No. 1 to the Registration Rights and       (27)
             Lock-Up Agreement, dated as of February 27,
             2003, by and between Curative Health Services,
             Inc. and Jon M. Tamiyasu, in his capacity as
             the Stockholders' Representative under the
             Registration Rights and Lock-Up Agreement,
             dated as of February 28, 2002, by and among
             Curative Health Services, Inc. and the
             shareholders of Apex Therapeutic Care, Inc.


<PAGE>


Exhibit No.  Description                                          Ref. No.
-----------------------------------------------------------------------------

  10.47      Kerlin Agreement, dated February 28, 2002, by        (27)
             and among Curative Health Services, Inc.,
             Kerlin Capital Group, LLC, William K. Doyle and
             Cheryl S. Doyle as Trustees of the William K.
             Doyle and Cheryl S. Doyle Family Trust dated
             July 15, 1991, and Timothy J. Fahringer (the
             "Kerlin Parties") and the stockholders of Apex
             Therapeutic Care, Inc.

  10.48      Amendment No. 1 to the Kerlin Agreement, dated       (27)
             as of February 27, 2003, by and among Curative
             Health Services, Inc., Jon M. Tamiyasu, in his
             capacity as the Stockholders' Representative
             under the Stock Purchase Agreement, dated as of
             January 27, 2002, by and among Curative and the
             shareholders of Apex Therapeutic Care, Inc. and
             the Kerlin Parties

  10.49      Form of Amendment to Executive Employment            (27)**
             Agreements with John C. Prior, William C. Tella
             and Nancy F. Lanis

  10.50      Employment agreement dated as of March 5, 2003       (31)**
             between Michelle LeDell and the Company

  10.51      Employment agreement dated as of March 5, 2003       (32)**
             between Alan Jackson and the Company

  10.52      Amendment No. 1 to Curative Health Services,         (33)**
             Inc. 2001 Broad-Based Stock Incentive Plan

  10.53      Amendment No. 2 to Curative Health Services,         (34)**
             Inc. 2001 Broad-Based Stock Incentive Plan

  10.54      Credit Agreement, dated as of June 9, 2003,          (35)
             between General Electric Capital Corporation
             and the Company

  10.55      Consent and First Amendment to Credit Agreement,     (36)
             dated as of July 11, 2003, among General Electric
             Capital Corporation and the Company.

  10.56      Employment agreement dated as of September 2,        (37)**
             2003 between Anne Bruce and Company

  10.57      Second Amendment to Credit Agreement, made and       (38)
             entered into as of October 10, 2003, among
             General Electric Capital Corporation and the
             Company and the related Term Note

  10.58      Form of Acknowledgment Relating to Employment        (39)**
             Agreement, dated as of June 3, 2003, executed
             by John C. Prior


<PAGE>


Exhibit No.  Description                                          Ref. No.
-----------------------------------------------------------------------------

  10.59      Form of Acknowledgment of Assignment of              (40)**
             Employment Agreement, dated as of June 3, 2003,
             executed by Joseph L. Feshbach, William C.
             Tella, Thomas Axmacher and Nancy F. Lanis

  10.60      Form of Amendment to and Second Acknowledgment       (41)**
             Relating to Employment Agreement, dated as of
             August 19, 2003, executed by John C. Prior

  10.61      Form of Amendment to and Second Acknowledgment       (42)**
             of Assignment of Employment Agreement, dated as
             of August 19, 2003, executed by Joseph L.
             Feshbach, William C. Tella, Thomas Axmacher and
             Nancy F. Lanis

  10.62      Form of Acknowledgment of Limitations on             (43)**
             Exercise of Stock Options, dated as of June 3,
             2003, executed by Timothy I. Maudlin, Gerard
             Moufflet, Lawrence P. English, Paul S. Auerbach
             and Daniel E. Berce

  10.63      Third Amendment to Credit Agreement, made and           *
             entered into as of December 31, 2003, among
             General Electric Capital Corporation and the
             Company

     21      Subsidiaries of the Registrant                          *

     23      Consent of Ernst & Young LLP                            *

     24      Power of Attorney (included signature page)             *

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

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

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

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

   99.1      Cautionary Statements                                   *


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


<PAGE>


  *    Filed herewith.
  **   Required to be filed pursuant to Item 601(b) (10) (ii) (A) or (iii) of
       Regulation S-K.

  (1)  Incorporated by reference to similarly numbered exhibit to the Company's
       Current Report on Form 8-K dated May 30, 1996.
  (2)  Incorporated by reference to the Company's Registration Statement on Form
       S-8 (filed July 7, 1993, No. 33-65710).
  (3)  Incorporated by reference to the Company's Registration Statement on Form
       S-8 (filed October 13, 1994, No. 33-85188).
  (4)  Incorporated by reference to similarly numbered exhibit to the Company's
       Current Report on Form 8-K dated November 6, 1995.
  (5)  Incorporated by reference to Exhibit 10.25.2 to the Company's Quarterly
       Report on Form 10-Q filed for the quarter ended June 30, 1996.
  (6)  Incorporated by reference to similarly numbered exhibit to the Company's
       Annual Report on Form 10-K filed for the year ended December 31, 1997.
  (7)  Incorporated by reference to Exhibit 10.45.1 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 1998.
  (8)  Incorporated by reference to similarly numbered exhibit (unless otherwise
       indicated) to the Company's Quarterly Report on Form 10-Q for the quarter
       ended June 30, 1998.
  (9)  Incorporated by reference to similarly numbered exhibit to the Company's
       Annual Report on Form 10-K filed for the year ended December 31, 1998.
 (10)  Incorporated by reference to similarly numbered exhibit to the Company's
       Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
 (11)  Incorporated by reference to Exhibit 10.25 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended June 30, 2000.
 (12)  Incorporated by reference to Exhibit 10.26 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended June 30, 2000.
 (13)  Incorporated by reference to similarly numbered exhibit to the Company's
       Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
 (14)  Incorporated by reference to similarly numbered exhibit to the Company's
       Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
 (15)  Incorporated by reference to Exhibit 2.1 to the Company's Current Report
       on Form 8-K filed April 13, 2001.
 (16)  Incorporated by reference to Exhibit 2.2 to the Company's Current Report
       on Form 8-K filed April 13, 2001.
 (17)  Incorporated by reference to Exhibit 2.3 to the Company's Current Report
       on Form 8-K filed April 13, 2001.
 (18)  Incorporated by reference to similarly numbered exhibit to the Company's
       Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
 (19)  [Omitted]
 (20)  Incorporated by reference to similarly numbered exhibit to the Company's
       Annual Report on Form 10-K filed for the year ended December 31, 2001.
 (21)  Incorporated by reference to Exhibit 2 to the Company's Current Report on
       Form 8-K dated March 11, 2002.
 (22)  Incorporated by reference to Exhibit 99.2 to the Company's Current Report
       on Form 8-K dated June 11, 2002.
 (23)  Incorporated by reference to Exhibit 99.3 to the Company's Current Report
       on Form 8-K dated June 11, 2002.
 (24)  Incorporated by reference to Exhibit 2.2 to the Company's Current Report
       on Form 8-K dated July 2, 2002.
 (25)  Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2002.
 (26)  Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2002.
 (27)  Incorporated by reference to similarly numbered exhibit to the Company's
       Annual Report on Form 10-K filed for the year ended December 31, 2002.


<PAGE>


 (28)  Incorporated by reference to Exhibit 2.1 to the Company's Current Report
       on Form 8-K dated August 19, 2003, of Curative Health Services, Inc., the
       predecessor company
 (29)  Incorporated by reference to Exhibit 3.1 to the Company's Current Report
       on Form 8-K filed August 19, 2003)
 (30)  Incorporated by reference to Exhibit 3.2 to the Company's Current Report
       on Form 8-K filed August 19, 2003
 (31)  Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 2003.
 (32)  Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 2003.
 (33)  Incorporated by reference to Exhibit 10.3 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 2003.
 (34)  Incorporated by reference to Exhibit 10.4 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 2003.
 (35)  Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended June 30, 2003.
 (36)  Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended June 30, 2003.
 (37)  Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.
 (38)  Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.
 (39)  Incorporated by reference to Exhibit 10.3 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.
 (40)  Incorporated by reference to Exhibit 10.4 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.
 (41)  Incorporated by reference to Exhibit 10.5 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.
 (42)  Incorporated by reference to Exhibit 10.6 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.
 (43)  Incorporated by reference to Exhibit 10.7 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended September 30, 2003.