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

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FORM 10-Q

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(Mark One)

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

For the quarterly period ended September 30, 2004

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
(631) 232-7000

(Address and phone number of principal executive offices)

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

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

As of October 29, 2004, there were 12,934,794 shares of the Registrant's
Common Stock, $.01 par value, outstanding.

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INDEX



Part I Financial Information Page No.
- -------------------------------------------------------------------------------------

Item 1 Financial Statements:

Condensed Consolidated Statements of Operations 3
Three and Nine Months ended September 30, 2004 and 2003

Condensed Consolidated Balance Sheets 4
September 30, 2004 and December 31, 2003

Condensed Consolidated Statements of Cash Flows 5
Nine Months ended September 30, 2004 and 2003

Notes to Condensed Consolidated Financial Statements 6

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

Item 3 Quantitative and Qualitative Disclosures About Market Risk 26

Item 4 Controls and Procedures 27


Part II Other Information Page No.
- -------------------------------------------------------------------------------------

Item 1 Legal Proceedings 28

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 29

Item 6 Exhibits 29

Signatures 31



2


Part I Financial Information

Item 1. Financial Statements

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



Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
--------- --------- --------- ---------

Revenues:
Products $ 61,422 $ 39,215 $ 178,206 $ 127,038
Services 7,320 7,372 20,534 22,258
--------- --------- --------- ---------
Total revenues 68,742 46,587 198,740 149,296

Costs and operating expenses:
Cost of product sales 50,754 27,744 144,165 90,299
Cost of services 3,092 3,254 8,991 10,114
Selling, general and administrative 11,942 12,014 38,135 32,848
--------- --------- --------- ---------
Total costs and operating expenses 65,788 43,012 191,291 133,261
--------- --------- --------- ---------

Income from operations 2,954 3,575 7,449 16,035

Interest expense (5,569) (661) (10,178) (1,673)

Other expense (851) -- (759) --

Other income 44 3 60 7
--------- --------- --------- ---------

(Loss) income before income taxes (3,422) 2,917 (3,428) 14,369

Income tax (benefit) provision (1,355) 1,152 (1,363) 5,676
--------- --------- --------- ---------

Net (loss) income $ (2,067) $ 1,765 $ (2,065) $ 8,693
========= ========= ========= =========

Net (loss) income per common share, basic $ (.16) $ .14 $ (.16) $ .70
========= ========= ========= =========

Net (loss) income per common share, diluted $ (.16)(i) $ .13(i) $ (.16)(i) $ .64(i)
========= ========= ========= =========

Weighted average common shares, basic 13,092 12,434 13,089 12,344
========= ========= ========= =========

Weighted average common shares, diluted 13,092 14,025 13,089 13,880
========= ========= ========= =========


(i) See Note 3 for (loss) earnings per share calculation

See accompanying notes


3


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



September 30, 2004 December 31, 2003
------------------ -----------------

ASSETS
Current assets:
Cash and cash equivalents $ 3,517 $ 1,072
Accounts receivable, net 76,232 55,217
Inventories 13,205 11,237
Prepaids and other current assets 7,277 4,270
Deferred tax assets 3,680 2,984
--------- ---------
Total current assets 103,911 74,780

Property and equipment, net 10,550 7,890
Intangibles subject to amortization, net 21,143 1,463
Intangibles not subject to amortization (trade names) 1,615 682
Goodwill 256,459 147,895
Other assets 12,113 1,228
--------- ---------
Total assets $ 405,791 $ 233,938
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,664 $ 28,892
Accrued expenses and other current liabilities 25,629 11,502
Deferred taxes 1,007 1,007
Current portion of long-term liabilities 3,871 7,911
--------- ---------
Total current liabilities 50,171 49,312

Long-term liabilities 209,615 39,599
Deferred taxes 1,752 1,307
Other long-term liabilities 851 --
--------- ---------
Total long-term liabilities 212,218 40,906

Stockholders' equity:
Common stock 128 127
Additional paid in capital 116,828 115,082
Retained earnings 28,053 30,118
Notes receivable - stockholders (1,607) (1,607)
--------- ---------
Total stockholders' equity 143,402 143,720
--------- ---------

Total liabilities and stockholders' equity $ 405,791 $ 233,938
========= =========


See accompanying notes


4


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



Nine Months Ended
September 30
2004 2003
--------- ---------

OPERATING ACTIVITIES:
Net (loss) income $ (2,065) $ 8,693
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,894 1,949
Provision for doubtful accounts 1,949 2,383
Amortization of deferred financing fees 930 --
Change in fair value of interest rate swap 759 --
Changes in operating assets and liabilities, net of effects from
Specialty Infusion acquisitions:
Accounts receivable 5,581 (8,040)
Inventories 1,192 2,650
Swap interest receivable (797) --
Prepaids and other (2,946) 4
Accounts payable and accrued expenses (10,427) (6,228)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,930) 1,411

INVESTING ACTIVITIES:
Proceeds from Investment in Accordant Health Services, Inc. 2,327 --
Specialty Infusion acquisitions, net of cash acquired (154,127) (24,316)
Purchases of property and equipment (1,471) (4,181)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (153,271) (28,497)

FINANCING ACTIVITIES:
Net proceeds from long-term borrowings 173,508 --
Shares repurchased and retired -- (1,524)
Proceeds from exercise of stock options 162 3,940
Proceeds from repayment of notes receivable - stockholders -- 780
Borrowing from credit facilities 8,339 35,610
Repayments of long-term liabilities (24,363) (13,368)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 157,646 25,438
--------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,445 (1,648)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,072 2,643
--------- ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,517 $ 995
========= =========

SUPPLEMENTAL INFORMATION
Interest paid $ 1,443 $ 1,554
========= =========
Income taxes paid $ 1,017 $ 4,583
========= =========


See accompanying notes


5


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The condensed consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments and a second
quarter 2004 non-recurring revenue adjustment of approximately $1.0 million
(reduction to revenue) - see Note 10) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements for the
year ended December 31, 2003 and notes thereto contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
results of operations for the three and nine months ended September 30, 2004 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 2004.

In this quarterly report on Form 10-Q, "Curative" or the "Company" refers
collectively to Curative Health Services, Inc. and its consolidated
subsidiaries, including Critical Care Systems, Inc. ("CCS"). With the
acquisition of CCS (see Note 4), the Company repositioned its Specialty Pharmacy
Services business unit to focus on the specialty infusion market which is a
hybrid of the specialty pharmacy and traditional home infusion industries. In
connection with this repositioning, the Company changed the name of its
Specialty Pharmacy Services business unit to Specialty Infusion business unit
and the name of its Specialty Healthcare Services business unit to Wound Care
Management business unit. For ease of reference, the names of these business
units have been standardized throughout this quarterly report on Form 10-Q
regardless of whether the discussion pertains to periods prior to or after the
name changes.

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 to Employees," and related Interpretations
because the Company believes the alternate fair value accounting provided for
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.

The following table illustrates the effect on net (loss) income and (loss)
earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation for the three and nine
months ended September 30, 2004 and 2003 (in thousands, except per share data):


6


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation (continued)



Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
------------------------ ------------------------

Net (loss) income $ (2,067) $ 1,765 $ (2,065) $ 8,693
Deduct:Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 1,287 1,145 3,736 3,470
--------- --------- --------- ---------
Pro forma net (loss) income $ (3,354) $ 620 $ (5,801) $ 5,223
========= ========= ========= =========

(Loss) earnings per share:
Basic - as reported $ (.16) $ .14 $ (.16) $ .70
Basic - pro forma (.26) .05 (.44) .42

Diluted - as reported(1) $ (.16) $ .13 $ (.16) $ .64
Diluted - pro forma(1) (.26) .05 (.44) .39


(1) See Note 3 for (loss) earnings per share calculation

Note 2. Reclassifications

Certain prior year amounts in the condensed consolidated financial statements
and accompanying notes have been reclassified to conform to the current year
classifications.

Note 3. Net (Loss) Income per Common Share

Net (loss) income per common share, basic, is computed by dividing the net
(loss) income by the weighted average number of common shares outstanding. Net
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 (loss) earnings per share (in thousands):



Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
------------------ -----------------

Weighted average shares, basic 13,092 12,434 13,089 12,344
Effect of dilutive stock options and convertible notes -- 1,591 -- 1,536
------ ------ ------ ------
Weighted average shares, diluted 13,092 14,025 13,089 13,880
====== ====== ====== ======



7


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Net (Loss) Income per Common Share (continued)

Adjusted net (loss) income and net (loss) income per common share, diluted, for
the three and nine months ended September 30, 2004 and 2003 were computed as
follows (in thousands, except per share data):



Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2004 2003 2004 2003
------------------------- -------------------------

Net (loss) income, as reported $ (2,067) $ 1,765 $ (2,065) $ 8,693
Add back interest related to convertible notes,
notes, net of tax -- 41 -- 172
-------- -------- -------- --------
Adjusted net (loss) income $ (2,067) $ 1,806 $ (2,065) $ 8,865
======== ======== ======== ========

Net (loss) income per common share, diluted $ (.16)(2) $ .13(1) $ (.16)(2) $ .64(1)
======== ======== ======== ========

Weighted average shares, diluted 13,092 14,025 13,089 13,880
======== ======== ======== ========


(1) In accordance with SFAS No. 128, "Earnings Per Share," net income per
common share, diluted, for the three and nine months ended September 30,
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.

(2) Basic shares were used to calculate net loss per common share, diluted,
for the three and nine months ended September 30, 2004 as using the
effects of stock options and convertible notes would have an anti-dilutive
effect on earnings per share. If not anti-dilutive, weighted average
shares, diluted, would have been 13,526 and 13,748 for the three and nine
months ended September 30, 2004.

Note 4. Specialty Infusion Acquisitions

On February 3, 2003, the Company acquired MedCare, Inc. ("MedCare"), a specialty
pharmacy with locations in Alabama, Mississippi and West Virginia. The purchase
price for MedCare was $6.3 million. 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. A final purchase
price allocation based on fair market value of acquired assets and liabilities
has been completed.

On June 10, 2003, the Company acquired certain assets of Prescription City, Inc.
("Prescription City"), a Spring Valley, New York, specialty pharmacy business
specializing in the provision of chemotherapy and cancer drugs. The purchase
price for Prescription City was $17.5 million. Fair market valuations have not
yet been finalized and, as such, the allocation of the purchase price is
preliminary, pending a final valuation.


8


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Specialty Infusion Acquisitions (continued)

As previously disclosed, 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 has cooperated 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 has filed a complaint in the Southern
District of New York against Paul Frank and Prescription City, seeking
rescission, compensatory and punitive damages and other relief. Such litigation
is pending, and the outcome is uncertain at this time.

On April 23, 2004, the Company acquired CCS, a leading national provider of
specialty infusion pharmaceuticals and related comprehensive clinical services.
Total cash consideration was approximately $154.1 million, including working
capital adjustments of approximately $4.1 million. CCS focuses on delivering
four principal therapies: hemophilia clotting factor, intravenous immune
globulins ("IVIG"), total parenteral nutrition and anti-infective therapies. The
Company financed the acquisition of CCS with a portion of its recently issued
$185.0 million aggregate principal amount of 10.75% senior notes due 2011 and
additional borrowings under the Company's refinanced credit facility with
General Electric Capital Corporation, as agent and lender.

The Company acquired approximately $37.9 million of CCS's assets, including
$28.6 million in accounts receivable, $3.2 million in inventory and $3.3 million
in fixed assets. The Company also assumed approximately $13.9 million of CCS's
liabilities, including $1.4 million recorded in accrued expenses related to
severance costs associated with the terminations of 10 CCS employees. As of
September 30, 2004, all such costs were paid by the Company. The excess of the
acquisition cost over the fair value of identifiable tangible net assets
acquired was approximately $130.2 million, consisting of approximately $20.5
million in payor contracts and $0.2 million in covenants not to compete, which
are being amortized over 17 years and 4 years, respectively, from the date of
acquisition, and trade name and goodwill of approximately $0.9 million and
$108.6 million, respectively, which are not being amortized for book purposes
per SFAS No. 142, "Goodwill and Other Intangible Assets." Fair market valuations
have not yet been finalized and, as such, the allocation of the purchase price
is preliminary, pending completion of a final valuation.

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


9


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Specialty Infusion Acquisitions (continued)

Unaudited pro forma amounts for the three and nine months ended September 30,
2004 and 2003, assuming the specialty infusion acquisitions had occurred on
January 1, 2003 are as follows (in thousands, except per share data):



Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
--------------------------- ---------------------------

Revenues $ 68,742 $ 74,639 $ 232,290 $ 234,102
Net (loss) income $ (2,067) $ 724 $ (4,969) $ 4,956
Net (loss) income per share, diluted $ (.16)(2) $ .05(1) $ (.38)(2) $ .37(1)


(1) Calculated under the "as if converted" method. See Note 3.

(2) Basic shares were used as using the effects of stock options and
convertible notes would have an anti-dilutive effect on earnings per
share.

The pro forma amounts for the three and nine months ended September 30, 2004 and
2003 give effect to: (i) the Company's issuance of $185.0 million aggregate
principal amount of 10.75% senior notes due 2011; (ii) the refinancing of the
Company's revolving credit facility and (iii) specialty infusion acquisitions as
if these transactions occurred on January 1, 2003. The above pro forma amounts
include adjustments related to the CCS acquisition, including, but not limited
to, the amortization of identifiable intangibles related to a preliminary
purchase price allocation, additional compensation expense and retention
incentives, and pro forma tax adjustments.

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

Note 5. Segment Information

The Company adheres to the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company has two
reportable segments: Specialty Infusion and Wound Care Management. In its
Specialty Infusion business unit, the Company purchases 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, and other support services, including
education, reimbursement and the provision or coordination of injection or
infusion services related to, these biopharmaceutical products, including
Synagis(R) for the prevention of respiratory syncytial virus. Revenues from
Synagis(R) sales for the three and nine months ended September 30, 2004 were
approximately $0.7 million and $25.3 million, respectively. 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.


10


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Segment Information (continued)

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

The Company evaluates segment performance based on income from operations. For
the three months ended September 30, 2004, management estimated that corporate
general and administrative expenses allocated to the reportable segments were
63% for Specialty Infusion and 37% for Wound Care Management. For the nine
months ended September 30, 2004, management estimated that corporate general and
administrative expenses allocated to the reportable segments were 62% for
Specialty Infusion and 38% for Wound Care Management. Intercompany transactions
were eliminated to arrive at consolidated totals.

The following tables present the results of operations and total assets of the
reportable segments of the Company at and for the three and nine months ended
September 30, 2004 and 2003 (in thousands):

At and for the three months ended September 30, 2004
----------------------------------------------------
Specialty Wound Care
Infusion Management Total
--------- ---------- --------
Revenues $ 61,422 $ 7,320 $ 68,742
Income from operations $ 1,166 $ 1,788 $ 2,954
Total assets $376,511 $ 29,280 $405,791

At and for the three months ended September 30, 2003
----------------------------------------------------
Specialty Wound Care
Infusion Management Total
--------- ---------- --------
Revenues $ 39,215 $ 7,372 $ 46,587
Income from operations $ 3,027 $ 548 $ 3,575
Total assets $202,772 $ 16,599 $219,371

At and for the nine months ended September 30, 2004
----------------------------------------------------
Specialty Wound Care
Infusion Management Total
--------- ---------- --------
Revenues $178,206 $ 20,534 $198,740
Income from operations $ 4,183 $ 3,266 $ 7,449
Total assets $376,511 $ 29,280 $405,791

At and for the nine months ended September 30, 2003
----------------------------------------------------
Specialty Wound Care
Infusion Management Total
--------- ---------- --------
Revenues $127,038 $ 22,258 $149,296
Income from operations $ 13,669 $ 2,366 $ 16,035
Total assets $202,772 $ 16,599 $219,371


11


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Employee and Facility Termination Costs

In 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
nullified 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 establishes
fair value as the objective for initial measurement of liabilities related to
exit or disposal activities and requires that such liabilities be recognized
when incurred.

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

The following provides a reconciliation of the related accrued costs associated
with the pharmacy consolidation at and for the three and nine months ended
September 30, 2004 (in thousands):



At and for the three months ended September 30, 2004
----------------------------------------------------
Beginning Costs Paid or Ending
Balance Otherwise Settled Balance
--------- ----------------- -------

Employee termination costs $ 39 $ 39 $ --
Facility termination costs 311 107 204
---- ---- ----
$350 $146 $204
==== ==== ====


At and for the nine months ended September 30, 2004
----------------------------------------------------
Beginning Costs Paid or Ending
Balance Otherwise Settled Balance
--------- ----------------- -------

Employee termination costs $ 39 $ 39 $ --
Facility termination costs 431 227 204
---- ---- ----
$470 $266 $204
==== ==== ====


In 2004, the Company expects to pay the remainder of these accrued costs.

Note 7. Changes in Capital Structure

During the first nine months of 2004, the Company had the following significant
changes in capital structure:

Notes Converted into Common Stock. In January 2004, certain selling shareholders
of Infinity Infusion Care, Ltd. ("Infinity") exercised their rights under
convertible notes and converted approximately $1.2 million of such notes into
72,715 shares of the Company's common stock.


12


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Derivative Instruments, Hedging Activities and Debt

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

In conjunction with the acquisition of CCS on April 23, 2004, the Company issued
$185.0 million aggregate principal amount of 10.75% senior subordinated notes
due May 1, 2011 (the "Notes") which bear interest at 10.75%, payable
semi-annually. In addition, the Company entered into a $90.0 million notional
amount interest rate swap agreement. This agreement is used by the Company to
reduce interest expense and modify exposure to interest rate risk by converting
its fixed rate debt to a floating rate liability. Under the agreement, the
Company receives, on the portion of the senior subordinated notes hedged, 10.75%
fixed rate amounts in exchange for floating interest rate (the 6-month LIBOR
rate plus a premium) payments over the life of the agreement without an exchange
of the underlying principal amount. The swap matures on May 2, 2011.

Due to hedge ineffectiveness, changes in fair value of the swap are recognized
in earnings, and the carrying value of the Company's debt is not marked to fair
value. The fair value of the swap agreement as of September 30, 2004 was
approximately $0.8 million and was recorded in other long-term liabilities on
the balance sheet and in other expense on the statement of operations. The
Company is exposed to the risk of interest rate changes and credit risk in the
event of nonperformance by the counterparties. However, the Company believes the
risk of nonperformance is low.

Also in conjunction with the acquisition of CCS on April 23, 2004, the Company
completed the refinancing of its existing credit facility with General Electric
Capital Corporation, as agent and lender to a $40.0 million senior secured
revolving credit facility to support permitted acquisitions and future working
capital and general corporate needs. At that time, the Company paid off its
existing revolver and term loan in the amounts of $13.6 million and $24.0
million, respectively. The amended and restated revolving credit facility is an
asset backed facility, with availability based upon the Company's balance of
eligible accounts receivable and inventory, offset by approximately $7.5 million
held against that availability as a reserve for the Company's swap agreement. A
commitment fee of approximately $0.9 million was paid upon closing of the
amended and restated agreement, the cost of which will be amortized over the
remaining term of the loan. As of September 30, 2004, the Company had
approximately $20.4 million of availability under its revolving credit facility.
The facility also contains certain financial covenants which are measured
quarterly during the term of the facility which expires in July, 2008. As of
September 30, 2004, the Company was in compliance with those covenants.


13


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Note Guarantees

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

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

Note 10. Medi-Cal Reimbursement Reduction

Approximately 10% and 15% of the Company's total revenues for the three and nine
months ended September 30, 2004, respectively, were derived from California
state funded health programs. The California state legislature in 2003 passed
legislation that modifies the reimbursement methodology for blood-clotting
factors under various California state funded health programs. Under the new
reimbursement methodology, blood-clotting factor products will be reimbursed
based upon Average Selling Price ("ASP"), as provided by the manufacturers, plus
20%.

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

In May 2004, DHS issued a provider bulletin notifying providers that the ASP
plus 20% methodology would be implemented for services provided on and after
June 1, 2004, but did not specify actual reimbursement rates. On or about July
9, 2004, DHS published a notice in the California Regulatory Notice Register
advising that persons wanting to find out the latest rates could obtain the
information from Electronic Data Systems. The revised rates have resulted in
substantially greater cuts than the guidance previously provided by DHS
representatives had indicated, amounting to approximately a 30-40% cut from
rates previously in effect.


14


Curative Health Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Medi-Cal Reimbursement Reduction (continued)

On May 27, 2004, a lawsuit was filed on behalf of two individual Medi-Cal
recipients with hemophilia in the United States District Court for the Eastern
District of California against the State of California relating to the
implementation of the new ASP reimbursement methodology, alleging, among other
things, that a severe reduction in reimbursement rates would threaten the
ability of Medi-Cal recipients with hemophilia to have adequate access to blood
clotting factor. The Court denied an application for a temporary restraining
order in the case on the grounds that, because DHS had not revealed the new
rates, there was insufficient evidence that a withdrawal of blood clotting
factor providers from the Medi-Cal program was imminent. This case is still
pending. In addition, on June 10, 2004, the Company filed a lawsuit in the
Superior Court for the County of Sacramento relating to the failure of DHS to
disclose payment rates and the detailed methodology utilized to determine the
rates, and its failure to comply with certain applicable federal procedural
requirements relating to the reimbursement rates. DHS removed the case to the
United States District Court for the Eastern District of California, which
subsequently ruled that the removal was improper and remanded the case back to
the Superior Court. The Company is currently engaged in settlement discussions
with the State that may result in resolution of one or both of these cases, but
at this time, the ultimate outcomes of these litigations are uncertain.


15


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

Overview

Curative Health Services, Inc., through its two business units, Specialty
Infusion and Wound Care Management, seeks to deliver high-quality care and
clinical results that result in high patient satisfaction for patients
experiencing serious or chronic medical conditions.

Curative's Specialty Infusion business unit provides biopharmaceutical and
compounded pharmaceutical products and related clinical services to patients
with chronic and critical disease states to assist these patients with their
intensive disease management needs. The Company purchases various
biopharmaceutical and other pharmaceutical 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 and other pharmaceutical
products. The 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, chronic or severe infections,
gastrointestinal illnesses that prohibit oral digestion and other severe
conditions requiring nutritional support, respiratory syncytial virus, cancer,
rheumatoid arthritis, hepatitis C, multiple sclerosis or growth hormone
deficiency. Examples of biopharmaceutical products used by the Company's
patients include hemophilia clotting factor, IVIG, MedImmune, Inc.'s Synagis(R)
and Centocor, Inc.'s Remicade(R). Examples of other pharmaceutical products used
by the Company's patients include compounded pharmaceuticals such as total
parenteral nutrition products and anti-infectives. As of September 30, 2004, the
Company had 407 payor contracts and 20 retail pharmacy contracts and provided
services or products in approximately 40 states. The Specialty Infusion business
unit provides services directly to patients and caregivers and delivers its
products via overnight mail or courier and through its retail pharmacies.

The following provides approximate percentages of Specialty Infusion patient
revenues for the three and nine months ended September 30, 2004 and December 31,
2003:

Three Months Ended Nine Months Ended Year Ended
September 30, 2004 September 30, 2004 December 31, 2003
------------------ ------------------ -----------------

Private Payors 61.4% 53.5% 42.5%
Medicaid 29.6% 39.3% 51.0%
Medicare 8.9% 7.2% 6.5%

Curative's Wound Care Management business unit is a leading disease management
company specializing in chronic wound care management. The Wound Care Management
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. 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 Company's
treatment procedures are designed to achieve positive results for wound healing
based on significant experience in the field. The Company maintains a
proprietary database of patient results that it has collected since 1988
containing over 470,000 patient cases. The Company's treatment procedures, which
are based on extensive patient data, have allowed the Company to achieve an
overall rate of healing of approximately 85% for patients completing therapy. As
of September 30, 2004, the Wound Care Center(R) network consisted of 93
outpatient clinics located on or near campuses of acute care hospitals in 30
states.


16


Recent Developments

California Medi-Cal Reimbursement Reduction

Approximately 10% and 15% of the Company's total revenues for the three and nine
months ended September 30, 2004, respectively, were derived from California
state funded health programs. The California state legislature in 2003 passed
legislation that modifies the reimbursement methodology for blood-clotting
factors under various California state funded health programs. Under the new
reimbursement methodology, blood-clotting factor products will be reimbursed
based upon ASP, as provided by the manufacturers, plus 20%.

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

In May 2004, DHS issued a provider bulletin notifying providers that the ASP
plus 20% methodology would be implemented for services provided on and after
June 1, 2004, but did not specify actual reimbursement rates. On or about July
9, 2004, DHS published a notice in the California Regulatory Notice Register
advising that persons wanting to find out the latest rates could obtain the
information from Electronic Data Systems. The revised rates have resulted in
substantially greater cuts than the guidance previously provided by DHS
representatives had indicated, amounting to approximately a 30-40% cut from
rates previously in effect.

On May 27, 2004, a lawsuit was filed on behalf of two individual Medi-Cal
recipients with hemophilia in the United States District Court for the Eastern
District of California against the State of California relating to the
implementation of the new ASP reimbursement methodology, alleging, among other
things, that a severe reduction in reimbursement rates would threaten the
ability of Medi-Cal recipients with hemophilia to have adequate access to blood
clotting factor. The Court denied an application for a temporary restraining
order in the case on the grounds that, because DHS had not revealed the new
rates, there was insufficient evidence that a withdrawal of blood clotting
factor providers from the Medi-Cal program was imminent. This case is still
pending. In addition, on June 10, 2004, the Company filed a lawsuit in the
Superior Court for the County of Sacramento relating to the failure of DHS to
disclose payment rates and the detailed methodology utilized to determine the
rates, and its failure to comply with certain applicable federal procedural
requirements relating to the reimbursement rates. DHS removed the case to the
United States District Court for the Eastern District of California, which
subsequently ruled that the removal was improper and remanded the case back to
the Superior Court. The Company is currently engaged in settlement discussions
with the State that may result in resolution of one or both of these cases, but
at this time, the ultimate outcomes of these litigations are uncertain.


17


Recent Developments (continued)

Change in Medicare Reimbursement Methodology

In November 2004, the Centers for Medicare & Medicaid Services ("CMS") posted
the Final Physician Payment Rule which contains the final rule for reimbursement
for blood clotting factor. The new Medicare reimbursement methodology will be
ASP plus 6% plus a $0.14 per unit dispensing fee. This rule will be effective
January 1, 2005. Under the previous methodology, the Company was reimbursed at
95% of average wholesale price. The new methodology will result in reduced
reimbursement of approximately 12%.

Critical Accounting Policies and Estimates

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

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

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

Inventories. Inventories are carried at the lower of cost or market on a first
in, first out basis. Inventories consist of high-cost biopharmaceutical and
pharmaceutical products that, in many cases, require refrigeration or other
special handling. As a result, inventories are subject to spoilage or shrinkage.
On a quarterly basis, the Company performs a physical inventory and determines
whether any shrinkage or spoilage adjustments are needed. Although the Company
believes its inventories balance at September 30, 2004 is 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.


18


Critical Accounting Policies and Estimates (continued)

Deferred taxes. The Company had approximately $3.7 million in deferred tax
assets at September 30, 2004 and approximately $2.8 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 separately
identifiable intangibles, such as pharmacy and customer relationships and
covenants not to compete. The Company accounts for goodwill and intangible
assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
which requires goodwill and intangible assets with indefinite lives no longer be
amortized but rather reviewed annually, or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that are not
deemed to have an indefinite life are amortized over their useful lives. In
assessing the recoverability of the Company's goodwill and intangibles, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or assumptions change in the future, the Company may need to record an
impairment charge for these assets. An impairment charge would reduce operating
income in the period it was determined that the charge was needed.

Derivative Instruments and Hedging Activities. The Company has an interest rate
swap covering a portion of its fixed rate senior notes. The Company accounts for
the swap instrument under the provisions of SFAS No. 133, as amended by SFAS
Nos. 138 and 149, which require that all derivative financial instruments be
recorded on the consolidated balance sheets at fair value as either assets or
liabilities. Adjustments in fair value are recognized in earnings in the period
of the change. Due to hedge ineffectiveness, changes in fair value of the swap
are recognized in earnings, and the carrying value of the Company's debt is not
marked to fair value. The Company is exposed to the risk of interest rate
changes and credit risk in the event of nonperformance by the counterparties.
However, the Company believes the risk of nonperformance is low.


19


Key Performance Indicators

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



For the nine months ended September 30
--------------------------------------------------------
2004 2003 $ Change % Change
-------- -------- -------- --------

Specialty Infusion revenues $178,206 $127,038 $ 51,168 40%
Wound Care Management revenues 20,534 22,258 (1,724) (8%)
-------- -------- --------
Total revenues $198,740 $149,296 $ 49,444 33%

Specialty Infusion revenues to total 90% 85%
Wound Care Management revenues to total 10% 15%
-------- --------
Total 100% 100%

Specialty Infusion gross margin $ 34,041 $ 36,739 $ (2,698) (7%)
Wound Care Management gross margin 11,543 12,144 (601) (5%)
-------- -------- --------
Total gross margin $ 45,584 $ 48,883 $ (3,299) (7%)

Specialty Infusion gross margin % 19% 29%
Wound Care Management gross margin % 56% 55%
Total gross margin % 23% 33%

Specialty Infusion - SG&A $ 14,970 $ 9,067 $ 5,903 65%
Wound Care Management - SG&A 3,030 3,499 (469) (13%)
Corporate - SG&A 13,809 14,950 (1,141) (8%)
Charges(1) - SG&A 6,326 5,332 994 19%
-------- -------- --------
Total SG&A $ 38,135 $ 32,848 $ 5,287 16%

Operating margin $ 7,449 $ 16,035 $ (8,586) (54%)
Operating margin % 4% 11%


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


20


Results of Operations

Revenues. The Company's revenues for the third quarter of 2004 increased $22.2
million, or 48%, to $68.7 million compared to $46.6 million for the third
quarter of the prior fiscal year. For the first nine months of 2004, revenues
increased $49.4 million, or 33%, to $198.7 million from $149.3 million for the
same period in 2003. The increases in revenues for the three and nine months of
2004 compared to the same periods in 2003 were the result of the 2004
acquisition of CCS and the specialty infusion acquisitions the Company completed
in 2003, offset by a reduction in hemophilia revenue related to the reduced
reimbursement from California state programs and a slight reduction in service
revenues in the Wound Care Management business unit.

Product revenues, attributed entirely to the Specialty Infusion business unit,
increased $22.2 million, or 57%, to $61.4 million in the third quarter of 2004
from $39.2 million in the third quarter of 2003. For the first nine months of
2004, product revenues increased $51.2 million, or 40%, to $178.2 million
compared to $127.0 million for the same period in 2003. The increases in product
revenues for the three and nine months of 2004 compared to the same periods in
2003 were primarily attributable to the 2004 acquisition of CCS and the
specialty infusion acquisitions the Company completed in 2003, offset by a
reduction in hemophilia revenue related to the reduced reimbursement from
California state programs and IVIG sales. Product revenues for the three and
nine months ended September 30, 2004 and 2003 included the following:



Three Months Ended September 30
-------------------------------------------------
2004 2003
---------------------- ----------------------
% of % of
Specialty Specialty
In Infusion In Infusion
millions Revenues millions Revenues
-------- --------- -------- ---------

Hemophilia $ 28.2 46% $ 28.3 72%
IVIG, infusables and injectables(1) 7.8 13% 4.9 13%
Antibiotics 9.8 16% -- --
Synagis(R) 0.7 1% 0.5 1%
Oncology 1.8 3% 3.7 9%
TPN 3.8 6% -- --
Other(2) 9.3 15% 1.8 5%
------ ------ ------ ------
Total Specialty Infusion revenues $ 61.4 100% $ 39.2 100%
====== ====== ====== ======


Nine Months Ended September 30
-------------------------------------------------
2004 2003
---------------------- ----------------------
% of % of
Specialty Specialty
In Infusion In Infusion
millions Revenues millions Revenues
-------- --------- -------- ---------

Hemophilia $ 85.6 48% $ 85.5 67%
IVIG, infusables and injectables(1) 19.5 11% 13.6 11%
Antibiotics 17.0 9% -- --
Synagis(R) 25.3 14% 18.8 15%
Oncology 5.2 3% 4.6 4%
TPN 6.9 4% -- --
Other(2) 18.7 11% 4.5 3%
------ ------ ------ ------
Total Specialty Infusion revenues $178.2 100% $127.0 100%
====== ====== ====== ======



21


(1) Includes IVIG, Remicade(R) and growth hormone products

(2) Other includes, but is not limited to, products such as oral medications,
Avonex(R), Rebetron(R), Betaseron(R) and Rebif(R)

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

Service revenues, attributed entirely to the Wound Care Management business
unit, decreased slightly (1%) to $7.3 million in the third quarter of 2004 from
$7.4 million in the third quarter of 2003. For the first nine months of 2004,
service revenues decreased $1.7 million, or 8%, to $20.5 million compared to
$22.3 million for the same period in 2003. The decreases in service revenues for
the three and nine months ended September 30, 2004 were primarily attributable
to contract renegotiations resulting in lower average revenues per program and
the conversion over the last 12 months of 3 under arrangement programs to
management service programs where revenues are lower. For the third quarter of
2004, the Company signed 2 new Wound Care Management contracts and 3 contracts
were terminated. For the first nine months of 2004, the Company signed 11 new
contracts and 6 contracts were terminated. The continued termination,
non-renewal or renegotiations of a material number of management contracts or
the inability to sign new contracts could result in a continued decline in the
Company's Wound Care Management business unit revenue.

Cost of Product Sales. Cost of product sales, attributed entirely to the
Specialty Infusion business unit, increased $23.0 million, or 83% to $50.8
million in the third quarter 2004 from $27.7 million in the third quarter of
2003. For the first nine months of 2004, cost of product sales increased $53.9
million, or 60%, to $144.2 million compared to $90.3 million for the same period
in 2003. The increases in cost of product sales for the three and nine months
ended September 30, 2004 were primarily attributable to the 2004 acquisition of
CCS and the specialty infusion acquisitions the Company completed in 2003. As a
percentage of product revenues, cost of product sales for the third quarter of
2004 was 83% compared to 71% for the same period in 2003 and 81% for the first
nine months of 2004 compared to 71% for the same period in 2003. The increased
percentage for the third quarter and the first nine months of 2004 was primarily
attributable to the acquisition of CCS which resulted in the reduction of the
percentage of the Company's revenues derived from hemophilia products, which
have a lower product cost as a percentage of revenue, as well as the reduction
in hemophilia revenue related to the reduced reimbursement from California state
programs.

Cost of Services. Cost of services, attributed entirely to the Wound Care
Management business unit, decreased $0.2 million, or 5%, to $3.1 million in the
third quarter of 2004 from $3.3 million in the third quarter of 2003. For the
first nine months of 2004, cost of services decreased $1.1 million, or 11%, to
$9.0 million compared to $10.1 million in the third quarter of 2003. The
decreases in cost of services for the three and nine months ended September 30,
2004 were primarily attributed to the conversion over the last 12 months of 3
under arrangement programs to management service programs where expenses are
lower. As a percentage of service revenues, cost of services for the third
quarter of 2004 was 42% compared to 44% for the same period in 2003 and 44% for
the first nine months of 2004 compared to 45% for the same period in 2003.

Selling, General and Administrative. Selling, general and administrative
expenses decreased by 1% to $11.9 million for the third quarter of 2004 from
$12.0 million for the same period in 2003. For the third quarter of 2004,
selling, general and administrative expenses consisted of $5.7 million related
to the Specialty Infusion business, $1.0 million related to the Wound Care
Management business, $3.9 million related to corporate services and $1.3 million
in charges related to integration costs of the CCS acquisition and litigation
costs associated with Prescription City and hemophilia reimbursement. The $1.3
million in charges were $0.5 million less than the $1.8 million in charges
recorded in the third


22


quarter of 2003, which consisted of costs associated with an uncompleted
convertible note offering, severance related to executive departures, costs
related to an uncompleted acquisition and costs related to a corporate legal
structure reorganization. As a percentage of revenues, selling, general and
administrative expenses were 17% in the third quarter of 2004 compared to 26%
for same period in 2003.

For the first nine months of 2004, selling, general and administrative expenses
increased $5.3 million, or 16%, to $38.1 million from $32.8 million for the same
period in 2003 and consisted of $15.0 million related to the Specialty Infusion
business, $3.0 million related to the Wound Care Management business, $13.8
million related to corporate services and $6.3 million in charges related to
integration costs of the CCS acquisition and litigation costs associated with
Prescription City and Medi-Cal hemophilia reimbursement. The increase of $5.3
million was due to the 2004 acquisition of CCS, acquisitions completed in 2003,
growth in corporate departments to support these acquisitions and $6.3 million
in charges in the first nine months of 2004 compared to $5.3 million in charges
for the same period of 2003. The charges incurred in the first nine months of
2003 were related to an uncompleted convertible note offering, severance related
to executive departures, an uncompleted acquisition, a corporate legal structure
reorganization, early termination of the Company's previous credit line and
costs of the Company's consolidation of its pharmacy operations. As a percentage
of revenues, selling, general and administrative expenses were 19% for the first
nine months of 2004 compared to 22% for the same period in 2003.

Net (Loss) Income. Net loss was $2.1 million, or ($0.16) per diluted share, in
the third quarter of 2004 compared to net income of $1.8 million, or $0.13 per
diluted share, in the third quarter of 2003. For the first nine months of 2004,
net loss was $2.1 million, or $(0.16) per diluted share, compared to net income
of $8.7 million, or $0.64 per diluted share, for the same period in 2003. The
decreases for the third quarter and first nine months of 2004 were primarily
attributed to the increase in charges incurred in 2004, increased interest
expense related to the Notes and the reductions in hemophilia revenue related to
the reduced reimbursement from California state programs and IVIG sales.

Liquidity and Capital Resources

Working capital was $53.7 million at September 30, 2004 compared to $25.5
million at December 31, 2003. Total cash and cash equivalents at September 30,
2004 was $3.5 million. The ratio of current assets to current liabilities was
2.1 to 1 at September 30, 2004 and 1.5 to 1 at December 31, 2003.

Cash flows used in operating activities for the nine months ended September 30,
2004 totaled $1.9 million, primarily attributable to the net loss for the
period, a decrease in accounts payable and accrued expenses of $10.4 million and
an increase in prepaids and other of $2.9 million, offset by depreciation and
amortization of $3.9 million, doubtful accounts provision of $1.9 million, a
decrease of accounts receivable of $5.6 million and a decrease in inventories of
$1.2 million. The increase in prepaids and other is primarily the result of a
third quarter deposit made with a supplier, the purpose of which is to improve
the payment discount percentage the Company receives. This deposit is refundable
at any time.

Cash flows used in investing activities totaled $153.3 million attributable to
$154.1 million cash used in the CCS acquisition and $1.5 million used in fixed
asset purchases, offset by proceeds of approximately $2.3 million from Accordant
Health Services.

Cash flows provided by financing activities totaled $157.6 million attributable
to $173.5 million proceeds from long-term borrowings and $0.2 million in
proceeds from the exercise of stock options, offset by $16.0 million used in
repayments of debt obligations.


23


During the first nine months of 2004, the Company experienced a net increase in
accounts receivable of $21.0 million attributable to the acquisition of CCS and
an increase in accounts receivable days outstanding. Days sales outstanding were
100 days at September 30, 2004, as compared to 78 days at December 31, 2003. At
September 30, 2004, days sales outstanding for the Specialty Infusion business
unit was 104 days and for the Wound Care Management business unit, days sales
outstanding was 65 days compared to 79 days and 70 days, respectively, at
December 31, 2003. The increase in days sales outstanding was attributed to the
inclusion of CCS, which historically has experienced higher days sales
outstanding, as well as a continued slowdown from California state payors.

As of September 30, 2004, the Company's current portion of long-term liabilities
of $3.9 million included $2.0 million representing the current portion of the
Department of Justice ("DOJ") obligation, $0.9 million representing the current
portion of a convertible note payable used in connection with the purchase of
Apex Therapeutic Care, Inc. ("Apex") in February 2002 and $1.0 million
representing the note payable used in connection with the purchase of certain
assets of Prescription City in June 2003. At September 30, 2004, the Company's
long-term liabilities of $209.6 million included $185.0 million in senior notes
payable $19.6 million in borrowed funds from the Company's commercial lender,
$0.5 million related to the DOJ obligation, a $1.5 million promissory note
representing the long-term portion of the convertible note used in the purchase
of Apex and $3.0 million in a convertible note payable related to the purchase
of Home Care of New York, Inc. in October 2002.

The Company's current portion of long-term liabilities and long-term liabilities
increased $166.0 million to $213.5 million at September 30, 2004 compared to
$47.5 million at December 31, 2003. The increase is due to the Company's
issuance of $185.0 million aggregate principal amount of 10.75% senior notes due
2011 pursuant to Rule 144A and Regulation S under the Securities Act of 1933,
offset by the conversion of $1.2 million in the first quarter of 2004 related to
the note the Company issued pursuant to its acquisition of Infinity Infusion
Care, Ltd. and a lower balance on the revolving credit facility.

The Company's longer term cash requirements include working capital for the
expansion of its Specialty Infusion business and for acquisitions. Other cash
requirements are anticipated for capital expenditures in the normal course of
business, including the acquisition of software, computers and equipment related
to the Company's management information systems. As of September 30, 2004, the
Company had a $2.5 million obligation, payable over approximately two years, to
the DOJ related to the settlement of its litigation previously disclosed, as
well as senior notes bank debt and convertible and promissory notes totaling
$211.0 million payable over various periods through 2011. In April 2004, the
Company completed the acquisition of CCS for total consideration of
approximately $154.1 million in cash. The purchase price was paid with the
proceeds from an offering of $185.0 million aggregate principal amount of 10.75%
senior notes due 2011 offered to eligible purchasers pursuant to Rule 144A and
Regulation S under the Securities Act of 1933. Concurrent with the transaction
closing, the Company also completed the refinancing of its existing credit
facility with General Electric Capital Corporation, as agent and lender to a
$40.0 million senior secured revolving credit facility to support permitted
acquisitions, and future working capital and general corporate needs. As of
September 30, 2004, the Company had approximately $20.4 million of availability
under its revolving credit facility. The credit facility contains both
financial and non-financial covenants. The financial covenants include a total
leverage ratio, fixed charges coverage ratio, senior secured leverage ratio,
capital expenditures and accounts receivable days outstanding limits. In the
event of default under any of these covenants, the Company may seek a waiver
or amendment of the covenants. There can be no assurance, however, that such
a waiver or amendment will be obtained. In the event of any such default, the
lender may suspend or terminate advances under the credit facility, or the
lender may accelerate the debt and demand immediate payment of any outstanding
balance. An acceleration of the debt under the Company's senior secured
credit facility would result in an event of default under the indenture for
the Company's Notes due 2011 as well. The Company was in compliance with the
covenants under the credit facility at September 30, 2004.


24



The Company anticipates a reduction in its days sales outstanding over the
next twelve months and expects that this reduction will improve its cash
flow from operations. The Company is in negotiations with the State of
California and believes it will see an improvement in collections from the
State's programs, particularly as the State moves to electronic payment, which
is currently scheduled to occur in 2005. Additionally, as it enters into
the Synagis(R) season (approximately October through May), typically its
strongest cash flow period, the Company expects a further reduction in days
sales outstanding. There can be no assurances, however, that the Company
will be successful in reducing its days sales outstanding or improving
its cash flow from operations. If the Company is not successful in improving
its operating cash flow, it may be necessary to reduce operating costs, capital
expenditures or pursue additional sources of debt and/or equity financing.

The Company believes that, based on the above as well as its current business
plan, its expected operating cash flow and existing credit facilities will be
sufficient to meet working capital needs and a minimal number of acquisitions
over the next twelve months. Any acquisitions of substantial size will require
the Company to increase its credit facilities, issue equity or offer some
combination of both debt and equity.


Cautionary Statement

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include statements regarding
intent, belief or current expectations of the Company and its management. These
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause the Company's actual results
to differ materially from the results discussed in these statements. Factors
that might cause such differences include, but are not limited to, those
described under the heading, "Critical Accounting Policies and Estimates"
herein, or those described in Exhibit 99.1 to this Form 10-Q and other factors
described in the Company's future filings with the SEC.



25



Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

For non-trading purposes, the Company is subject to interest rate risk under
its current revolving credit facility and an interest rate swap on a portion
of its fixed rate debt. In conjunction with the acquisition of CCS on
April 23, 2004, the Company completed the refinancing of its existing credit
facility with General Electric Capital Corporation, as agent and lender to
a $40.0 million senior secured revolving credit facility. Loans under this
credit facility may, at the Company's option, be obtained as Base Rate loans,
LIBOR loans or any combination thereof. This credit facility will terminate on
April 23, 2009. In the second quarter of 2004, the Company entered into a
$90.0 million notional amount interest rate swap on a portion of its fixed rate
debt. This swap agreement is used by the Company to reduce interest expense and
modify exposure to interest rate risk by converting its fixed rate debt to a
floating rate liability. Under the swap agreement, the Company receives, on the
portion of the senior subordinated notes hedged, 10.75% fixed rate amounts in
exchange for floating interest rate (the 6-month LIBOR rate plus a premium)
payments over the life of the agreement without an exchange of the underlying
principal amount. The swap matures on May 2, 2011. Due to hedge ineffectiveness,
changes in fair value of the swap are recognized in earnings, and the carrying
value of the Company's debt is not marked to fair value. The Company is
exposed to credit risk in the event of nonperformance by the counterparties.
However, the Company believes the risk of nonperformance is low.

The following table provides information about the Company's senior secured
revolving credit facility and the interest rate swap, both of which are
sensitive to changes in interest rates (dollars in millions):



Outstanding Balances
September 30, 2004 December 31,
-------------------- ---------------------------------------------------------
Fair There-
Balance Value 2005 2006 2007 2008 2009 after
--------- ------- ------ ------ ------ ------ ------ -------


Liability:
Long-term Debt (Revolver)
Variable Rate ($US)(1) $ 20.0 $ 20.0 $ 20.0 $ 20.0 $ 20.0 $ 20.0 $ - $ -
Average interest rate(2) 5.34% 5.34% 5.34% 5.34% 5.34%

Interest Rate Derivative:
Fixed to Variable ($US) $ 0.8 $ 0.8 $ 90.0 $ 90.0 $ 9.0 $ 90.0 $ 90.0 $ 90.0
Average pay rate(3) 8.55% 8.55% 8.55% 8.55% 8.55% 8.55% 8.55%
Average receivable rate(3) 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75%


(1) The senior secured revolving credit facility terminates on April 23, 2009
(2) The LIBOR interest rate in effect at September 30, 2004 was the 30-day
LIBOR rate of 1.84% plus 3.5%. As of November 8, 2004, the 30-day LIBOR
rate was 2.09%. On a monthly basis, a Base Rate of prime plus 2.25%
is applied to the difference between the LIBOR period loan and the
actual outstanding balance of the revolving facility. As of September 30,
2004, the prime rate in effect was 4.75%. In addition to the LIBOR
and Base Rate interest rate, there is a monthly unused line fee of
between 0.5% and 0.75% of the unused balance on the facility.
(3) The average pay rate assumes a consistent rate of 8.55%. The average
receivable rate is based on a fixed rate of 10.75%.




26



Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-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, the Company's disclosure controls and procedures were effective in
timely alerting them to the material information relating to the Company (or its
consolidated subsidiaries) required to be included in the reports the Company
files or submits under the Exchange Act.

Changes in Internal Controls

During the fiscal quarter ended September 30, 2004, there has been no change in
the Company's 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, the Company's internal control over financial
reporting.


27


Curative Health Services, Inc. and Subsidiaries

Part II Other Information

Item 1. 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 or
results of operations.

Prescription City Litigation

As previously disclosed, 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 has cooperated 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 has filed a complaint in the Southern
District of New York against Paul Frank and Prescription City, seeking
rescission, compensatory and punitive damages and other relief. Such litigation
is pending, and the outcome is uncertain at this time.

California DHS Litigation

Also as previously disclosed, on June 10, 2004, the Company filed a lawsuit in
the Superior Court for the County of Sacramento relating to the failure of DHS
to disclose payment rates and the detailed methodology utilized to determine the
rates, and its failure to comply with certain applicable federal procedural
requirements relating to the reimbursement rates. DHS removed the case to the
United States District Court for the Eastern District of California, which
subsequently ruled that the removal was improper and remanded the case back to
the Superior Court. The Company is currently engaged in settlement discussions
with the State that may result in resolution of one or both of these cases, but
at this time, the ultimate outcomes of these litigations are uncertain.


28


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c)

Issuer Purchases of Equity Securities
Third Quarter 2004



(d) Maximum
Number (or
(c) Total Number Approximate
of Shares Dollar Value) of
(a) Total Purchased as Shares that May
Number of (b) Average Part of Publicly Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans or
Period(i) Purchased per Share or Programs Programs
- -------------------------------------------------------------------------------------------------------------------------

Month #1
(July 1 to July 31) -- -- -- --
Month #2
(August 1 to August 31) 183,206 $ 5.91 183,206(i) $ --(i)
Month #3
(September 1 to September 30) -- -- -- --
------- ------- ------- -------
Total 183,206 $ 5.91 183,206 $ --
======= ======= ======= =======


- ----------
(i) Pursuant to the Employment Agreement (the "Agreement") between Paul F.
McConnell and the Company, dated April 23, 2004, which agreement is part
of the negotiated transaction of the Company's acquisition of CCS and
which is filed with the Company's Current Report on Form 8-K on May 4,
2004, Mr. McConnell agreed to purchase on the open market with his own
personal funds, subject to availability, applicable laws and the Company's
trading policies, shares of the Common Stock of the Company having a total
purchase price of $2.0 million. The Agreement specifies that Mr. McConnell
shall purchase these shares within 30 days of April 23, 2004, provided
that, such 30-day period will be suspended for any portion where
applicable laws and the Company's trading policies prohibit such purchase.
In August 2004, Mr. McConnell fulfilled his commitment and, in accordance
with the Agreement, will hold one-half of the purchased shares for a
period of at least 1 year and 30 days from April 23, 2004 and the
remaining purchased shares for a period of at least 2 years and 30 days
from April 23, 2004.

Item 6. Exhibits

(a) Exhibits

Exhibit 2.1 Stock Purchase Agreement relating to Critical Care
Systems, Inc. by and among Curative Health Services,
Inc. Critical Care Systems, Inc. and each of the persons
listed therein, dated February 24, 2004**

Exhibit 2.2 Letter Agreement supplementing the Stock Purchase
Agreement, dated April 23, 2004, by and between Curative
Health Services, Inc. and Christopher J. York, as
Seller's Representative**

Exhibit 3.1 Amended and Restated Articles of Incorporation of
Curative Health Services, Inc.*


29


Item 6. Exhibits (continued)

Exhibit 3.2 By-Laws of Curative Health Services, Inc.*

Exhibit 4.1 Indenture, dated April 23, 2004, by and among Curative
Health Services, Inc., certain of its subsidiaries as
Guarantor and Wells Fargo Bank, N.A., as Trustee**

Exhibit 4.2 Registration Rights Agreement, dated April 23, 2004, by
and among Curative Health Services, Inc., certain of its
subsidiaries as Guarantors and UBS Securities LLC**

Exhibit 4.3 Specimen of 144A Notes**

Exhibit 4.4 Specimen of Regulation S Notes**

Exhibit 4.5 Specimen of Guarantees**

Exhibit 4.6 Specimen of Registered Notes

Exhibit 10.1 Third Amendment to Amended and Restated Credit
Agreement, made and entered into as of October 20, 2004,
among General Electric Capital Corporation and the
Company

Exhibit 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

Exhibit 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

Exhibit 32 Certification of the Chief Executive Officer and Chief
Financial Officer, pursuant to 18 U.S.C. ss.1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002

Exhibit 99.1 Cautionary Statements

* Incorporated by reference to the similarly numbered exhibit to the
Company's Current Report on Form 8-K filed on August 19, 2003

** Incorporated by reference to the similarly numbered exhibit to the
Company's Current Report on Form 8-K filed on April 30, 2004

The Company has excluded from the exhibits filed with this report
instruments defining the rights of holders of long-term 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.


30


SIGNATURES

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

Date: November 9, 2004

Curative Health Services, Inc.
(Registrant)


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


/s/ Thomas Axmacher
-------------------
Thomas Axmacher
Chief Financial Officer
(Principal Financial and Accounting
Officer)


31