We are a national provider of specialty pharmacy and disease management services focused on HIV/AIDS patients, as well as specialized biopharmaceutical medications and services to chronically ill patients. We work closely with physicians, nurses, clinics and AIDS Service Organizations, or ASOs, and with government and private payors to improve clinical outcomes and reduce treatment costs for our patients.

We operate our business as two reporting segments. Our Specialty HIV division distributes medications, ancillary drugs and nutritional supplies under our trade name MOMS Pharmacy. Most of our HIV/AIDS patients rely on Medicaid and other state-administered programs, such as the AIDS Drug Assistance Program, or ADAP, to pay for their HIV/AIDS medications.

Our Specialty Infusion division, acquired in April 2008, focuses on specialty biopharmaceutical medications under the name Biomed America. Biomed provides services for intravenous immunoglobulin, blood clotting factor, and other therapies for patients living with chronic diseases.

We believe that the combination of services we offer to patients, healthcare providers and payors makes us an attractive source of specialty pharmacy and disease management services, contributes to better clinical outcomes and reduces overall healthcare costs.

Our Specialty HIV services include the following:

· Specialized MOMSPak prescription packaging that helps reduce patient error associated with complex multi-drug regimens, which require multiple drugs to be taken at varying doses and schedules;

· Reimbursement experience that assists patients and healthcare providers with the complex reimbursement processes;

· Arrangement for the timely delivery of medications in a discreet and convenient manner as directed by our patients or their physicians;

· Specialized pharmacists who consult with patients, physicians, nurses and ASOs to provide education, counseling, treatment coordination, clinical information and compliance monitoring; and

· Information systems and prescription automation solutions that make the provision of clinical data and the transmission of prescriptions more efficient and accurate.

We have grown our Specialty HIV business primarily by acquiring other specialty pharmacies and expanding our existing business. Since the beginning of 2003, we have acquired seven specialty pharmacies in California and two specialty pharmacies in New York. We have generated internal growth primarily by increasing the number of patients we serve. In addition, our business has grown as the price of HIV/AIDS medications has increased. In December 2007, we opened our first satellite pharmacy in Oakland, California. We will continue to evaluate acquisitions and satellite locations and expand our existing Specialty HIV business as opportunities arise or circumstances warrant.

Our Specialty Infusion segment provides pharmacy, nursing and reimbursement services to patients with costly, chronic diseases. These services include the following:

· Specialized nursing for the timely administration of medications as directed by physicians;

· Specialized pharmacists who consult with patients, physicians, and nurses to provide education, counseling, treatment coordination, and clinical information; and

· Reimbursement experience that assists patients and healthcare providers with the complex reimbursement processes.

Our Specialty Infusion business derives revenues primarily from the sale of drugs to patients and focuses almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. Our Specialty Infusion division principally provides specialty pharmacy and disease management services to patients with the following conditions: Hemophilia, Autoimmune Disorders/Neuropathies, Respiratory Syncytial Virus (RSV), and HIV/AIDS. The following table represents the percentage of total revenues our Specialty Infusion division generated from sales of the products used to treat the conditions described above:

                               Three months ended         Nine months ended
      Therapy Products         September 30, 2008       September 30, 2008 (3)
      Blood Clotting Factor                   61.2 %                       59.5 %
      IVIG (1)                                33.2 %                       34.5 %
      Synagis (2)                              0.4 %                        0.5 %
      Other                                    5.2 %                        5.5 %
      Total                                    100 %                        100 %

(1) Intravenous immunoglobulin

(2) Synagis is used for the treatment of RSV and is primarily dispensed in the December and March quarters.

(3) Based on revenue for the period April 1, 2008 to September 30, 2008

Geographic Footprint. As of September 30, 2008, our Specialty HIV division operated eleven pharmacy locations, strategically located in California (seven separate locations), New York (two separate locations), Florida and Washington to serve major metropolitan areas where high concentrations of HIV/AIDS patients reside. In discussing our results of operations for our Specialty HIV segment, we address changes in the net sales contributed by each of these regional pharmacy locations because we believe this provides a meaningful indication of the historical performance of our business.

As of September 30, 2008, our Specialty Infusion division operated six locations in Kansas, California, Florida, Pennsylvania, New York and Texas and is licensed to dispense drugs in over 40 states.

Net Sales. Since the acquisition of Biomed and for the three and nine months ended September 30, 2008, approximately 57% and 59%, respectively, of our net sales came from payments directly from government sources such as Medicaid, ADAP, and Medicare (excluding Part D, described below, which is administered through private payor sources). These are all highly regulated government programs subject to frequent changes and cost containment measures. We continually monitor changes in reimbursement for all products provided.

The following table presents the percentage of our total revenues reimbursed by these payors:

                            Three months ended September 30, 2008                     Nine months ended September 30, 2008
                                            Specialty                                                  Specialty
                     Specialty HIV           Infusion            Total         Specialty HIV          Infusion(1)           Total
Non governmental               37.3 %               60.7 %           42.9 %              36.4 %                65.9 %          41.1 %
Governmental
  Medicaid/ADAP                62.6 %               37.4 %           56.5 %              63.4 %                32.6 %          58.5 %
  Medicare                      0.1 %                1.9 %            0.6 %               0.2 %                 1.5 %           0.4 %
Total                         100.0 %              100.0 %          100.0 %             100.0 %               100.0 %         100.0 %

(1) Based on revenue for the period April 1, 2008 to September 30, 2008

Gross Profit. Our gross profit reflects net sales less the cost of goods sold. Cost of goods sold is the cost of pharmaceutical products we purchase from wholesalers and the labor cost associated with nurses we provide to administer medications. The amount that we are reimbursed by government and private payors has historically increased as the price of the pharmaceutical products we purchase has increased. However, as a result of cost containment initiatives prevalent in the healthcare industry, private and government payors have reduced reimbursement rates, which may prevent us from recovering the full amount of any price increases.

Effective July 1, 2008, the California legislature approved a 10% reduction in the reimbursement to providers paid under the California State Medicaid program, Medi-Cal. The 10% reduction, which was initiated as part of the fiscal 2009 state budget setting process, became effective July 1, 2008 and included reduced reimbursement for prescription drugs. On August 18, 2008, the U.S. District Court issued a preliminary injunction to halt certain portions of the 10% payment reduction including the reductions related to prescription drugs. In response to the ruling, the California Department of Health Care Services, or the DHCS, eliminated the 10% payment reduction effective September 5, 2008. The DHCS also announced that corrections to previously adjudicated claims for dates of service on or after August 18, 2008 will be reprocessed at rates in effect prior to the cuts. The State of California has filed an appeal of the preliminary injunction with the Ninth Circuit Court of Appeals.

Operating Expenses. Our operating expenses are made up of both variable and fixed costs. Our principal variable costs, which increase as net sales increase, are labor and delivery. Our principal fixed costs, which do not vary directly with changes in net sales, are facilities, equipment and insurance.

While we believe that we have a sufficient revenue base to continue to operate profitably given our current level of operating and other expenses, our business remains subject to uncertainties and potential changes that could result in losses. In particular, changes to reimbursement rates, unexpected increases in operating expenses, difficulty integrating acquisitions, or declines in the number of patients we serve or the number of prescriptions we fill could adversely affect our future results. For a further discussion regarding these uncertainties and potential changes, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007 and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.

Critical Accounting Policies

Management believes that the following accounting policies represent "critical accounting policies," which the Securities and Exchange Commission, or the SEC, defines as those that are most important to the presentation of a company's financial condition and results of operations and require management's most difficult, subjective, or complex judgments, often because management must make estimates about uncertain and changing matters. Our critical accounting policies affect the amount of income and expense we record in each period, as well as the value of our assets and liabilities and our disclosures regarding contingent assets and liabilities. In applying these critical accounting policies, we make estimates and assumptions to prepare our financial statements that, if made differently, could have a positive or negative effect on our financial results. We believe that our estimates and assumptions are both reasonable and appropriate, in light of applicable accounting rules. However, estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ materially from estimates.

We discuss these and other significant accounting policies related to our continuing operations in Note 2 of the notes to our Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data in our Annual Report on Form 10-K for the year ended December 31, 2007.

Revenue Recognition. We are reimbursed for a substantial portion of our net sales by government and private payors. Net sales are recognized upon shipment and are recorded net of contractual allowances to patients, government, private payors and others. Contractual allowances represent estimated differences between billed sales and amounts expected to be realized from third-party payors. Any difference between amounts expected to be realized from third party payors and actual amounts received are recorded as an adjustment to sales in the period the actual reimbursement rate is determined.

Any patient can initiate the filling of prescriptions by having a doctor call in prescriptions to our pharmacists, faxing our pharmacists a prescription, mailing prescriptions, or electronically submitting prescriptions to one of our facilities. Once we have verified that the prescriptions are valid and have received authorization from a patient's insurance company or state insurance program, the pharmacist then fills the prescriptions and ships the medications to the patient through an outside delivery service, an express courier service or postal mail, or the patient picks up the prescriptions at the pharmacy. During the month of September 2008, the Specialty HIV division serviced 16,700 patients.

Our Specialty HIV division receives premium reimbursement under California's HIV/AIDS Pharmacy Pilot Program, which we refer to as the California Pilot Program, and has been certified as a specialized HIV pharmacy eligible for premium reimbursement under the New York State Medicaid program. The California Pilot Program was renewed until June 30, 2009. We have been notified that the New York program has been extended through September 2009, and we are awaiting recertification. We qualified for both the California and New York programs in 2005, including retroactive payment of prescriptions dating back to September 2004. Premium reimbursement for eligible prescriptions dispensed in the current period are recorded as a component of net sales in the period in which we ship the medication. These revenues are estimated at the time service is provided and accrued to the extent that payment has not been received. Under the California Pilot Program, we receive regular payments for premium reimbursement, which are paid in conjunction with the regular reimbursement amounts due through the normal payment cycle. In New York, we receive the premium payment annually, and we received the annual payment for fiscal 2007 under the New York program in September 2008. For additional information regarding each of these reimbursement programs, please refer to Part I, Item 1. Business-Third Party Reimbursement, Cost Containment and Legislation in our Annual Report on Form 10-K for the year ended December 31, 2007.

Long-Lived Asset Impairment. In assessing the recoverability of our intangible assets, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If we determine that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions: cash flow deficits, a historic or anticipated decline in net sales or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset, and material decreases in the fair value of some or all of the assets. Changes in strategy or market conditions could significantly impact these assumptions, and as a result, we may be required to record impairment charges for these assets. We follow Statement of Financial Accounting Standards, or SFAS, No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," or SFAS No. 144. In the nine months ended September 30, 2007, we recorded a non-cash charge of $599 to our results of operations to reflect the impairment of our intangible asset as a result of the termination of our license for the Labtracker-HIVTM software from Ground Zero Software, Inc., or Ground Zero.

In the three and nine months ended September 30, 2008, we recorded a non-cash charge of $519 to our results of operations to reflect the impairment of our intangible asset and property and equipment as a result of our abandonment of the long-lived assets acquired from Oris Medical Systems, Inc. in June 2005.

Goodwill and Other Intangible Assets. In accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and intangible assets associated with acquisitions that are deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Such impairment tests require the comparison of the fair value and the carrying value of reporting units. Measuring the fair value of a reporting unit is generally based on valuation techniques using multiples of sales or earnings, unless supportable information is available for using a present value technique, such as estimates of future cash flows. We assess the potential impairment of goodwill and other indefinite-lived intangible assets annually and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors that could trigger an interim impairment review include the following:

· significant underperformance relative to expected historical or projected future operating results;

· significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

· significant negative industry or economic trends.

If we determine through the impairment review process that goodwill has been impaired, we record an impairment charge in our consolidated statement of income. Based on our impairment review, we have not recorded any impairment to goodwill and other intangible assets that have indefinite lives during the nine-month period ended September 30, 2008.

We adopted SFAS No. 157, "Fair Value Measurements," or SFAS No. 157, on January 1, 2008. SFAS No. 157 defines fair value, establishes a methodology for measuring fair value, and expands the required disclosure for fair value measurements. On February 12, 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, No. SFAS 157-2, "Effective Date of FASB Statement No. 157," which amends SFAS No. 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. On October 10, 2008, the FASB issued FSP No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active", or FSP 157-3, which clarifies the application of SFAS No. 157 in situations in which the market for a financial asset is inactive. FSP 157-3 also provides an example that illustrates key considerations in determining the fair value of a financial asset in an inactive market. FSP 157-3 was effective upon issuance. Our adoption of FSP 157-3 did not have a material impact on our consolidated financial statements. Therefore, beginning on January 1, 2008, this standard was applied prospectively to new fair value measurements of financial instruments and recurring fair value measurements of non-financial assets and non-financial liabilities. The adoption of SFAS No. 157 for our financial assets and financial liabilities did not have a material impact on our consolidated financial statements. On January 1, 2009, SFAS No. 157 will also apply to all other fair value measurements. We are evaluating the effect the implementation of SFAS No. 157 will have on our non-financial assets and non-financial liabilities on our consolidated financial statements. See Note 6 Fair Value Of Certain Financial Assets And Liabilities in this Quarterly Report on Form 10-Q for additional information.

On December 4, 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141 (Revised 2007), "Business Combinations," or SFAS No. 141(R). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. SFAS No. 141(R) will only have an impact on our financial statements if we are involved in a business combination in fiscal 2009 or later years.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133," or SFAS No. 161. SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS No. 133, and its related interpretations; and
(c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS No. 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact that SFAS No. 161 will have on our financial statements.

Results of Operations

Nine Months Ended September 30, 2008 and 2007

Net Sales. Net sales for the nine months ended September 30, 2008 increased to $243,824 from $183,075 for the nine months ended September 30, 2007, an increase of 33.1%. The increase in net sales for the nine months ended September 30, 2008 as compared to the same period in 2007 is primarily attributable to the acquisition of Biomed, which was included in our operating results for the six months ended September 30, 2008 from the date of acquisition. Net Sales in our Specialty HIV business increased to $204,256 from $183,075 for the nine months ended September 30, 2008 and 2007, respectively. The increase in Specialty HIV net sales of approximately 12% is principally attributable to the addition of new patients in California.

In the Specialty HIV division, we recorded revenue of $2,233 and $1,675 relating to the New York and California premium reimbursement programs for the nine months ended September 30, 2008 and 2007, respectively. The accounts receivable balance at September 30, 2008 related to premium reimbursement was $1,424. The accounts receivable balance at September 30, 2007 related to premium reimbursement was $913. The increase in premium reimbursement revenue in the Specialty HIV division principally resulted from an increase in the premium reimbursement rate for the New York program. The increase in the premium reimbursement accounts receivable balance is principally the result of a suspension in payments from California due to the delay in the signing of their fiscal 2009 budget.

(in thousands, except patient months & prescriptions data)
                                                          Nine Months Ended September 30,
                                              2008                                              2007
                                                              Patient                                           Patient
Distribution Region       Net Sales       Prescriptions        Months       Net Sales       Prescriptions        Months
California (1)            $  135,735             533,814        110,645     $  118,735             482,691        103,198
New York                      63,567             224,799         33,459         59,526             222,325         33,581
Washington (2)                 3,497              16,411          2,946          3,137              16,140          2,936
Florida                        1,457               6,651            895          1,677               7,404          1,128
Total                     $  204,256             781,675        147,945     $  183,075             728,560        140,843

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