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 for 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 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.

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

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 of Medicaid and other state-administered programs, such as the AIDS Drug Assistance Program, or ADAP, which many of our HIV/AIDS patients rely on for payment;

· 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 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. In October 2008, we opened a new satellite pharmacy affiliated with the Lifelong AIDS Alliance, a leading provider of practical support services and advocacy for those with HIV/AIDS in Washington State. We will continue to evaluate acquisitions, strategic affiliations with ASOs, 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 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. Our Specialty Infusion division principally provides specialty pharmacy and disease management services to patients with the following conditions: Hemophilia, Autoimmune Disorders/Neuropathies, Primary Immunodefiency Diseases (PID), Respiratory Syncytial Virus (RSV), and HIV/AIDS.

The following table represents the percentage of total revenues our Specialty Infusion division generated during the three months ended March 31, 2009, from sales of the products used to treat the conditions described above:

                      Therapy Products         Therapy Mix
                      Blood Clotting Factor            60.7 %
                      IVIG (1)                         32.6 %
                      Other                             6.7 %
                      Total                           100.0 %

(1) Intravenous immunoglobulin.

Geographic Footprint

As of March 31, 2009, our Specialty HIV division operated twelve pharmacy locations, strategically located in California (seven separate locations), New York (two separate locations), Washington (two separate locations) and Florida 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 March 31, 2009, 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

For the three months ended March 31, 2009, approximately 56% of our net sales have come 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, along with Medicare Part D, are all highly regulated government programs subject to frequent changes and cost containment measures. We continually monitor changes in reimbursement for all products provided.

Based on revenues for the three months ended March 31, 2009 for our Specialty HIV business and our Specialty Infusion business, the following table presents the percentage of our total revenues reimbursed by these payors:

                              Specialty HIV      Specialty Infusion       Total
          Non governmental              35.8 %                  68.5 %      44.4 %
          Governmental
          Medicaid/ADAP                 64.1 %                  26.6 %      54.2 %
          Medicare                       0.1 %                   4.9 %       1.4 %
          Total                        100.0 %                 100.0 %     100.0 %

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 Medi-Cal. The 10% reduction, which was initiated as part of the fiscal 2009 state budget setting process, 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 DHCS, eliminated the 10% payment reduction, effective September 5, 2008. 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.

In September 2008, Assembly Bill 1183 was enacted in California, requiring provider payments to be reduced by 1% or 5%, depending upon the provider type, for dates of service on or after March 1, 2009. These reductions replace the 10% provider payment reductions previously implemented. Based on the results for our Specialty HIV business and for our Specialty Infusion business for the three months ended March 31, 2009, our annualized net sales for prescription drugs from the Medi-Cal program subject to the 5% and 1% reductions total approximately $59 million and $10 million, respectively, or 21.0% and 11.2% of our total annualized net sales, respectively. On January 16, 2009, Managed Pharmacy Care and other plaintiffs filed a complaint challenging the 5% rate reduction to providers of pharmacy services under Assembly Bill 1183. On February 27, 2009, the U.S. District Court issued a preliminary injunction prohibiting DHCS from implementing the 5% reduction in payments to pharmacies for prescription drugs (including prescription drugs and traditional over-the-counter drugs provided by prescription) provided under the Medi-Cal fee-for-service program. If ultimately implemented, we believe the 5% rate reduction will have a material adverse effect on our operations, financial condition and financial results.

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 pharmacy and nursing labor and delivery of medications to patients. Our principal fixed costs, which do not vary directly with changes in net sales, are facilities, corporate labor expenses, 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, 2008.

Critical Accounting Policies

Management believes that our accounting policies related to revenue recognition, allowance for doubtful accounts, long-lived asset impairments, and goodwill and other intangible assets represent "critical accounting policies," which 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. Further information regarding these policies appears within "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 9, 2009. During the three-month period ended March 31, 2009, there have been no significant changes to our critical accounting policies or to the related assumptions and estimates involved in applying these policies.

We adopted SFAS No. 157-2, "Effective Date of FASB Statement No. 157," or SFAS No. 157-2, on January 1, 2009. SFAS 157-2 amended SFAS No. 157, "Fair Value Measurements," or 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. The impact of the adoption of SFAS No. 157-2 on our non-financial assets and non-financial liabilities did not have a material impact on our consolidated financial statements.

We adopted SFAS No. 141 (Revised 2007), "Business Combinations," or SFAS No. 141(R), on January 1, 2009. SFAS No. 141(R) significantly changes the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity is 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. On April 1, 2009, the FASB issued FSP 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies," or FSP 141(R)-1, which amends and clarifies SFAS No. 141(R) as it relates to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(R)-1 requires assets and liabilities assumed in a business combination that arise from a contingency be recognized at fair value, if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would be recognized in accordance with SFAS No. 5, "Accounting for Contingencies" and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss." FSP 141(R)-1 is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. FSP 141(R)-1 was effective for us as of January 1, 2009. SFAS No. 141(R) and FSP 141(R)-1 will only have an impact on our financial statements if we are involved in a business combination in 2009 or later years.

We adopted SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133," or SFAS No. 161, on January 1, 2009. 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. Because SFAS No. 161 requires enhanced disclosures, without a change to existing standards relative to measurement and recognition, our adoption of SFAS No. 161 did not have an impact on our financial statements.

We adopted EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock," or EITF 07-5, on January 1, 2009, with the cumulative effect of the change in accounting principle adjusted to the opening balance of retained earnings. EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise price and settlement provisions. EITF 07-5 also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. We adopted the provisions of EITF 07-5 effective January 1, 2009. As a result of the adoption of EITF 07-5, we recorded a liability of $1,425 for the fair value of outstanding warrants, which as required, was accounted for as a decrease to the January 1, 2009 accumulated earnings of $271 ($190 net of taxes) and a decrease to additional paid-in capital of $1,154.

On April 9, 2009, the FASB issued the following three Final Staff Positions, or FSPs:

· FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," or FSP 157-4;

· FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments or FSP 107-1 and APB 28-1, respectively; and

· FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," or FSP 115-2 and FSP 124-2, respectively.

All three FSPs are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt an FSP only if elects to early adopt all three FSPs. We will adopt all three FSPs for the quarterly period ending June 30, 2009.

FSP FAS 157-4 provides guidance on determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms SFAS No. 157, "Fair Value Measurements," which states the objective of fair value measurement - to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP 157-4 also requires an entity to disclose a change in valuation technique (and related inputs) resulting from the application of this FSP and to quantify its effects, if practicable. We are currently assessing the impact of the adoption of FSP 157-4 on our consolidated financial statements.

FSP 107-1 and APB 28-1 address fair value disclosures for any financial instruments that are not currently reflected at fair value on the balance sheet of an entity. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. FSP 107-1 and APB 28-1 now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all financial instruments not measured on the balance sheet at fair value. Because FSP 107-1 and APB 28-1 require enhanced disclosures, without a change to existing standards relative to measurement and recognition, our adoption of FSP 107-1 and APB 28-1 will not have an impact on our consolidated financial statements.

FSP 115-2 and 124-2 focus on other-than-temporary impairments, intending to bring greater consistency to the timing of impairment recognition and provide greater clarity to investors about credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. FSP 115-2 and 124-2 also requires increased and timelier disclosures sought by investors regarding expected cash flows, credit losses and an aging of securities with unrealized losses. We are currently assessing the impact of the adoption of FSP 115-2 and 124-2 on our consolidated financial statements.

Results of Operations

Three Months Ended March 31, 2009 and 2008

Net Sales. Net sales for the three months ended March 31, 2009 increased to $96,584 from $65,258 in 2008, an increase of 48.0%. The increase in net sales for the three months ended March 31, 2009 as compared to the same period in 2008 is primarily attributable to the acquisition of our Specialty Infusion business from Biomed America, Inc., or Biomed, in April 2008, and an increase in net sales in our Specialty HIV business to $71,019 for the three months ended March 31, 2009 from $65,258 in the same period in 2008. The increase in Specialty HIV net sales of approximately 9% is principally attributable to the increase in the number of prescriptions processed in California, increases in the price of the anti-retroviral drugs we sell, and to a lesser degree, new patients in Washington due to the opening of our Lifelong pharmacy.

In the Specialty HIV division, we recorded revenue of $823 and $601 relating to the New York and California premium reimbursement programs combined for three months ended March 31, 2009 and 2008, respectively. The accounts receivable balance at March 31, 2009 related to premium reimbursement was $3,099 as compared to $1,154 at March 31, 2008. 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 primarily the result of a suspension in payments from California due to budgetary delays and the increased premium reimbursement from the New York program. Based on our past experience, we expect to receive payment with respect to the New York program in the fourth quarter of 2009; however, there can be no assurance as to when we will actually receive payment. Additionally, the California DHCS completed an audit of the premium reimbursement paid to us under the California Pilot Program for the period August 3, 2007 to June 5, 2008, which resulted in a final payment by the Company of $239, which was fully reserved.

The following table sets forth the net sales and operating data for our Specialty HIV segment for each of its distribution regions for the three months ended March 31, 2009 and 2008:

(In thousands, except patient months and prescription data)

                                                   Three Months Ended March 31,
                                               2009                                                    2008
Distribution Region      Net Sales       Prescriptions      Patient Months       Net Sales       Prescriptions      Patient Months
California              $    46,902             181,496              36,613     $    43,043             174,113              36,633
New York                     21,858              74,482              11,389          20,673              74,414              11,199
Washington                    1,749               7,337               1,478           1,048               5,168                 942
Florida                         510               2,140                 306             494               2,184                 290
Total                   $    71,019             265,455              49,786     $    65,258             255,879              49,064

The prescription and patient month data has been presented to provide additional information about our operations. A prescription typically represents a 30-day supply of medication for an individual patient. "Patient months" represents a count of the number of months during a period that a patient received at least one prescription. If an individual patient received multiple medications during each month for a yearly period, a count of 12 would be included in patient months irrespective of the number of medications filled each month.

Gross Profit. Gross profit was $18,242 and $9,654 for the three months ended March 31, 2009 and 2008, respectively, and represents 18.9% and 14.8% of net sales, respectively. The increase in gross profit and in gross profit as a percent of net sales is principally attributable to the acquisition of the Specialty Infusion business, which generally realizes higher gross margin than our Specialty HIV business.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2009 increased to $9,671 from $7,060 for the three months ended March 31, 2008, but declined as a percentage of net sales to 10.0% in 2009 from 10.8% in 2008. The increase in selling, general and administrative expenses was primarily due to the acquisition of the Specialty Infusion business. The decrease in selling, general, and administrative expenses as a percentage of revenue is primarily attributable to the non-recurrence of legal fees we incurred in 2008 principally related to the litigation with Oris Medical Systems, Inc., or OMS. We did not and do not expect to realize significant cost efficiencies as a result of the Biomed acquisition.

Depreciation and Amortization. Depreciation and amortization was $1,489 and $875 for the three months ended March 31, 2009 and 2008, respectively, and represents 1.5% and 1.3% of net sales, respectively. The increase in depreciation and amortization is primarily due to $726 in amortization of intangible assets resulting from the acquisition of Biomed in April 2008.

Litigation Settlement. As a result of the litigation settlement with OMS, which is more fully described in Note 11 in these Notes to our Consolidated Financial Statements of this Quarterly Report on Form 10-Q, we recorded a charge of $3,950 for the three months ended March 31, 2008. Also as part of the settlement, the original asset purchase agreement with OMS terminated and, effective September 1, 2008, all parties were released from related non-compete, non-solicitation and confidentiality agreements.

Operating Income (Loss). Operating income for the three months ended March 31, 2009 was $7,082 as compared to an operating loss of $2,231 for the three months ended March 31, 2008, which represented 7.3% and (3.4%) of net sales, respectively. The increase in operating income in 2009, after considering the effect of the OMS litigation settlement and related expenses, is primarily due to the acquisition of the Specialty Infusion business, which generally realizes higher gross margin than our Specialty HIV business.

Interest Expense. Interest expense was $724 for the three months ended March 31, 2009, which represents an increase of $723 over interest expense of $1 for the three months ended March 31, 2008. The increase in interest expense is principally attributable to indebtedness related to the financing of the Biomed acquisition.

Interest Income. Interest income was $24 for the three months ended March 31, 2009, which represents a decrease of $192 over interest income of $216 recorded for the three months ended March 31, 2008. The decrease in interest income is principally attributable to the liquidation of investments as a result of the financing of the Biomed acquisition.

Other Expense - Change in Fair Value of Warrants. On January 1, 2009, we adopted the provisions of EITF 07-5, which requires us to remeasure the fair value of outstanding warrants each period. As a result, we recorded a charge of $207 for the three months ended March 31, 2009.

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