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 and six months ended June 30, 2009, from sales of the products used to treat the conditions described above:

                                  Three Months Ended       Six Months Ended
                                                June 30, 2009
          Therapy Products                       Therapy Mix
          Blood Clotting Factor                  57.8 %                 59.3 %
          IVIG (1)                               34.9 %                 33.7 %
          Other                                   7.3 %                  7.0 %
          Total                                 100.0 %                100.0 %

(1) Intravenous immunoglobulin.

Geographic Footprint

As of June 30, 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. As of June 30, 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 and six months ended June 30, 2009, approximately 55% 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, 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 and six months ended June 30, 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:

                                Three Months Ended June 30, 2009                     Six Months Ended June 30, 2009
                                                 Specialty                                           Specialty
                          Specialty HIV          Infusion         Total       Specialty HIV          Infusion         Total
Non governmental                    36.8 %              69.3 %      44.8 %              36.3 %              68.9 %      44.6 %
Governmental
  Medicaid/ADAP                     63.1 %              25.2 %      53.8 %              63.6 %              25.9 %      54.0 %
  Medicare                           0.1 %               5.5 %       1.4 %               0.1 %               5.2 %       1.4 %
Total                              100.0 %             100.0 %     100.0 %             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 filed an appeal of the preliminary injunction with the Ninth Circuit Court of Appeals. On July 9, 2009, the Ninth Circuit Court of Appeals sustained the District Court's injunction and ordered DHCS to reimburse providers the 10% reduction previously deducted from provider payments for the period from July 1, 2008 to August 18, 2008. As of June 30, 2009, the Company has not recognized any revenues or related accounts receivable related to this retroactive payment. The Company estimates its retroactive reimbursement payment will total approximately $700.

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 and subsequently overturned by the courts. 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. Based on the results for our Specialty HIV business and for our Specialty Infusion business for the six months ended June 30, 2009, our annualized net sales for prescription drugs from the Medi-Cal program subject to the 5% and 1% reductions total approximately $62 million and $13 million, respectively, or 21.1% and 12.9% of our total annualized net sales, respectively.

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 under Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 six-month period ended June 30, 2009, there have been no significant changes to our critical accounting policies or to the related assumptions and estimates involved in applying these policies. However, the Company has expanded its disclosures as it relates to Revenue Recognition and Goodwill and Other Intangible Assets, as follows:

Revenue Recognition. Substantially all of our revenues are generated from the sale of prescription drugs to patients and are reimbursed by government and private payors. Net sales for both our Specialty HIV and Specialty Infusion divisions are recognized upon shipment. For the Specialty Infusion division and to a lesser degree the Specialty HIV division, revenues are recorded net of contractual allowances. Contractual allowances represent estimated differences between billed sales and amounts expected to be realized from third party payors. We evaluate several criteria in developing estimated contractual allowances, including historical trends based on actual claims paid and current contract and reimbursement terms. 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, or mailing 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. These and other factors indicate we are a principal in the arrangement with our patients and third party payors and as such, we record our revenues and cost of goods sold on a gross basis in accordance with Emerging Issues Task Force Issue No. 99-19.

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, and, as a result, of the current budget issues in California, no decision has yet been made with respect to further renewal. We have been notified that the New York program has been extended through September 2010, and we are awaiting recertification. We have qualified for both the California and New York programs since 2005. Premium reimbursement for eligible prescriptions dispensed in the current period are recorded as a component of net sales. These revenues are estimated at the time service is provided and accrued to the extent that payment has not been received. In New York, we receive the premium payment annually, and we received the annual payment for calendar year 2007 under the New York program in September 2008. Under the California Pilot Program, we have historically received regular payments for premium reimbursement, which are paid in conjunction with the regular reimbursement amounts due through the normal payment cycle. However, since July 1, 2008, we have recognized revenue of $1,338, but have collected only $150, under the California Pilot Program. We believe the budgetary challenges currently experienced in California may result in further payment delays. Based on this uncertainty, we did not recognize any revenues related to the California Pilot Program for the three months ended June 30, 2009. The net accounts receivable balance at June 30, 2009 related to the California Pilot Program was $855.

Goodwill and Other Intangible Assets. In accordance with 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.

The impairment test for goodwill involves comparing the fair value of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure for a goodwill impairment loss. This step revalues all assets and liabilities of the reporting unit to their current fair values and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.

The valuation of goodwill is dependent upon the estimated fair market value of our three reporting units. The Specialty Infusion segment, which resulted from the acquisition of Biomed in April 2008, is comprised of only a single business component and, therefore, was determined to be a separate reporting unit under SFAS No. 142. All goodwill resulting from the Biomed acquisition was fully allocated to the Specialty Infusion segment. The Specialty HIV segment was disaggregated into an East and West region (or reporting unit) for the purpose of testing goodwill for impairment. A regional difference in state reimbursement programs (principally California and New York states) was the principal factor used to determine the two reporting units. All of the other economic characteristics of each of the pharmacies within these regions are similar. The goodwill originating from acquisitions in California and Washington states are allocated to the West region. The goodwill originating from acquisitions in New York state is allocated to the East region.

We determine fair values of the reporting units by us using a combination of the income and market approach, with equal weighting given to both. We utilized the income and market approach transaction methods, as they were determined to be the most applicable to the perspective of value. The income approach bears significance because it considers our future income potential. The market approach transaction method is appropriate because it reflects market behavior and the attitudes and actions of market participants. The selected approaches were determined to be most reasonable given the availability and appropriateness of data available as of the date of value. An equal weighting was applied, as there were no material circumstances surrounding the application of each approach that would require a different weighting mechanism.

The income approach, or discounted cash flow approach, requires estimates regarding future operations and the ability to generate cash flows, including projections of revenue, costs, and capital requirements. It also requires estimates as to the appropriate discount rates to be used. Our cash flow model used forecasts for five-year periods and a terminal value. The significant assumptions for these forecasts included compounded annual revenue growth rates ranging from 6% to 12%, with an average compounded annual growth rate of approximately 10.5%. The growth rates, profitability levels, and other variables were determined by reviewing historical results and current operating trends of the reporting units. Terminal values for all reporting units were calculated using a long-term growth rate of 3%. In estimating the fair value of the reporting units for the 2008 impairment tests, we applied discount rates to our reporting units' projected cash flows of 13%. In developing this discount rate, we relied upon a weighted average cost of capital, or WACC, calculation. In order to estimate the cost of equity component of the WACC, we relied upon the capital asset pricing model. In estimating the appropriate WACC, assumptions with regard to cost of debt capital, the risk-free rate, beta, and the debt and equity weights were developed based on market information known as of the goodwill testing date. The equity risk premium was based on Ibbotson's SBBI
(2008), a third party research report used in the development of discount rates. Finally, a size risk premium was considered to be appropriate, and was included as part of the assumed cost of equity component of the WACC. The size risk premium was also based on Ibbotson's SBBI (2008).

The market approach is based on the comparable transaction method, which considers the sale and acquisition activities in our industry and derives a range of valuation multiples. We applied the median of the resulting multiples (approximately 15.5 times EBITDA) to the reporting units to determine fair value under this method. This methodology conforms to our prior valuations.

When we performed our annual impairment test at December 31, 2008, we determined that, when either the income or market approach was used on a stand alone basis, no impairment existed. Given the sensitivity of the valuation of the reporting units to changes in estimated future cash flows versus the 2008 estimate, an increase in the discount rate of more than 300 basis points would likely result in an impairment charge for goodwill. Given the sensitivity of the valuation of the reporting units to changes in valuation multiples versus the 2008 estimate, a reduction in the assumed valuation multiples of more than 50% would likely result in an impairment charge for goodwill.

During the fourth quarter of 2008, we experienced a decline in our market capitalization due to the current global economic environment and the overall volatility in the stock market. As a result, our market capitalization was less than our book value as of the end of 2008. We do not believe that the decline in our stock price was caused by events directly related to us. With respect to the testing of our goodwill for impairment, we believe that it is reasonable to consider market capitalization as an indicator of fair value over a reasonable period of time. We considered and evaluated the decline in market capitalization, as well as other factors described above and concluded that the carrying value of each reporting unit continues to be recoverable. If the current economic market conditions and volatility in the stock market persist, we may be adversely affected, which could result in an impairment in goodwill in the future.

We assess the potential impairment of goodwill and other indefinite-lived intangible assets annually, typically in the fourth quarter, 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 its overall business; and

• significant negative industry or economic trends, including sustained declines in market capitalization.

Based on our assessment of the above factors, we have determined that no interim impairment tests were necessary since our annual impairment test performed at December 31, 2008.

Results of Operations

Three Months Ended June 30, 2009 and 2008

Net Sales. Total net sales increased 15.3% to $99,658 for three months ended June 30, 2009 from $86,430 for the three months ended June 30, 2008. Specialty Infusion revenues increased 38.0% to $24,484 for the three months ended June 30, 2009 from $17,737 for the three months ended June 30, 2008. The increase in Specialty Infusion revenues is primarily due to volume growth in both our Blood Clotting Factor and IVIG therapy products as a result of the addition of new patients and, to a lesser degree, additional sales of products to existing patients. Specialty HIV revenues increased 9.4% to $75,174 for the three months ended June 30, 2009 from $68,693 for three months ended June 30, 2008. The increase in Specialty HIV revenues is principally attributable to a 6.8% increase in prescription volume and, to a lesser degree, an increase in the price of the anti-retroviral drugs we sell, partially offset by the decrease in revenue recognized for the California Pilot Program for the three months ended June 30, 2009. For the three months ended June 30, 2008, we recorded $364 in revenue related to the California Pilot Program. Based on the current uncertainty of the California budget process, we did not record any revenues related to the California Pilot Program for the three months ended June 30, 2009. The net accounts receivable balance at June 30, 2009 related to the California Pilot Program was $855 as compared to net accounts receivable of $121 at June 30, 2008. Although we have historically received regular payments for premium reimbursement under the California Pilot Program, the current budget issues in California have resulted in payment delays, which we expect to continue. Revenue for the three months ended June 30, 2009 relating to the New York premium reimbursement program was $485 as compared to $227 for the same period in 2008. The accounts receivable balance at June 30, 2009 related to the New York premium reimbursement was $2,357 as compared to $1,264 at June 30, 2008. Based on our past experience with the New York premium reimbursement program, we expect to receive our annual payment for calendar year 2008 in the fourth quarter of 2009; however, there can be no assurance as to when we will actually receive payment.

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 June 30, 2009 and 2008:

(In thousands, except patient months and prescription data)

                                                    Three Months Ended June 30,
                                               2009                                                    2008
Distribution Region      Net Sales       Prescriptions      Patient Months       Net Sales       Prescriptions      Patient Months
California              $    48,694             188,777              37,357     $    46,026             179,008              36,810
. . .