The following discussion should be read in conjunction with the audited consolidated financial statements, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the "Form 10-K") filed with the U.S. Securities and Exchange Commission, as well as our unaudited consolidated interim financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (this "Report").

This Report contains statements not purely historical and which may be considered 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 (the "Exchange Act"), including statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. These forward looking statements may include, but are not limited to:

· Statements relating to our business development activities;

· Sales and marketing efforts;

· Status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements;

· Future capital expenditures;

· Effects of regulation and competition in our business; and

· Future operation performance.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. These factors include, among other things:

· Risks associated with increased government regulation related to the health care and insurance industries in general, and more specifically, pharmacy benefit management and specialty pharmaceutical distribution organizations;

· Unfavorable economic and market conditions, including governmental budget constraints;

· Reductions in Federal and state reimbursement rates;

· Delays or suspensions of Federal and state payments for services provided;

· Existence of complex laws and regulations relating to our business;

· Compliance with financial covenants required under our revolving credit facility;

· Availability of financing sources;

· Declines and other changes in revenue due to expiration of short-term contracts;

· Network lock-outs and decisions to in-source by health insurers;

· Unforeseen problems arising from contract terminations;

· Increases or other changes in our acquisition cost for our products; and

· Changes in industry pricing benchmarks such as average wholesale price ("AWP"), wholesale acquisition cost ("WAC") and average manufacturer price ("AMP"), including the impact of the AWP Class Action Litigation Settlement and/or state Medicaid Agencies failure to adjust reimbursement rates;

· Increased competition from our competitors, including competitors with greater financial, technical, marketing and other resources, could have the effect of reducing prices and margins.

You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Business Overview

We are a specialty pharmaceutical healthcare organization that partners with patients, physicians, healthcare payors and pharmaceutical manufacturers to provide access to medications and management solutions to optimize outcomes for chronic and other complex healthcare conditions.

Our business is reported under two operating segments: (i) Specialty Pharmacy Services, and (ii) Traditional Pharmacy Services. Our Specialty Pharmacy Services segment includes comprehensive support, dispensing and distribution, patient care management, data reporting, as well as a range of other complex therapy management services for certain chronic health conditions. The medications we dispense include oral, injectable and infusible medications used to treat patients living with chronic and other complex health conditions and are provided to patients and physicians. Our Traditional Pharmacy Services segment consists mainly of traditional mail service pharmacy fulfillment, and to a lesser extent, prescription discount card programs and fully funded pharmacy benefit management services.

In the quarter ended September 30, 2009, we renamed the reportable segment formerly known as "PBM Services" to "Traditional Pharmacy Services". The new title reflects a shift in the nature of the business included in this segment which has become substantially more weighted towards services other than fully funded pharmacy benefit management including traditional mail service pharmacy fulfillment and prescription discount card programs.

Revenues from Specialty Pharmacy Services and Traditional Pharmacy Services are derived from our relationships with healthcare payors including managed care organizations, government-funded and/or operated programs, third party administrators ("TPAs") and self-funded employer groups (collectively, "Plan Sponsors"), as well as from our relationship with pharmaceutical manufacturers, patients and physicians.

Our Specialty Pharmacy Services are marketed and/or sold to Plan Sponsors, pharmaceutical manufacturers, physicians, and patients, and target certain specialty medications that are used to treat patients living with chronic and other complex health conditions. These services include the distribution of biotech and other high cost injectable, oral and infusible prescription medications and the provision of therapy management services.

We experienced a reduction in revenue in 2009 due to the termination of the Centers for Medicare and Medicaid Services' ("CMS") Competitive Acquisition Program ("CAP"), and certain United HealthCare ("UHC") contracts. As expected, our gross profit as a percentage of revenue increased as a result of these contract terminations, as they operated at margin rates below the average for Specialty Pharmacy Services.

On September 26, 2009, First DataBank and Medi-Span reduced the markup factor applied to WAC to determine the AWP for over 20,000 drug codes as a result of the settlement of a class action lawsuit involving First DataBank and Medi-Span. A majority of our Third Party Payor customers agreed to adjust reimbursement rates payable to us following the implementation of the AWP change and our net reimbursement remained the same. However, certain state governmental agencies have declined to make any adjustment to their reimbursement following the implementation of the AWP change and accordingly our reimbursement, as well as those of our peers, for services provided to government funded and/or operated programs will be reduced. The impact of the AWP settlement will be to reduce our gross margins beginning in the fourth quarter of 2009. We estimate the annual impact will be approximately $5.0 million. In 2010, we expect the margin impact will be offset by overall organic growth as well as an emphasis on higher margin business mix.

Our Traditional Pharmacy Services are marketed to Plan Sponsors and are designed to promote a broad range of cost-effective, clinically appropriate pharmacy services through our own mail service distribution facility and national pharmacy retail network. We also administer prescription discount card programs on behalf of commercial Plan Sponsors, most typically TPAs. Under such programs we derive revenue on a per claim basis from the dispensing network pharmacy.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base those estimates and judgments on historical experience and on various other factors that we believe 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. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. There have been no changes to critical accounting estimates in the quarter ended September 30, 2009.

For a full description of our accounting policies please refer to Note 2 of Notes to Consolidated Financial Statements included in the Form 10-K.

Results of Operations

In the following Management's Discussion and Analysis we provide a discussion of
reported results for the three and nine month periods ended September 30, 2009
as compared to the same periods a year earlier.

                                 Three Months Ended                            Nine Months Ended
                                    September 30,                                September 30,
                             2009                  2008                  2009                   2008
Revenue                $ 333,476   100.0 %   $ 359,427   100.0 %   $ 987,974   100.0 %   $ 1,035,338   100.0 %
Gross profit           $  41,496    12.4 %   $  36,081    10.0 %   $ 115,874    11.7 %   $   104,179    10.1 %
Income from
operations             $   6,661     2.0 %   $   2,809     0.8 %   $  16,129     1.6 %   $     6,362     0.6 %
Interest expense,
net                    $     447     0.1 %   $     669     0.2 %   $   1,471     0.1 %   $     1,931     0.2 %
Income before income
taxes                  $   6,214     1.9 %   $   2,140     0.6 %   $  14,658     1.5 %   $     4,431     0.4 %
Net income             $   5,747     1.7 %   $   1,410     0.4 %   $  13,409     1.4 %   $     2,552     0.2 %

Revenue. Revenue for the third quarter of 2009 was $333.5 million as compared to revenue of $359.4 million in the third quarter of 2008, a decrease of $25.9 million, or 7.2%. Specialty Pharmacy Services revenue for the third quarter of 2009 was $279.0 million as compared to revenue of $307.1 million for the same period a year ago, a decrease of $28.1 million, or 9.2%. The decrease was primarily due to the termination of the CAP and certain UHC contracts offset by revenue generated under new contracts and drug inflation. Traditional Pharmacy Services revenue for the third quarter of 2009 was $54.5 million, as compared to revenue of $52.3 million for the same period a year ago, an increase of $2.2 million, or 4.2%. The increase was primarily attributable to growth in our discount cash card programs.

Revenue for the nine months ended September 30, 2009 was $988.0 million as compared to revenue of $1,035.3 million for the nine months ended September 30, 2008, a decrease of $47.3 million, or 4.6%. Specialty Pharmacy Services revenue for the nine months ended September 30, 2009 was $828.8 million as compared to revenue of $882.6 million for the same period a year ago, a decrease of $53.8 million, or 6.1%. The decrease was primarily due to the termination of the CAP and certain UHC contracts offset by revenue generated under new contracts and drug inflation. Traditional Pharmacy Services revenue for the nine months ended September 30, 2009 was $159.2 million, as compared to revenue of $152.7 million for the same period a year ago, an increase of $6.5 million, or 4.3%. The increase was primarily attributable to growth in our discount cash card programs.

Cost of Revenue and Gross Profit. Cost of revenue for the third quarter of 2009 was $292.0 million as compared to $323.3 million for the same period in 2008. Gross margin dollars were $41.5 million for the third quarter of 2009 as compared to $36.1 million for the same period a year ago, an increase of $5.4 million, or 15.0%. Gross margin as a percentage of revenue increased to 12.4% in the third quarter of 2009 from 10.0% in the third quarter of 2008. The increase in gross margin percentage from 2008 to 2009 was primarily the result of the termination of the CAP and certain UHC contracts which, as expected, reduced volume and increased Specialty Pharmacy Services' overall margin percentage. In addition to a more favorable business mix, supply chain programs and reduced shipping costs also contributed to the increase of the gross margin percentage and dollars.

Cost of revenue for the nine months ended September 30, 2009 was $872.1 million as compared to $931.2 million for the same period in 2008. Gross margin dollars were $115.9 million for the nine months ended September 30, 2009 as compared to $104.2 million for the same period a year ago, an increase of $11.7 million, or 11.2%. Gross margin as a percentage of revenue increased to 11.7% in the nine months ended September 30, 2009 from 10.1% in the nine months ended September 30, 2008. The increase in gross margin percentage from 2008 to 2009 was primarily the result of the termination of the CAP and certain UHC contracts which, as expected, reduced volumes and increased Specialty Pharmacy Services' overall margin percentage. In addition to a more favorable business mix, supply chain programs and reduced shipping costs also contributed to the increase of the gross margin percentage and dollars. We also experienced an increase in gross margin dollars in 2009 due to action taken to purchase drugs during the fourth quarter of 2008 in anticipation of drug cost increases to take effect during the first quarter of 2009. In early 2008, there was a longer than usual delay in updating the industry price lists used by us and our peers to charge customers for reimbursement, which caused a reduction in gross margin in the three months ended March 31, 2008.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2009 were $32.4 million, or 9.7% of total revenue, as compared to $31.9 million, or 8.9% of total revenue, for the quarter ended September 30, 2008. SG&A expenses were up slightly due to several offsetting factors. First, variable broker costs to market discount card programs increased $0.7 million due to revenue growth. Offsetting this volume-based growth in SG&A was the $0.8 million reduction in cost due to the absence of the one-time settlement with the Office of the Inspector General ("OIG") in the third quarter of 2008. In addition, investments in our sales force and information technology increased salaries and consulting costs. These costs were partially offset by continued cost control measures in our operating units and reduction in Corporate overhead costs such as employee benefits. Legal and Compliance costs also increased due to refreshing our compliance programs.

SG&A for the nine months ended September 30, 2009 was $94.3 million, or 9.5% of total revenue, as compared to $95.0 million, or 9.2% of total revenue, for the same period in 2008. SG&A expenses were down slightly due to several offsetting factors. First, variable broker costs to market discount card programs increased $2.3 million due to revenue growth. These costs and costs to strengthen our sales force and information technology were more than offset by continued cost control measures which reduced certain salaries and benefits and by the absence of the one-time settlement with the Office of the Inspector General ("OIG") in the third quarter of 2008.

Bad Debt Expense. For the third quarter of 2009, bad debt expense was $2.4 million, or 0.7% of revenue, as compared to $1.4 million, or 0.4% of revenue, in the third quarter of 2008. Prior year results include recoveries on previously reserved amounts. Our overall methodology used for determining our provision for bad debt remains essentially unchanged.

For the nine months ended September 30, 2009, bad debt expense was $5.4 million, or 0.5% of revenue, as compared to $2.8 million, or 0.3% of revenue, in the nine months ended September 30, 2008. Prior year results include recoveries on previously reserved amounts. Our overall methodology used for determining our provision for bad debt remains essentially unchanged.

Net Interest Expense. Net interest expense was $0.4 million for the third quarter of 2009 as compared to $0.7 million for the same period a year ago, due to reduced borrowing levels.

Net interest expense was $1.5 million for the nine months ended 2009 as compared to $1.9 million for the same period a year ago, due to reduced borrowing levels as well as a reduced borrowing rate.

Provision for Income Taxes. For the quarter ended September 30, 2009, our provision for income taxes was $0.5 million with an effective tax rate of 7.5%. For the quarter ended September 30, 2008, our provision for income taxes was $0.7 million with an effective rate of 34.1%. The lower effective tax rate of 7.5% for the current quarter compared to the statutory rate is primarily a result of a reduction in the valuation allowance due to the expected utilization of a portion of the net operating losses in 2009. The effective tax rate for the quarter ended September 30, 2008 differs from the statutory rate primarily due to amortization of indefinite lived assets.

For the nine months ended September 30, 2009, our provision for income taxes was $1.2 million with an effective tax rate of 8.5%. For the nine months ended September 30, 2008, our provision for income taxes was $1.9 million with an effective tax rate of 42.4%. The lower effective tax rate of 8.5% for the nine months ended September 30, 2009 compared to the statutory rate is primarily a result of a reduction in the valuation allowance due to the expected utilization of a portion of the net operating losses in 2009. The effective tax rate for the nine months ended September 30, 2008 differs from the statutory rate primarily due to amortization of indefinite lived assets.

Net Income and Income Per Share. Net income for the third quarter of 2009 was $5.7 million, or $0.14 per diluted share, as compared to net income of $1.4 million, or $0.04 per diluted share, for the same period last year.

Net income for the nine months ended September 30, 2009 was $13.4 million, or $0.34 per diluted share, as compared to net income of $2.6 million, or $0.07 per diluted share, for the same period last year.

Liquidity and Capital Resources

We utilize both funds generated from operations and available credit under our Facility (as defined below) for general working capital needs, capital expenditures and acquisitions.

Net cash provided by operating activities totaled $14.0 million during the first nine months of 2009, as compared to $15.4 million of cash used in operating activities during the first nine months of 2008. The increase in cash provided by operating activities was primarily the result of net income of $13.4 million, as well as a decrease in accounts receivable, which was offset by an increase in inventory and by a reduction in accounts payable. The $11.3 million reduction in accounts receivable was due to termination of the CAP and certain UHC contracts. The increase of $2.6 million in inventory was a result of supply chain programs. The decrease of $14.0 million in accounts payable is primarily related to the timing of strategic inventory purchases.

Net cash used in investing activities during the first nine months of 2009 was $4.5 million compared to $5.9 million for the same period in 2008. The cash used was driven primarily by the investment in our information technology infrastructure during the first nine months of 2009 and 2008.

Net cash used in financing activities during the first nine months of 2009 was $9.5 million compared to $21.3 million of cash provided by financing activities for the same period a year ago. The cash used in financing activities to pay down the line of credit was generated from higher net income and lower working capital requirements. We also received $1.4 million from the exercise of employee stock compensation plans in 2009.

At September 30, 2009, there was $39.6 million in outstanding borrowings under our revolving credit facility (the "Facility") with an affiliate of Healthcare Finance Group, Inc. ("HFG"), as compared to $50.4 million at December 31, 2008. The Facility provides for borrowing up to $85.0 million at the London Inter-Bank Offered Rate ("LIBOR") or a pre-determined minimum rate plus the applicable margin and other associated fees, provided a sufficient level of receivable assets are available as collateral. The term of the Facility runs through November 1, 2010. Under the terms of the Facility, we may request to increase the amount available for borrowing up to $100.0 million, and convert a portion of any outstanding borrowings from a Revolving Loan into a Term Loan. The borrowing base utilizes receivable balances and proceeds thereof as security under the Facility. At September 30, 2009 we had $45.4 million of credit available on a borrowing basis of $85.0 million under the Facility.

The Facility contains various covenants that, among other things, require us to maintain certain financial ratios as defined in the agreements governing the Facility. We were in compliance with all the covenants contained in the agreements as of September 30, 2009

At September 30, 2009, we had working capital of $76.2 million compared to $58.8 million at December 31, 2008. We made substantial information technology ("IT") systems investments during 2008 and will continue to invest in 2009 to improve efficiencies, internals controls, and data reporting and management. We believe that our cash on hand, together with funds available under the Facility and cash expected to be generated from operating activities, will be sufficient to fund our anticipated working capital, IT systems investments and other cash needs for at least the next twelve months.

We may also pursue joint venture arrangements, business acquisitions and other transactions designed to expand our business, which we would expect to fund from borrowings under the Facility, other future indebtedness or, if appropriate, the private and/or public sale or exchange of our debt or equity securities.

At September 30, 2009, we had Federal net operating loss carryforwards available to us of approximately $29.0 million, of which $5.9 million is subject to an annual limitation, all of which will begin expiring in 2017 and later. We have state net operating loss carryforwards remaining of approximately $15.3 million, the majority of which will begin expiring in 2017 and later.

In the ordinary course of business, we also obtained certain letters of credit ("LC") from commercial banks in favor of various parties. At September 30, 2009, there was $1.1 million on deposit as collateral for these LCs.