Critical Accounting Policies
See Part II, Item 7 - Critical Accounting Policies, our consolidated financial statements and related notes in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended March 31, 2009 filed with the SEC on July 14, 2009 for accounting policies and related estimates we believe are the most critical to understanding our condensed consolidated financial statements, financial condition and results of operations and which require complex management judgment and assumptions, or involve uncertainties.
Three-Month Period Ended September 30, 2009 Compared to the Three-Month Period Ended September 30, 2008
Results of Continuing Operations, (in thousands, except share amounts)

                                                               Three-Month Period
                                                              Ended September 30,
                                                            2009               2008
Revenues, net                                           $      25,616      $      26,719
Cost of revenues                                               18,210             18,504

Gross profit                                                    7,406              8,215

Selling, general and administrative expenses                   10,082             10,081
Depreciation and amortization                                     531                613
Total operating expenses                                       10,613             10,694


Operating loss                                                 (3,207 )           (2,479 )
Other expenses                                                    840              1,098

Net loss before income tax expense                             (4,047 )           (3,577 )
Income tax expense                                                  7                198

Net loss from continuing operations                     $      (4,054 )    $      (3,775 )

Weighted average number of shares - basic and
diluted                                                   161,201,000        133,019,000
Net loss from continuing operations per share -
basic and diluted                                       $       (0.03 )    $       (0.03 )

Revenues, Cost of Revenues and Gross Profits The following summarizes revenues, cost of revenues and gross profits by segment for the three-month periods ended September 30, (in thousands):

                                         % of Total                      % of Total        $ Increase/        % Increase/
                            2009          Revenue           2008          Revenue          (Decrease)         (Decrease)
Revenues, net:
Services                  $ 21,709              84.7 %    $ 24,824              92.9 %    $      (3,115 )            -12.5 %
Pharmacy                     3,409              13.3 %       1,214               4.5 %            2,195              180.8 %
Catalog                        498               2.0 %         681               2.6 %             (183 )            -26.9 %

                            25,616             100.0 %      26,719             100.0 %           (1,103 )             -4.1 %


Cost of revenues:
Services                  $ 15,028                        $ 17,113                        $      (2,085 )            -12.2 %
Pharmacy                     2,895                           1,012                                1,883              186.1 %
Catalog                        287                             379                                  (92 )            -24.3 %

                            18,210                          18,504                                 (294 )             -1.6 %




                                    Gross                      Gross
                                   Margin %                   Margin %
     Gross margins:
     Services           6,681           30.8 %     7,711           31.1 %     (1,030 )     -13.4 %
     Pharmacy             514           15.1 %       202           16.6 %        312       154.5 %
     Catalog              211           42.4 %       302           44.3 %        (91 )     -30.1 %

                      $ 7,406           28.9 %   $ 8,215           30.7 %   $   (809 )      -9.8 %

The following table summarizes the components of the Services segment revenues for the three-month periods ended September 30, (in thousands):

                                         % of Total                      % of Total        $ Increase/        % Increase/
                            2009          Revenue           2008          Revenue          (Decrease)         (Decrease)

Home care                 $ 17,255              79.5 %    $ 17,451              70.3 %    $        (196 )             -1.1 %
Medical staffing             3,127              14.4 %       4,985              20.1 %           (1,858 )            -37.3 %
Travel staffing              1,327               6.1 %       2,388               9.6 %           (1,061 )            -44.4 %

Total Services            $ 21,709             100.0 %    $ 24,824             100.0 %    $      (3,115 )            -12.5 %

Services Segment
The Services segment remains the largest source of revenue for the Company. Home care revenue as a percentage of Services revenue continues to increase, reaching 79.5% of revenue during the second quarter of fiscal 2010. Home care revenues fell by $196,000, or 1.1%, from $17.451,000 to $17,255,000 over the same period a year ago. The modest decline was principally caused by reductions in reimbursement per billable hour in some state-sponsored home care programs and by a revenue decline in Michigan, one of the Company's largest home care markets, due largely to economic conditions reducing the number of billable hours during the period.

The negative trends in the medical staffing and travel staffing markets continued in the fiscal second quarter 2010. Medical staffing and travel staffing declined by 37.3% and 44.4%, respectively, as compared with the prior year quarter. Demand for the Company's per diem and travel medical staffing services declined as compared with the same period a year ago. Several factors have contributed to the lower level of overall demand. Market conditions for temporary medical staffing are currently not favorable, driven by lower patient censuses in facilities; constraints on facility staffing budgets; the return of part-time staff to full-time status and increases in overtime accepted by permanent staff of our potential customers, largely in response to overall economic conditions; and delays in the construction and opening of new facilities that often drives short-term staffing requirements. In addition to these market conditions, travel staffing revenues have been adversely affected by state budget constraints with a major correctional institution customer. Gross margin in the Home Care and Medical Staffing business of 30.8% was essentially flat compared with the 31.0% gross margin in same quarter a year ago. While the overall mix of higher margin home care business increased as a percentage of total revenues, this gross margin benefit was offset by several factors. These factors included a reduction in margins on several state-sponsored home care programs, such as Arizona and California; a reduction in the percentage of business generated in some of the company's higher margin offices and markets, including the state of Michigan; and an overall decline in the margins in the medical staffing business due to changes in staffing business mix.
Pharmacy Segment
The revenue in the Pharmacy segment increased by $2,195,000, or 180.8%, to $3,409,000 during the second quarter of fiscal 2010 compared to the same period last year. This growth was driven by the Company's DailyMed program. During the third and fourth quarters of fiscal 2009, revenue generated from the DailyMed medication management program began to increase at a more rapid pace than in previous quarters, and the Company continues to pursue additional opportunities with government entities, managed care organizations, assisted living and group home facilities, existing home care customers and in direct-to-consumer initiatives. The Company expects these growth trends to continue during fiscal 2010 and beyond. The revenue growth over the last several quarters was primarily driven by the Company's relationship with Indiana Medicaid. The Company continues to work with the Indiana Medicaid program and its managed care providers to identify and enroll those patients who will benefit most from participation in the DailyMed. Additionally, in June 2009, the Company announced the signing of an agreement with WellPoint. Under this agreement, the Company will initiate the DailyMed medication management program to WellPoint's high-risk Medicaid members in five states where WellPoint companies provide Medicaid managed care benefits. The five states are: California, Virginia, New York, Kansas and South Carolina. The program was launched to WellPoint's high risk members in Virginia in August, and the Company began recognizing revenue from these patients in September. The program is expected to be rolled out to WellPoint's California patients during fiscal third quarter 2010 with revenue beginning to be recognized in fiscal fourth quarter 2010. The Company anticipates the majority of its Pharmacy revenue growth over the next several quarters to be attributable to the WellPoint arrangement.
The costs of revenue in the Pharmacy segment include the cost of medications and other products sold to clients and packaging costs for the DailyMed proprietary dispensing system. Gross margins for the quarter ended September 30, 2009 were 15.1% compared to 16.6% for the prior year quarter. Part of this decline reflects the different payer/patient mix in the Indianapolis, Indiana pharmacy compared to the payer/patient mix serviced when the pharmacy was located in Paducah, Kentucky. In addition, there is a different brand/generic product mix for the patients being serviced, which impacts margins quarter over quarter. Margins improved during the most recent quarter to 15.1% from 11.0% in the first quarter of fiscal 2010. Several factors contributed to this improvement, including changes in adjudication/billing procedures, utilization of group purchasing organization (GPO) contracts resulting in lower drug acquisition costs, and a reduction in inventory adjustments.

Effective September 26, 2009, a federal court required the two industry publishers of average wholesale prices (AWP) to reduce AWPs on some 1,400 brand drugs. This was the result of a settlement of litigation by third parties against these publishers challenging the establishment of AWPs on these products. AWPs are regularly used as a basis for establishing the reimbursement received by pharmacies for products dispensed. Some of the Company's contracts for reimbursement, and some of the reimbursement policies of other payers, are based on discounts off of the published AWP. The industry publishers of AWPs have also decided to extend the reduction of AWPs to a much broader group of drugs than the list covered by the litigation settlement. Most commercial payers are adjusting their reimbursement formulas to compensate for the reduction in AWPs and the Company is in the process of amending agreements with these payers to reflect the new reimbursement formulas. In addition, some state-sponsored programs are adopting modifications to their reimbursement formulas to ensure a similar level of reimbursement to pharmacies after the change in AWPs as before the change. For payers adopting these adjustments, no material impact on the Company's reimbursement is expected. However, some payers, including the Indiana Medicaid program, have not adjusted their reimbursement formulas to account for the lower AWPs and, consequently, the Company is receiving a reduced level of reimbursement on some products effective September 26, 2009. The Company is evaluating the impact of these reimbursement changes on its business but it is likely that the net impact will be to reduce revenue and decrease gross margins on some portion of the Pharmacy segment business. In addition, various proposals in the national health care reform efforts propose modifications to the manner in which various federally-funded and state-sponsored programs reimburse pharmacies for dispensing product. Certain of these proposals could have the effect of negatively impacting net revenue and gross margins in future periods. Catalog Segment
Revenue from the Company's catalog and internet-based home health products business decreased 26.7% to $498,000 during the three-month period ended September 30, 2009 compared to the same period last year. The decrease in revenue is due in part to the reduction in catalog mailing to a more targeted audience, and in part due to economic conditions as virtually all of this business is cash and/or credit business. The gross margin decreased to 42.3% for the three-month period ended September 30, 2009 compared to 44.3% for the same period last year primarily due to change in the mix of the products being sold.

Selling, General and Administrative
The following summarizes selling, general and administrative expenses by segment
for the three-month periods ended September 30, (in thousands):

                                             % of Total                      % of Total        $ Increase/        % Increase/
                                2009            SG&A            2008            SG&A           (Decrease)         (Decrease)

Services                      $  5,454              54.1 %    $  6,330              62.8 %    $        (876 )            -13.8 %
Pharmacy                         1,873              18.6 %         988               9.8 %              885               89.6 %
Catalog                            204               2.0 %         298               3.0 %              (94 )            -31.5 %
Corporate                        2,551              25.3 %       2,465              24.4 %               86                3.5 %

                              $ 10,082             100.0 %    $ 10,081             100.0 %    $           1                0.0 %


SG&A as a % of net revenue        39.4 %                          37.7 %

Services Segment
The Services segment selling, general and administrative expense decreased to $5,454,000 for the three-month period ended September 30, 2009 compared to $6,330,000 for the same period in the prior year. This $876,000, or 13.8%, decrease was primarily due to a $388,000 decrease in commissions paid to the affiliates and a $384,000 decrease in employee costs. Affiliate commissions are based on the gross margins of the individual affiliates, and the decrease reflects a decrease in revenues and gross margins generated from the affiliate owned locations. The decrease in employee costs was a direct result of the Company's efforts to reduce headcount in certain areas. Pharmacy Segment
The Pharmacy segment selling, general and administrative expense increased by $885,000, or 89.6%, to $1,873,000 during the second quarter of fiscal 2010. In general, the increase in Pharmacy expenses was due to the recent growth in revenue in this segment, as well as the continued investment in infrastructure in advance of the anticipated revenue growth during the next several quarters, primarily resulting from the WellPoint arrangement. Specifically, total employee costs increased by $463,000 during the three-month period ended September 30, 2009 as the Company hired additional pharmacists, pharmacy technicians, and customer service representatives in order to process the increased volume. Additionally, the Company used more contract and temporary labor as well as consultants during this high growth period, and this contributed an additional $104,000 in expense. The remaining increase during the current year quarter was due to various other variable administrative expenses, such as bad debt and shipping, that increased with the growth in revenue.
The DailyMed program includes a significant level of patient care and value-added services designed to improve compliance, adherence and safety of a patient's medication regimen. These pharmacy services include consolidation, synchronization and transfer of prescriptions and medication therapy management (MTM) services. The Company makes a significant investment in these services as they are a key part to achieving the patient benefits and health care cost reductions associated with DailyMed. The Company's business model contemplates that payers will be willing to share some of these cost savings as they are realized. The Company has elected to provide these services to Indiana Medicaid customers without a cost-sharing arrangement as Indiana Medicaid has entered into a research agreement with the Purdue University School of Pharmacy to study DailyMed's ability to reduce total health care costs. The Company currently has a cost-sharing arrangement with WellPoint, which has specific target savings and trigger dates. This revenue will not be realized until certain points in time in the future. As cost sharing agreements become a more significant part of the Company's revenue, management anticipates overall profitability will improve.

Catalog Segment
The Catalog segment selling, general and administrative expense decreased by $94,000, or 31.5%, during the three-month period ended September 30, 2009. The decrease was primarily due to a $88,000 decrease in the costs to produce and mail catalogs.
Corporate
Corporate selling, general and administrative expense increased to $2,551,000 for the three-month period ended September 30, 2009 compared to $2,465,000 for the same period in the prior year. This $86,000, or 3.5%, increase was due to a $230,000 increase in legal fees and $117,000 increase in other professional fees. The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. The timing and cost of these issues are often erratic, and the increase in legal fees reflects a period of higher activity. The increase in professional fees was due to certain audit-related costs and fees for investment bank advisor services incurred during the current year quarter. These increases were partially offset by a $113,000 decrease in employee costs, which reflects reductions in headcount.
The Company divested of its home health equipment, industrial staffing and retail pharmacy software businesses during the first quarter of fiscal 2010. Subsequent to these divestitures, the Company began to reduce Corporate expenses in order to reduce overhead for the remaining business lines. These expense reduction initiatives will continue over the next several quarters and will primarily focus on employee costs and professional fees. Depreciation and Amortization
The following summarizes depreciation and amortization expense for the three-month periods ended September 30, (in thousands):

                                                                      $ Increase/        % Increase/
                                         2009           2008          (Decrease)         (Decrease)
Depreciation and amortization of
property and equipment                 $     372      $     307      $          65               21.2 %
Amortization of acquired intangible
assets                                       159            306               (147 )            -48.0 %

                                       $     531      $     613      $         (82 )            -13.4 %

Depreciation and amortization of property and equipment increased by approximately $65,000, or 21.2%, during the three-month period ended September 30, 2009 compared to the same period last year. The increase reflects the increase in depreciation associated with various software and Pharmacy equipment acquired during the last year.
Amortization of acquired intangible assets decreased by $147,000, or 48.0%, during the fiscal second quarter 2010 compared to fiscal 2009. The decrease reflects the fact that as of March 31, 2009, the Company recognized certain impairment charges relating to amortizable intangible assets associated with the Pharmacy and Catalog segments, which ultimately reduced future amortization expense.
Other Expenses
The following summarizes net interest expense for the three-month periods ended September 30, (in thousands):

                                                     $ Increase/       % Increase/
                              2009       2008        (Decrease)        (Decrease)
           Interest expense   $ 850     $ 1,068     $        (218 )           -20.4 %
           Interest income       (4 )       (14 )              10             -71.4 %

                              $ 846     $ 1,054     $        (208 )           -19.7 %

Interest expense for the three-month period ended September 30, 2009 decreased by $218,000, or 20.4%, to $850,000 as compared to the same period last year. The average interest bearing liabilities balance (balance of the beginning of the period plus the end of the period divided by two) for fiscal 2010 was $33.6 million compared to $36.9 million for fiscal 2009, which represents a reduction of 8.9%. The overall reduction of debt combined with the timing of the reductions resulted in the decrease in interest expense. Income Taxes
Income tax expense was $7,000 for the three-month period ended September 30, 2009 compared to $198,000 for the three-month period ended September 30, 2008, a decrease of $191,000. The income tax expense is primarily the result of state income tax liabilities of the subsidiary operating companies. The majority of the prior period expense related to the estimated tax liability in Michigan . . .