**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM 10-Q**





**Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934**





**For
      the quarterly period ended September 30, 2008**





**Commission
      File Number 000-51518**





**Chem
      Rx Corporation**


(Exact
      name of registrant as specified in its charter)





**Delaware**
              (State
                or other Jurisdiction of
              Incorporation
                or Organization)
            
            **20-2938469**
              (I.R.S.
                Employer Identification No.)





**750
      Park Place**


**Long
      Beach, NY 11561**


(Address
      of Principal Executive Office)





**(516) 889-8770**


(Registrant’s
      Telephone Number, Including Area Code)





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Exchange Act during the past
      12 months (or for such shorter period that the registrant was required to
      file such reports), and (2) has been subject to such filing requirements
      for the past 90 days.    Yes x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definitions of “large accelerated filer,” “accelerated filer,” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filero
            
            Accelerated
                fileroNon-accelerated
                filero
            
            Smaller
                reporting companyx(Do
                not check if a smaller reporting company)





Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).    Yes o No x





As
      of
      November 13, 2008, 13,796,946 shares of common stock, par value $.0001 per
      share, were issued and outstanding.













TABLE
      OF
      CONTENTS


PART I-
                  FINANCIAL INFORMATION:Item
                  1. Financial StatementsConsolidated
                  Balance Sheets at September 30, 2008 (unaudited) and December 31,
                  2007
              
              3Consolidated
                  Statements of Operations for the Three and Nine Months Ended September
                  30,
                  2008 and 2007 (unaudited)
              
              4Consolidated
                  Statements of Cash Flows for the Nine Months Ended September 30,
                  2008 and
                  2007 (unaudited)
              
              5Notes
                  to Consolidated Financial Statements (unaudited)
              
              6Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              
              18Item
                  3. Quantitative and Qualitative Disclosures about Market
                  Risk
              
              34Item
                  4. Controls and Procedures
              
              34PART II
                  - OTHER INFORMATION
              
              36Item
                  1. Legal Proceedings
              
              36Item
                  1A. Risk Factors
              
              36Item
                  2.  Unregistered Sales of Equity Securities and Use of
                  Proceeds
              
              37Item
                  6. Exhibits
              
              38SIGNATURES
              
              39


2





**PART I:
      FINANCIAL INFORMATION**





**Item
      1. Financial Statements** **.**





**CHEM
      RX CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      thousands, except share and per share data)**





**September
                30,**
              **2008**
            
            **December****31,**
              **2007****(unaudited)**
            
            **(Note 2)**CURRENT
                ASSETSCash
            
            $
            1,068
            
            $
            3,740Accounts
                receivable, net
            
            
            75,513
            
            
            65,038Inventory
            
            
            17,084
            
            
            22,354Prepaid
                expenses and other current assets
            
            
            6,654
            
            
            4,562Deferred
                tax asset
            
            
            555
            
            
            —Total
                Current Assets
            
            
            100,874
            
            
            95,694Property
                and equipment, net
            
            
            9,904
            
            
            8,806Intangible
                assets, net
            
            
            76,735
            
            
            82,033Goodwill
            
            
            38,826
            
            
            38,626Deferred
                financing costs, net
            
            
            4,409
            
            
            4,779Other
                assets
            
            
            951
            
            
            2,562Deferred
                tax asset
            
            
            —
            
            
            544TOTAL
                ASSETS
            
            $
            231,699
            
            $
            233,044CURRENT
                LIABILITIESAccounts
                payable
            
            $
            35,501
            
            $
            24,280Accrued
                expenses and other current liabilities
            
            
            2,697
            
            
            3,284Current
                portion of long-term debt
            
            
            2,000
            
            
            2,000Total
                Current Liabilities
            
            
            40,198
            
            
            29,564Deferred
                tax liability
            
            
            62
            
            
            —Long-term
                debt
            
            
            116,500
            
            
            129,000Subordinated
                notes payable - related parties
            
            
            9,059
            
            
            8,408Total
                Liabilities
            
            
            165,819
            
            
            166,972COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITYPreferred
                stock, $.0001 par value, authorized 1,000,000 shares; none
                issued
            
            
            —
            
            
            —Common
                stock, $.0001 par value, authorized 150,000,000 shares in 2008 and
                2007;
                14,428,951 and 14,400,000 issued in 2008 and 2007; 13,791,866 outstanding
                at September 30, 2008 and 13,762,915 outstanding at December 31,
                2007
            
            
            1
            
            
            1Treasury
                stock, 637,085 shares (at cost)
            
            
            (3,654
            )
            
            (3,654
            )Additional
                paid-in-capital
            
            
            67,710
            
            
            67,372Accumulated
                other comprehensive income
            
            
            323
            
            
            -Retained
                earnings
            
            
            1,500
            
            
            2,353Total
                Stockholders’ Equity
            
            
            65,880
            
            
            66,072TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            231,699
            
            $
            233,044





The
      accompanying notes are an integral part of the consolidated financial
      statements.


3





**CHEM
      RX CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands, except share and per share data)**


**(UNAUDITED)**




**Three months ended**
              **September
                30,**
            
            
            **Nine months ended**
              **September
                30,****2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007**Net
                sales
            
            $
            89,929
            
            $
            —
            
            $
            267,206
            
            $
            —Cost
                of sales
            
            
            66,236
            
            
            —
            
            
            198,217
            
            
            —Gross
                profit
            
            
            23,693
            
            
            —
            
            
            68,989
            
            
            —Selling,
                general and administrative expenses
            
            
            20,564
            
            
            253
            
            
            60,613
            
            
            529Operating
                income (loss)
            
            
            3,129
            
            
            (253
            )
            
            8,376
            
            
            (529
            )Other
                income (expense):Interest
                income
            
            
            18
            
            
            504
            
            
            66
            
            
            1,475Interest
                expense
            
            
            (3,387
            )
            
            —
            
            
            (10,554
            )
            
            —Other
                income, net
            
            
            471
            
            
            —
            
            
            1,171
            
            
            —Income
                (loss) before income taxes
            
            
            231
            
            
            251
            
            
            (941
            )
            
            946Provision
                (benefit) for income taxes
            
            
            428
            
            
            —
            
            
            (88
            )
            
            1Net
                (loss) income
            
            
            (197
            )
            
            251
            
            
            (853
            )
            
            945Accretion
                of trust fund relating to common stock subject to possible
                redemption
            
            
            —
            
            
            (101
            )
            
            —
            
            
            (300
            )Net
                (loss) income available to common stockholders
            
            $
            (197
            )
            $
            150
            
            $
            (853
            )
            $
            645Net
                (loss) income per share - basic and diluted
            
            $
            (.01
            )
            $
            .02
            
            $
            (.06
            )
            $
            .06Weighted
                average shares outstanding - basic and diluted
            
            
            13,791,457
            
            
            9,945,001
            
            
            13,788,945
            
            
            9,945,001





The
      accompanying notes are an integral part of the consolidated financial
      statements.


4





**CHEM
      RX CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(UNAUDITED)**





**Nine months ended**
              **September
                30,****2008**
            
            **2007**Cash
                flows provided by (used in) operating activities:Net
                (loss) income
            
            $
            (853
            )
            $
            945Adjustments
                to reconcile net (loss) income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            6,892
            
            
            —Amortization
                of deferred financing fees
            
            
            648
            
            
            —Deferred
                rent
            
            
            135
            
            
            —Deferred
                income taxes
            
            
            (88
            )
            
            —Interest
                accrued on subordinated notes payable - related parties
            
            
            651
            
            
            —Provision
                for doubtful accounts
            
            
            1,398
            
            
            —Stock
                based compensation
            
            
            338
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (11,872
            )
            
            —Inventory
            
            
            5,270
            
            
            —Prepaid
                expenses and other current assets
            
            
            (2,292
            )
            
            22Other
                assets
            
            
            2,159
            
            
            —Accounts
                payable
            
            
            11,183
            
            
            1,917Accrued
                expenses and other current liabilities
            
            
            (816
            )
            
            —Other
            
            
            —
            
            
            65Net
                cash provided by operating activities
            
            
            12,753
            
            
            2,949Cash
                flows used in investing activities:Investment
                held in trust fund
            
            
            —
            
            
            (1,474
            )Deferred
                Acquisition costs
            
            
            —
            
            
            (1,725
            )Property
                and equipment additions
            
            
            (2,647
            )
            
            —Net
                cash used in investing activities
            
            
            (2,647
            )
            
            (3,199
            )Cash
                flows provided by (used in) financing activities:Principal
                borrowings under revolving credit facility
            
            
            15,750
            
            
            —Principal
                payments on revolving credit facility
            
            
            (26,750
            )
            
            —Principal
                payments under initial term loan
            
            
            (1,500
            )
            
            —Payment
                of deferred financing fees
            
            
            (278
            )
            
            (396
            )Payments
                of deferred offering costs
            
            
            —
            
            
            599Net
                cash (used in) provided by financing activities
            
            
            (12,778
            )
            
            203Net
                (decrease) in cash and cash equivalents
            
            
            (2,672
            )
            
            (47
            )Cash
                and cash equivalents at beginning of period
            
            
            3,740
            
            
            54Cash
                and cash equivalents at end of period
            
            $
            1,068
            
            $
            7Supplemental
                disclosures:Accretion
                of trust fund relating to common stock subject to possible
                redemption
            
            $
            —
            
            $
            300Cash
                paid for:Interest
            
            $
            9,228
            
            $
            —Income
                taxes
            
            $
            388
            
            $
            1





The
      accompanying notes are an integral part of the consolidated financial
      statements.





5





**CHEM
      RX CORPORATION AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Amounts
      in thousands, except share and per share data)**


**(UNAUDITED)**





**1.**  **Organization
      and Other Matters**





Chem
      Rx
      Corporation (the “Company”) was formed as a blank check company in 2005. On
      October 26, 2007, the Company consummated a business combination by
      acquiring all of the issued and outstanding capital stock and other equity
      interests of B.J.K. Inc., a New York corporation doing business as Chem Rx,
      and
      certain related entities (collectively, the “B.J.K. Entities”). The sellers of
      such capital stock and other equity interests are referred to hereinafter as
      the
“Sellers.” The B.J.K. Entities provide institutional pharmacy services to
      skilled nursing facilities and other long-term healthcare institutions.
      Institutional pharmacy services consist of the fulfillment of orders for
      prescription and non-prescription drugs and related goods for residents of
      various healthcare institutions.





The
      Company services its customers primarily from its main pharmacy operations
      center in Long Beach, New York, and to a lesser extent from its operating
      facilities in South Plainfield, New Jersey; Sciota, Pennsylvania; Albany, New
      York; and Deerfield Beach, Florida.





The
      Company’s business operations are conducted in a single business segment
      consisting of the provision of institutional pharmacy services.





**Acquisition
      of Chem Rx**





The
      Company acquired the capital stock and other equity interests of the B.J.K.
      Entities for an aggregate purchase price of $191,444 including transaction
      costs
      of $11,813 (the “Business Combination”). The acquisition was accounted for using
      the purchase method, in accordance with Financial Accounting Standards Board
      (FASB) Statement No. 141, “Business Combinations.” Accordingly, the
      purchase price was allocated to the assets acquired and liabilities assumed
      based on their estimated fair values.





The
      purchase price paid by the Company consisted of the following:





Cash
                paid to or on behalf of Sellers
            
            $
            123,752Cash
                paid for transaction costs
            
            
            11,813Total
                cash paid
            
            
            135,565Subordinated
                notes payable issued to Sellers
            
            
            8,259B.J.K.
                Entities bank debt paid at closing
            
            
            33,745Issuance
                of 2,500,000 shares of common stock to Sellers(1)
            
            
            13,875Total
                purchase price paid
            
            $
            191,444








(1)
            The
                common stock was valued at $5.55 per share, which approximates the
                quoted
                market price of the common stock at the time the Business Combination
                was
                agreed to and amended.





6




The
      fair
      value of the assets acquired and liabilities assumed arising from the Business
      Combination were as follows:





**Fair Value**
              **October 26, 2007***Assets
                Acquired:*Cash
            
            $
            113Accounts
                receivable
            
            
            61,914Inventory
            
            
            18,605Other
                current assets
            
            
            5,580Property
                and equipment
            
            
            8,273Intangible
                assets
            
            
            83,210Other
                assets
            
            
            2,542Total
                assets acquired
            
            
            180,237*Liabilities
                Assumed:*Accounts
                payable and accrued liabilities
            
            
            (27,419
            )Net
                assets acquired over liabilities assumed
            
            
            152,818Excess
                of purchase price over net assets acquired (Goodwill)
            
            
            38,626Total
                purchase price paid
            
            $
            191,444





The
      Company and the Sellers agreed to treat the acquisition as an asset purchase
      for
      income tax purposes. Accordingly, deferred taxes were not recorded, since the
      financial statement and income tax basis of the assets acquired and liabilities
      assumed were identical on the date of acquisition. Goodwill in the amount of
      $33,419 is tax deductible. Until the Business Combination, the Company had
      no
      operations and existed with the sole purpose of identifying and acquiring an
      operating business, which was accomplished through the acquisition of the B.J.K.
      Entities.





In
      the
      first quarter of 2008, the Company adjusted the assets acquired in the Business
      Combination in connection with a correction principally related to its
      accounting for manufacturing rebates as well as certain other immaterial
      adjustments (see Note 2). As a result of the correction, previously reported
      assets acquired were adjusted by decreasing goodwill by $2,083, inventory by
      $483 and other long-term assets by $19 and by increasing prepaid and other
      current assets by $2,243 and accounts receivable by $342.





The
      Company could be required to pay the Sellers an additional amount of cash up
      to
      $12,500 and issue up to an aggregate of 9,000,000 newly issued shares of its
      common stock subject to the achievement of certain milestones as defined in
      the
      stock purchase agreement relating to the Business Combination. Such milestones
      include the achievement of specified quoted common stock prices and adjusted
      earnings before interest, taxes, depreciation and amortization (“EBITDA”) for
      the years 2007 through 2011. Such milestones are based on annual and cumulative
      thresholds and include both possible limitations and accelerations. No such
      milestones were achieved for any measurement period through September 30, 2008.
      This contingent consideration will be accounted for as additional purchase
      price
      if and when payment becomes probable.


7





The
      Sellers do not have the right to receive shares of the Company’s common stock as
      contingent stock consideration to the extent that, after giving effect to any
      such issuance, the Sellers (together with their affiliates) would beneficially
      own in excess of 20% (“the Maximum Percentage”) of the number of shares of the
      Company’s common stock outstanding immediately after giving effect to such
      issuance. In lieu of issuing such shares, the Company may pay each Seller an
      amount in cash equal to the number of shares to which such Seller was entitled
      to but limited by the Maximum Percentage, multiplied by the average of the
      closing prices for the Company’s common stock for a period of 30 consecutive
      trading days immediately preceding the date such shares become issuable to
      the
      Sellers. As of September 30, 2008, the Sellers own in excess of 20% of the
      shares of the Company’s common stock.





Unaudited
      pro-forma results, as corrected for the adjustments described in Note 2, for
      the
      Company, as if the Business Combination had occurred on January 1, 2007,
      are as follows:





**Three months**
              **ended**
              **September
                30, 2007**
            
            **Nine months**
              **ended**
              **September
                30, 2007**Net
                Sales
            
            $
            80,805
            
            $
            233,051Net
                (Loss) Income
            
            $
            (222
            )
            $
            143Net
                (Loss) Income per share—basic and diluted
            
            $
            (.02
            )
            $
            .01Weighted
                average shares outstanding—basic and diluted
            
            
            13,762,915
            
            
            13,762,915





**Initial
      Public Offering**





On
      October 27, October 31 and November 1, 2005, the Company sold an
      aggregate of 9,775,000 units in its initial public offering (“IPO”) at $6.00 per
      unit, for total gross proceeds of $58,650 and net proceeds of $53,473. Each
      unit
      consists of one share of the Company’s common stock, and two redeemable common
      stock purchase warrants (the “Unit”). Each warrant entitles the holder to
      purchase from the Company one share of common stock at an exercise price of
      $5.00 per share. The warrants became exercisable on the date of the Company’s
      business combination, October 26, 2007, and expire on October 20,
      2009.





The
      warrants sold in the IPO (the “IPO Warrants”) are redeemable by the Company at a
      price of $.01 per warrant upon 30 days’ notice if the closing sale price of
      the common stock is at least $8.50 per share for any 20 trading days within
      a 30
      trading day period ending on the third day prior to the date on which notice
      of
      redemption is given.





In
      connection with the IPO, the Company issued a unit purchase option (the “UPO”),
      for $0.10, to the representative of the underwriters in the IPO, to purchase
      425,000 units (creating 425,000 potential common shares and 850,000 potential
      warrants) at an exercise price of $7.50 per unit. The warrants underlying such
      units are exercisable at $6.25 per share and expire on October 20, 2009. The
      Company has accounted for the fair value of this UPO as an expense of the IPO
      resulting in a charge directly to stockholders’ equity. The Company estimated
      that the fair value of the UPO at the date of issuance was approximately $922
      ($2.17 per unit) using a Black-Scholes option-pricing model. The fair value
      of
      the option granted to the representative was estimated as of the date of grant
      using the following assumptions: (1) expected volatility of 42.875% based
      on the average volatility of comparable publicly traded companies,
      (2) risk-free interest rate of 4.03%, (3) expected dividend yield of 0% and
      (4) expected life of 5 years. The UPO may be exercised for cash or on
      a “cashless” basis. The holders of the warrants underlying the UPO are not
      entitled to receive net cash settlement of the warrants.





As
      of
      September 30, 2008, all 19,550,000 warrants and the entire UPO to purchase
      425,000 units (creating 425,000 potential common shares and 850,000 warrants)
      remain outstanding.


8




**2.**  **Summary
      of Significant Accounting Policies**





The
      accompanying unaudited consolidated financial statements of the Company have
      been prepared in accordance with U.S. generally accepted accounting principles
      for interim financial information and with the instructions to Quarterly Report
      on Form 10-Q. Accordingly, they do not include all of the information and
      footnotes required by U.S. generally accepted accounting principles for complete
      financial statements. Interim results are not necessarily indicative of results
      for a full year.





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reported period. Actual
      results could differ from those estimates. Estimates and assumptions are
      reviewed periodically and the effects of revisions are reflected in the
      consolidated financial statements in the period they are determined to be
      necessary. Significant estimates made in the accompanying unaudited consolidated
      financial statements include, but are not limited to, the allowance for doubtful
      accounts, sales discounts, manufacturing rebates, inventory valuation, valuation
      and recoverability of long lived assets, indefinite lived intangibles (including
      the values assigned to acquired intangible assets and goodwill), share based
      payments, warrants and income taxes.





A
      summary
      of the Company’s critical and significant accounting policies is presented in
      the Company’s 2007 Annual Report on Form 10-K. Users of financial
      information produced for interim periods are encouraged to refer to the notes
      contained in the 2007 Annual Report on Form 10-K when reviewing interim
      financial results. Since December 31, 2007, there have been no significant
      changes to the Company’s significant accounting policies or to the related
      assumptions and estimates involved in applying these policies, except for a
      change in the accounting for manufacturer rebates. The change in accounting
      for
      manufacturing rebates, from a cash basis of accounting to the accrual method,
      has been accounted for as a correction of previously issued financial reports,
      as discussed below.





The
      Company was unable to file its Quarterly Report on Form 10-Q for the quarter
      ended March 31, 2008 by the required filing date of May 15, 2008
      because the Company determined that it was necessary to reconsider its use
      of
      the cash basis of accounting for manufacturer rebates. The Company subsequently
      completed this evaluation and concluded that sufficient information was
      available in prior periods for the Company to make a reasonable estimate of
      manufacturer rebates and account for such rebates on an accrual basis. The
      Company further determined that the adjustments required to previously reported
      amounts under the accrual method of accounting would be immaterial.





As
      a
      result, the consolidated balance sheet at December 31, 2007 has been
      revised to correct the immaterial errors in the Company’s accounting for
      manufacturer rebates, as well as other income and certain professional fees.
      The
      effect of this correction, shown in the table below, is principally related
      to
      periods prior to the Business Combination and accordingly is reflected through
      a
      reduction in goodwill. For the period subsequent to the Business Combination,
      net income was overstated by $142 and, accordingly, retained earnings has been
      reduced. The Company believes that the effect of this correction was not
      material, either quantitatively or qualitatively, to 2007 or any prior
      year.





The
      following table represents the impact of the correction on the December 31,
      2007
      consolidated balance sheet:





**Reported**
            
            **Correction**
            
            **Revised**Accounts
                receivable
            
            $
            64,613
            
            $
            425
            
            $
            65,038Inventory
            
            $
            22,858
            
            $
            (504
            )
            $
            22,354Prepaid
                expenses and other current assets
            
            $
            2,419
            
            $
            2,143
            
            $
            4,562Goodwill
            
            $
            40,709
            
            $
            (2,083
            )
            $
            38,626Accrued
                expenses
            
            $
            3,157
            
            $
            127
            
            $
            3,284Retained
                earnings
            
            $
            2,495
            
            $
            (142
            )
            $
            2,353





In
      the
      opinion of management, the accompanying unaudited consolidated financial
      statements contain all material adjustments, consisting only of normal recurring
      adjustments, necessary to present fairly the consolidated financial position,
      results of operations and cash flows of the Company for the interim periods
      presented.




9




**Recent
      Accounting Pronouncements**




In
      February 2007, the Financial
      Accounting Standards Board (“FASB”) issued Statement
      of Financial Accounting Standards (“SFAS”) No. 159, *“* The
      Fair
      Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard
      permits entities to measure many financial instruments and certain other items
      at fair value. The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. The provisions of SFAS No. 159 are
      effective beginning in the Company’s 2008 fiscal year.  The
      adoption of SFAS No. 159 did not have an impact on the Company’s consolidated
      financial statements as the  Company
      did not elect the fair value option for any of its financial assets and
      liabilities.




In
      December 2007, the FASB issued
      SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Among
      other changes, SFAS 141R requires the acquiring entity in a business combination
      to recognize all (and only) the assets acquired and liabilities assumed in
      the
      transaction at fair value; and establishes the acquisition-date fair value
      as
      the measurement objective for all assets acquired and liabilities assumed,
      including earn-out provisions. SFAS 141R is effective for business combinations
      occurring in the first annual reporting period beginning after December 15,
      2008. The Company is evaluating the anticipated effect of this recently issued
      standard on its consolidated results of operations, financial position and
      cash
      flows.





In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling
      Interests in Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS 160”). Among other items, SFAS 160 requires all entities to report
      non-controlling (minority) interests in subsidiaries in the same way as equity
      in the consolidated financial statements. SFAS 160 is effective for the first
      annual reporting period beginning after December 15, 2008. The Company is
      evaluating the anticipated effect of this recently issued standard on its
      consolidated results of operations, financial position and cash
      flows.





In
      December 2007, the FASB issued SFAS No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities, an amendment of FASB Statement
      No. 133” (“SFAS 161”). Among other items, SFAS 161 requires qualitative
      disclosures about objectives and strategies for using derivatives, quantitative
      disclosures about fair value amounts of, and gains and losses on, derivative
      instruments, and disclosures about credit-risk-related contingent features
      in
      derivative agreements. SFAS 161 is effective for the first annual reporting
      period beginning after November 15, 2008. The Company is evaluating the
      anticipated effect of this recently issued standard on its consolidated results
      of operations, financial position and cash flows.




In
      April
      2008, the FASB issued FASB Staff Position No. 142-3, *“* Determination
      of the Useful Life of Intangible Assets ” (“FSP
      No.
      142-3”), which amends the factors that should be considered when developing
      renewal or extension assumptions used to determine the useful life of an
      intangible asset under Statement of Financial Accounting Standards No. 142
      (“SFAS No. 142”), *“* Goodwill
      and Other Intangible Assets”, in order to improve consistency between SFAS No.
      142 and the period of expected cash flows to measure the fair value of the
      asset
      under Statement of Financial Accounting Standards No. 141 (revised 2007), *“* Business
      Combinations” and other U.S. generally accepted accounting practices. This FASB
      Staff Position is effective for fiscal periods beginning on or after December
      15, 2008. The adoption of FSP No. 142-3 is not expected to have a material
      impact on the Company’s financial statements.




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS 162”). This statement identifies the sources of
      accounting principles and the framework for selecting the principles used in
      the
      preparation of financial statements of nongovernmental entities that are
      presented in accordance with GAAP. With the issuance of this statement, the
      FASB
      concluded that the GAAP hierarchy should be directed toward the entity and
      not
      its auditor, and reside in the accounting literature established by the FASB
      as
      opposed to the American Institute of Certified Public Accountants (AICPA)
      Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
      Conformity With Generally Accepted Accounting Principles.” This statement is
      effective 60 days following the SEC’s approval of the Public Company Accounting
      Oversight Board amendments to AU Section 411, “The Meaning of Present
      Fairly in Conformity With Generally Accepted Accounting Principles.” We have
      evaluated the new statement and have determined that it will not have a
      significant impact on the determination or reporting of our financial
      results.




10




Effective
      January 1, 2008,  the
      Company  adopted
      SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a
      framework for measuring fair value and requires enhanced disclosures about
      fair
      value measurements. SFAS No. 157 clarifies that fair value is an exit
      price, representing the amount that would be received to sell an asset or paid
      to transfer a liability in an orderly transaction between market participants.
      SFAS No. 157 also requires disclosure about how fair value is determined
      for assets and liabilities and establishes a hierarchy for which these assets
      and liabilities must be grouped, based on significant levels of inputs as
      follows:




**Level
      1** quoted prices in active markets for identical assets or liabilities;




**Level
      2** quoted prices in active markets for similar assets and liabilities and inputs
      that are observable for the asset or liability; or




**Level
      3** unobservable inputs, such as discounted cash flow models or
      valuations.




The
      determination of where assets and liabilities fall within this hierarchy is
      based upon the lowest level of input that is significant to the fair value
      measurement.  The
      Company has a derivative interest rate swap, which has been designated as a
      cash
      flow hedge.    The
      initial fair value of this instrument was determined by  the
      counterparties using inputs that are available in the public swap markets for
      similarly termed instruments and then making adjustments for the terms specific
      to its instrument.   The Company  continues
      to value this security based on quotes from its counterparties. Since the inputs
      used to value this option contract are observable,  the
      Company has classified  it
      as
      level 2 inputs. There was no ineffectiveness relating to the interest rate
      swap
      for the three and nine months ended September 30, 2008, with all of
      the unrecognized gains and losses being recorded in accumulated other
      comprehensive income in stockholders’ equity.




In
      February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2
“Effective Date of FASB Statement No. 157”, which delays the effective date
      of SFAS No. 157 for non-financial assets and non-financial liabilities,
      except items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis. FSP FAS No. 157-2 defers the effective
      date of SFAS No. 157 to fiscal years beginning after November 15,
      2008, and for interim periods within those fiscal years.  The
      Company is currently evaluating whether the adoption of SFAS No. 157, for
      items within the scope of FSP FAS No. 157-2, will have an impact on its
      consolidated financial position, results of operations or cash
      flows.




Management
      does not believe that any other recently issued, but not yet effective,
      accounting standards if currently adopted would have a material effect on the
      accompanying financial statements.





**3.**  **Related
      Party Transactions**





In
      January 2007, two of the Company’s initial directors (J. Jay Lobell and
      Lindsay Rosenwald) entered into a personal warrant purchase plan to collectively
      purchase up to an additional 1,000,000 warrants in the public marketplace at
      prices not to exceed $.64 per warrant. The purchase plan was completed during
      February 2007, resulting in the purchase of 1,000,000 warrants pursuant to
      such purchase plan.





Prior
      to
      the Business Combination, the Company occupied office space provided by an
      affiliate of Lindsay Rosenwald, who was the Company’s chairman at the time. The
      Company paid such affiliate $7.50 per month for such services commencing on
      October 21, 2005 and ending on October 26, 2007. For the three and
      nine months ended September 30, 2007, the Company incurred expense totaling
      $22.5 and $67.5, respectively to such affiliate pursuant to this
      agreement.





The
      Company leases its 75,000-square-foot Long Beach, New York facility from 750
      Park Place Realty Co., LLC (the “Long Beach Landlord”) under a lease agreement
      that expires December 31, 2020. The ownership interests in the Long Beach
      Landlord are owned by Jerry Silva, Steven Silva, Rosalie Silva and the heirs
      of
      Mark Baldinger. Rosalie Silva is Jerry Silva’s wife. Mark Baldinger was a former
      principal of the B.J.K. Entities. Under the lease, the Company pays rent at
      the
      monthly rate of $125, increasing to $150 on January 1, 2010, $175 on
      January 1, 2013, $200 on January 1, 2016 and $225 on January 1,
      2019. Jerry Silva, Rosalie Silva and Steven Silva currently earn approximately
      $385, $385 and $55, respectively, from their ownership interests in the Long
      Beach Landlord. These amounts are net of annual mortgage payments of
      approximately $353 and other operating expenses. Under the lease, the Company
      is
      obligated to pay the real estate taxes relating to the premises. The Company
      expensed $65 and $259 in real estate taxes during the three and nine months
      ended September 30, 2008, respectively, with respect to the Long Beach facility.




11




Jerry
      Silva, the Company’s chairman and chief executive officer, and Steven Silva, the
      Company’s president and chief operating officer in their individual capacities
      and in their respective capacities as life tenant and remainderman of a life
      tenancy (together, the “Silvas”),in connection with the Business Combination,
      entered into three separate put option agreements with certain institutional
      investors pursuant to which the Silvas granted to each investor an option to
      require the Silvas to purchase up to a total of 5,169,749 shares of the
      Company’s common stock from them during a specified period and a specified price
      in the future to the extent the applicable investor purchased outstanding shares
      of the Company’s common stock and caused those shares to be voted in favor of
      the Business Combination at the special meeting of the Company’s stockholders.
      Each put option was exercisable at any time, and from time to time, beginning
      July 22, 2008 and ending October 27, 2008. The exercise price for each put
      option was the average price paid by the investor to acquire the shares subject
      to the put option, but not to exceed $6.00 per share. When exercised, the put
      option could be settled in cash or physically settled, at the option of the
      Silvas. The option may be settled in cash only if the Company’s shares are
      traded on the Nasdaq Capital Market, the Nasdaq Global Market, or any registered
      national stock exchange. During the period July 22, 2008 through September
      16,
      2008, all three put options were exercised requiring the Silvas to purchase
      a
      total of 5,169,749 shares, resulting in the Silvas and their affiliates owning
      54.22% of the Company’s outstanding shares of common stock at November 13, 2008.





On
      April 8, 2008, the Company arranged for one of the Company’s major
      pharmaceutical vendors to extend certain benefits to the Company.  The
      vendor, AmerisourceBergen Drug Corporation (“ABDC”), and the Company are parties
      to a prime vendor agreement.  The prime vendor agreement was amended in
      connection with the Company’s Business Combination to provide, among other
      things, that the Company would be required to maintain a cash deposit of $2,500
      as security for its pharmaceutical purchases from ABDC.  On April 8,
      2008, Jerry Silva delivered to ABDC a personal letter of credit in the amount
      of
      $2,500 as security for pharmaceutical purchases by the Company under the prime
      vendor agreement.  In exchange for the delivery of the letter of credit,
      ABDC agreed, among other things, to return to the Company the $2,500 cash
      deposit.  No payment or other financial accommodation was given to Jerry
      Silva by the Company with respect to the letter of credit.





On
      May
      30, 2008 Jerry Silva, delivered to Kinray, Inc. (“Kinray”) one of the Company’s
      major pharmaceutical vendors, a personal guaranty to unconditionally and
      irrevocably guarantee to Kinray the full and prompt payment, upon the due date,
      maturity, acceleration or otherwise, of any and all indebtedness and/or any
      fully adjudicated claim now existing or which may hereafter arise in favor
      of
      Kinray against the Company. No payment or other financial accommodation was
      given to Jerry Silva by the Company with respect to this guaranty.




12




**4.**  **Commitments
      and Contingencies**





The
      initial stockholders of the Company are entitled to registration rights with
      respect to their founding shares pursuant to an agreement dated October 21,
      2005. The holders of the majority of these shares are entitled to make certain
      demands that the Company register these shares at any time commencing three
      months prior to October 21, 2008. In addition, the initial stockholders
      have certain “piggy-back” registration rights on registration statements filed
      subsequent to October 21, 2008.





Pursuant
      to an agreement dated October 26, 2007, the Sellers are entitled to certain
      piggyback and demand registration rights with respect to the shares of the
      Company’s common stock that they were issued as part of the purchase price under
      the stock purchase agreement relating to the Business Combination.





On
      December 20, 2007, JMP Securities LLC and Shattuck Hammond
      Partners LLC filed a complaint in the Superior Court of California for the
      City and County of San Francisco against B.J.K. Inc., the Company, and
      certain individuals affiliated with the Company. The plaintiffs alleged that
      they were entitled to compensation as a result of the Company’s acquisition of
      B.J.K. Inc. on October 26, 2007. The complaint asserted various claims
      including breach of contract, breach of implied covenant of good faith and
      fair
      dealing, fraud, negligent misrepresentation and unjust enrichment, and sought
      various damages including compensatory damages of not less than $2.23 million,
      punitive damages, the reimbursement of the plaintiffs’ legal fees and court
      costs, and a declaratory judgment as to the validity and enforceability of
      a
      financial advisory and investment banking services agreement entered into by
      B.J.K. Inc. Following mediation, the parties entered into a settlement agreement
      and caused the lawsuit to be dismissed with prejudice. Jerry Silva, Steven
      Silva, and certain of their affiliates are obligated to indemnify the Company
      for any costs associated with these claims under the terms of the stock purchase
      agreement dated as of June 1, 2007, pursuant to which these parties sold
      B.J.K. Inc. to the Company. Accordingly, these parties funded the settlement
      payment to the plaintiffs. The Company therefore believes that this lawsuit
      does
      not have an adverse effect on the Company’s results of operations or financial
      position.





**5.**  **Accounts
      Receivable**





Gross
      accounts receivable at September 30, 2008 and December 31, 2007 totaled
      approximately $82,189 and $72,893 million, respectively. The allowance for
      doubtful accounts and sales discounts was $5,103 and $1,573 at September 30,
      2008 and $6,616 and $1,239 at December 31, 2007, respectively. Accounts
      receivable from nursing homes and prescription drug plans and other third
      parties totaled approximately $71,504 and $63,947 or 87% and 88% of the gross
      accounts receivable at September 30, 2008 and December 31, 2007, respectively.
      Approximately $19,666 and $19,528 of the respective balances were
      outstanding for more than 180 days at such dates.





**6.**  **Long-Term
      Debt**





On
      October 26, 2007, the Company entered into a first lien credit and guaranty
      agreement in an aggregate amount not to exceed $125,000, consisting of $80,000
      aggregate principal amount of initial term loan, $20,000 aggregate principal
      amount of delayed draw term loan commitments, and up to $25,000 aggregate
      principal amount of revolving commitments. Additionally, on October 26,
      2007, the Company entered into a second lien credit and guaranty agreement
      which
      consists of a second lien term loan facility in an aggregate amount not to
      exceed $37,000, collectively herein referred to as the “Credit Facilities.” On
      October 26, 2007, the Company utilized an aggregate of $121,000 of the
      Credit Facilities to fund the purchase of the B.J.K. Entities.




13





The
      initial term loan matures on October 26, 2013 and, prior to the amendment
      on March 31, 2008, described below, bore interest at the lender’s prime
      rate plus an applicable margin, as defined, of 3% or LIBOR plus 4%, at the
      option of the Company. At September 30, 2008, $78,500 was outstanding under
      the
      initial term loan. Principal payments related to the initial term loan are
      $2,000 per annum from 2008 through 2010 and $4,000 per annum in 2011 and 2012,
      payable quarterly. The interest rate on the initial term loan, as amended,
      approximated 8.26% as of September 30, 2008.





The
      delayed draw term commitments expired on July 31, 2008. Any borrowings
      under the delayed loan draw term commitments mature on October 26, 2013
      and, prior to the amendment on March 31, 2008, bore interest at the
      lender’s prime rate plus 3% or LIBOR plus 4%, at the option of the Company.
      Effective May 14, 2008, the delayed draw term commitments were terminated.
      At September 30, 2008, there were no borrowings due under the delayed draw
      term
      loan commitments.





The
      revolving commitments expire on October 26, 2012 and, prior to the
      amendment on March 31, 2008, bore interest at the lender’s prime rate plus
      3% or LIBOR plus 4%, at the option of the Company. As of September 30, 2008,
      $3,000 was outstanding under the revolving commitments at an interest rate
      of
      approximately 8.26%.





The
      second lien term loan facility matures on October 26, 2014 and, prior to
      the amendment on March 31, 2008, bore interest at an agreed upon base rate
      plus an applicable margin of 7.0% or the adjusted Eurodollar rate (as defined
      in
      the Credit Facilities) plus 8.0%, at the option of the Company. As of September
      30, 2008, $37,000 was outstanding under the second lien term loan facility.
      There are no principal repayment requirements under the second lien term loan
      facility until the maturity date. The interest rate on the second lien term
      loan, as amended, was 13.25% as of September 30, 2008.





The
      Credit Facilities are collateralized by substantially all the assets of the
      Company. The Credit Facilities provide for certain mandatory prepayments in
      the
      event cash proceeds are received from the sale of certain assets, the issuance
      of equity securities, the issuance of debt and in the event the Company has
      consolidated excess cash flow (as defined) in any fiscal year commencing in
      2008. The Credit Facilities also provide for a reduction in the applicable
      margin, as defined, based on the total leverage ratio of the
      Company.





The
      Company is also required to comply with certain restrictive and financial
      covenants, including, among other things, limits or restrictions on the ability
      of the Company and its subsidiaries to dispose of assets, incur additional
      indebtedness, incur guarantee obligations, prepay other indebtedness, make
      dividends, create liens, make investments, make acquisitions, modify the terms
      of the documents governing the indebtedness, engage in mergers, make capital
      expenditures or engage in certain transactions with affiliates. The Credit
      Facilities also require the Company to comply with minimum coverage ratios
      of
      Consolidated Adjusted EBITDA, as defined, to Consolidated Fixed Charges and
      Consolidated Adjusted EBITDA to Total Debt.





As
      of
      September 30, 2008, the Company was in compliance with the covenants contained
      in the Credit Facilities. While the Company currently believes that it will
      continue to be in compliance with the bank covenants in the future, failure
      to
      comply with the minimum Consolidated Fixed Charge Coverage Ratio test or the
      Total Leverage test (each as defined) would result in a violation of the Credit
      Facilities which, absent a waiver or an amendment, would permit the lenders
      to
      accelerate repayment of borrowings thereunder. If the debt under the Credit
      Facilities is accelerated, there can be no assurance that the Company would
      have
      sufficient assets to pay amounts due under the Credit Facilities, or have access
      to other sources of funding.





Effective
      March 31, 2008, the Company and its Lenders amended the Credit Facilities.
      The amendments were made in connection with certain violations of the financial
      covenants relating to fixed charge coverage ratios and total leverage ratios.
      The covenant violations arose because the definition of “Consolidated Adjusted
      EBITDA” in the Credit Facilities excluded only $5,350 of employee bonuses which
      were paid at the time of the Business Combination, instead of the entire $11,000
      of such employee bonuses which were intended to be excluded for this purpose.
      Accordingly, after the amendments, the definition of “Consolidated Adjusted
      EBITDA” provides that the entire $11,000 of employee bonuses paid in conjunction
      with the Business Combination is excluded from such calculation, effective
      as of
      the original date of the Credit Facilities.




14





The
      amendment of the first lien credit and guaranty agreement included an increase
      to the applicable margin ranges for LIBOR loans from 4.0% to 4.5% (from the
      original range of 3.5% to 4.0%) and for base rate loans from 3.00% to 3.50%
      (from the original range of 2.5% to 3.0%), respectively, as well as an amendment
      fee of $245,500 on the outstanding first lien indebtedness. The amendment fee
      has been added to deferred financing fees, and is being amortized over the
      life
      of the loan. The amendment to the second lien credit and guaranty agreement
      established a LIBOR-based loan floor interest rate of 13.25%, and a base
      rate-based loan floor interest rate of 14.25%. As a result, the applicable
      interest rate beginning March 28, 2008 for the second lien debt will be
      either (i) for Eurodollar rate loans, the greater of 13.25% or a rate equal
      to LIBOR plus the applicable original margin of 8.00%, or (ii) for
      non-Eurodollar loans, the greater of 14.25% or a rate equal to the prime rate
      plus the applicable original margin of 7.0%.





The
      Credit Facilities require the Company to enter into interest rate protection
      agreements to provide interest rate protection for a minimum of 50% of the
      Company’s consolidated total funded indebtedness under the first lien and second
      lien credit and guaranty agreements for a term of not less than three years.
      Effective January 28, 2008, the Company entered into a swap agreement (the
“Swap”) with Canadian Imperial Bank of Commerce (“CIBC”) to provide the required
      interest rate protection and to manage its exposure to changes in LIBOR. The
      Swap is for a notional amount of $58,500 expiring on January 28, 2011 with
      a fixed rate of LIBOR interest of 3.07%. The Swap has been designated as a
      cash
      flow hedge of the variability of the cash flows due to changes in LIBOR and
      has
      been deemed to be highly effective. Accordingly, the Company records the fair
      value of the Swap as an asset or liability on its consolidated balance sheet,
      and any unrealized gain or loss is included in accumulated other comprehensive
      income. As of September 30, 2008, the Company recorded an asset of $547,
      included in other assets, in the accompanying consolidated balance sheet and
      other comprehensive (loss) income of ($206) (net of tax of $144) and $323 (net
      of tax of $224) for the three and nine months ended September 30, 2008,
      respectively, to account for the change in the fair value of the Swap. No hedge
      ineffectiveness was recorded during the three and nine months ended September
      30, 2008.





**Subordinated
      Notes Payable—related parties**





As
      part
      of the financing of the Business Combination, the Company issued subordinated
      notes totaling $8,259 ($9,059 at September 30, 2008 including $800 of unpaid
      earned interest) to the former stockholders of the B.J.K. Entities. The notes
      mature on April 15, 2015 and bear interest at an interest rate of 10%.
      Interest is paid in-kind (by increasing the outstanding principal amount of
      the
      notes by the amount of such unpaid interest, and thereafter the principal amount
      of the notes is deemed to be such increased amount for all purposes, including
      the calculation of interest) and not in cash.





**7.**  **Comprehensive
      Income (Loss)**





The
      components of comprehensive income (loss) were as follows:





**Three Months Ended**
              **September
                30**
            
            **Nine Months Ended**
              **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                (Loss) income
            
            $
            (197
            )
            $
            251
            
            $
            (853
            )
            $
            945Other
                comprehensive income:Change
                in fair value of the Swap, net of taxes
            
            
            (206
            )
            
            —
            
            
            323
            
            
            —Total
                comprehensive (loss) income
            
            $
            (403
            )
            $
            251
            
            $
            (530
            )
            $
            945





**8.**  **Income
      Taxes**





The
      Company recorded a provision for income taxes of $428 and a benefit from income
      taxes of $88 for the three and nine months ended September 30, 2008,
      respectively. The provision is based on the Company’s expected effective tax
      rate on projected pre-tax results from operations for the year ending
      December 31, 2008. The Company recorded an income tax provision of $0 and
      $1 for the three and nine months ended September 30, 2007, respectively, based
      on the Company’s effective tax rate of 0.1% for the year ended December 31,
      2007.




15





A
      valuation allowance is recorded when management determines that it is more
      likely than not that some portion or all of the deferred tax assets will not
      be
      realized. The Company considers the scheduled reversal of deferred tax
      liabilities, projected future taxable income, and tax planning strategies,
      among
      other factors, in making this assessment. There was no valuation allowance
      as of
      September 30, 2008 and December 31, 2007 as the Company believes it is more
      likely than not that the net deferred tax assets will be realized.





**9.**  **Stockholders’
      Equity**





**Earnings
      Per Share**





Basic
      income (loss) per share (“EPS”) is computed by dividing the net income (loss)
      available to the common stockholders by the weighted average number of common
      shares outstanding during the periods. Common shares totaling 1,954,999 which
      were subject to possible redemption and have been excluded from the calculation
      of basic EPS for the three and nine months ended September 30, 2007 since such
      shares, if redeemed, participated only in their pro rata share of the trust
      fund
      earnings. Upon completion of the Business Combination, such shares were no
      longer redeemable.





Diluted
      EPS adjusts basic EPS for the effects of warrants, the warrants issuable
      pursuant to the UPO (see Note 1) and other potentially dilutive financial
      instruments, only in the periods in which such effect is dilutive.





On
      February 15, 2008, the Company entered into a business advisory agreement with
      a
      third party to provide certain services and advice regarding the Company’s
      business and financing activities. In connection with the business advisory
      agreement, the Company agreed to issue warrants to purchase up to a maximum
      of
      100,000 shares of the Company’s common stock. On February 15, 2008, May 15,
      2008 and August 15, 2008, the Company granted three warrants to purchase an
      aggregate of 75,000 shares of the Company’s common stock in connection with this
      agreement (the “Advisory Warrant”). The Advisory Warrants are exercisable at a
      price of $7.00 per share and had a fair value of $1.89, $1.72 and $1.37 on
      February 15, 2008, May 15, 2008 and August 15, 2008, respectively. The fair
      value of the Advisory Warrants was estimated on the date of each grant using
      a
      Black-Scholes option-pricing model with the following assumptions utilized:
      risk-free interest rate of 3.00%; expected life of 5 years; expected dividend
      yield of 0% and expected volatility of 48.6% (53.7% for the August 15, 2008
      warrant) based on the average volatility of comparable publicly traded
      companies. The expected volatility used was based on an examination of the
      historical and implied volatility of the stock prices of selected comparable
      companies and the nature of those companies, and other relevant factors. The
      Company recorded a non-cash charge of $34 and $124 in the three and nine months
      ended September 30, 2008, respectively, related to the Advisory
      Warrants.





Common
      shares subject to possible redemption include the IPO Warrants (see Note 1)
      and
      the warrants issuable pursuant to the UPO. For the three and nine months ended
      September 30, 2008, there were no in the money IPO Warrants, restricted shares
      and employee stock options.





**2007
      Incentive Compensation Plan**





On
      October 22, 2007, the stockholders of the Company approved the 2007
      Incentive Compensation Plan (the “Plan”), and authorized 1,350,000 shares for
      award under the Plan.  The Plan provides for the grant of a variety of
      equity instruments including stock options, restricted stock, stock appreciation
      rights, share units, performance units, and dividend equivalents.  Eligible
      recipients include the Company’s directors, officers, employees and certain
      third-party service providers.  Awards under the Plan are determined by the
      Company’s board of directors or a committee thereof.  The board has
      delegated its authority to grant awards under the Plan to the compensation
      committee of the board.





On
      January 24, 2008, board of directors of the Company (the “Board”) granted
      an aggregate of 28,302 shares of restricted stock (at the quoted market value
      on
      the date of grant of $5.30 per share) to the non-employee directors and a
      consultant to the Board. During the quarter ending June 30, 2008, the
      consultant resigned and therefore forfeited his 4,717 restricted shares. The
      restriction on the shares lapses in equal annual increments over a three-year
      period from date of grant, except under a change in control, as defined, whereby
      all restrictions lapse immediately. The fair value of the restricted shares
      is
      being amortized ratably over the restriction period. Accordingly, the Company
      recorded a pre-tax compensation charge of $10 and $28 for the three and nine
      months ended September 30, 2008, respectively. The unamortized pre-tax
      compensation expense related to the restricted shares at September 30, 2008
      was
      $97.




16




On
      April 16, 2008 the Board granted an aggregate of 2,886 shares of common
      stock as awards to the non-employee directors and the consultant valued at
      $5.20
      per share, representing the quoted market value on the date of grant. On
      July 16, 2008 the Board granted an aggregate of 2,480 shares of common
      stock as awards to the non-employee directors valued at $5.04 per share,
      representing the quoted market value on the date of grant. On October 16,
      2008 the Board granted an aggregate of 5,080 shares of common stock as awards
      to
      the non-employee directors valued at $2.46 per share, representing the quoted
      market value on the date of grant. Accordingly, the Company recorded a pre-tax
      compensation charge of $12.5 and $27.5 for the three and nine months ended
      September 30, 2008.





On
      April 29, 2008 and June 12, 2008, respectively, the Board granted stock
      options to employees for the purchase of 459,470 shares of common stock at
      $5.18
      per share and stock options to an executive for the purchase of 50,000 shares
      of
      common stock at $4.93 per share, the respective quoted market values per share
      as of the dates of grant.  The employee stock options are subject to the
      execution and delivery of stock option agreements.  The employee stock
      options will be exercisable in three equal annual installments beginning with
      the first anniversary of the date of grant, and will expire in seven years.
      The
      Company estimates the fair value of stock options using the Black-Scholes
      option-pricing model. The Company believes that the valuation technique and
      the
      approach utilized to develop the underlying assumptions are appropriate in
      calculating the fair values of our granted stock options. Estimates of fair
      value are not intended to predict actual future events of the value ultimately
      realized by the employees who receive equity awards. Accordingly, the Company
      recorded a pre-tax compensation charge of $97 and $158 for the three and nine
      months ended September 30, 2008. The unamortized pre-tax compensation expense
      related to the stock options at September 30, 2008 was $1,001.





The
      per
      share weighted average fair value of stock options granted during the three
      and
      nine months ended September 30, 2008 was $0 and $2.27. In addition to the
      exercise and grant date prices of the awards, certain assumptions that were
      used
      to estimate the fair value of the stock option grants are listed in the table
      below:





Expected
                dividend yield
            
            
            0
            %Expected
                volatility
            
            
            48.6
            %Risk-free
                interest rate
            
            
            2.90
            %Expected
                term (years)
            
            
            4.67





Expected
      Term:




The
      Company’s expected term represents the period that the Company’s stock-based
      awards are expected to be outstanding and was determined as a function of the
      contractual terms of the stock-based awards and vesting schedules. The Company
      used the simplified method under SAB No. 110, “ Use
      of a
      Simplified Method in Developing an Estimate of Expected Term of “Plain Vanilla”
Share Options for estimating expected term” as it does not have sufficient
      historical exercise data to provide a reasonable basis upon which to estimate
      expected term due to the limited period of time its equity shares have been
      publicly traded.





Expected
      Volatility:




Volatility
      factor was estimated using the average volatility of comparable publicly traded
      companies.





Expected
      Dividend:




The
      Black-Scholes model calls for a single expected dividend yield as an input.
      The
      Company does not anticipate that it will issue dividends in the near future.





Risk-Free
      Interest Rate:




The
      Company bases the risk-free interest rate used in the Black-Scholes model on
      the
      implied yield currently available on U.S. Treasury zero-coupon issues with
      an
      equivalent remaining term.





There
      were 806,499 remaining shares eligible for award under the Plan as of September
      30, 2008.




**Treasury
      Stock**





In
      connection with the Business Combination, during October 2007, 637,085
      shares of the Company’s common stock were purchased from stockholders who voted
      against the acquisition of the B.J.K. Entities and requested a redemption of
      their shares into a pro rata share of the trust fund. The cost of the shares
      purchased was $3,654.




17





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operation.**


**(amounts in thousands)**





The
      following management’s discussion and analysis should be read in conjunction
      with the “Unaudited Pro Forma Consolidated Financial Information” appearing in
      this section of this quarterly report and the financial statements appearing
      in
      Item 1 of this quarterly report.





On
      October 26, 2007, we acquired 100% of the issued and outstanding shares of
      capital stock and other equity interests of B.J.K. Inc., which conducts its
      business as “Chem Rx” (the “Business Combination”). Through B.J.K. Inc., we
      conduct an institutional pharmacy business, providing services to skilled
      nursing facilities and other long-term healthcare institutions, principally
      through an operations center based in Long Beach, New York, and also through
      locations in South Plainfield, New Jersey; Sciota, Pennsylvania; Albany, New
      York; and Deerfield Beach, Florida.





**Overview**





We
      provide pharmacy services to residents of skilled nursing facilities, assisted
      living facilities, residential living facilities and other long-term healthcare
      institutions. Our principal market is the New York metropolitan area and Long
      Island, New York. Since August 2006 we have expanded our operations into New
      Jersey, northeastern Pennsylvania, upstate New York and southeastern Florida.
      As
      of November 1, 2008 we service over 69,795 beds located in over 457 long-term
      care facilities.





Our
      management has pursued a strategy of seeking manageable growth within a
      defensible market niche. Our industry is highly competitive in terms of product
      pricing and affords limited opportunities to implement proprietary products
      or
      processes. Nevertheless, we believe that we have been able to increase our
      business through a focus on service, customer satisfaction and expanded delivery
      options, and the integration of technology interfaces.





Prior
      to
      August 2006, we serviced customers only in the State of New York, and
      conducted all of our operations from leased facilities at various locations
      on
      Long Island, New York, including, since 2001, from our current leased facility
      in Long Beach, New York. In August 2006, certain members of our management
      founded our New Jersey institutional pharmacy operation, Chem Rx New Jersey,
      which services the New Jersey market through a leased facility located in South
      Plainfield, New Jersey. We acquired the New Jersey operation in the Business
      Combination. In January 2007, we acquired substantially all of the assets
      of our Pennsylvania institutional pharmacy operation, Chem Rx PA, which provides
      institutional pharmacy services to the eastern Pennsylvania market from a leased
      facility located in Sciota, Pennsylvania. In August 2007, we acquired a
      long-term care pharmacy serving the upstate New York market from a leased
      facility in Albany, New York. On April 1, 2008 we began to service
      customers in the South Florida market from our new Deerfield Beach, Florida
      leased pharmacy operations center.





We
      believe that each of our pharmacy operations centers must service a sufficient
      number of beds to support a financially viable institutional pharmacy. Our
      expansion into the New Jersey market focused on gaining market share via the
      service of long-term care facilities owned or operated by principals of
      facilities already serviced by us in Long Beach, New York. In addition to
      developing a market with affiliates of existing customers, Chem Rx New Jersey
      purchased customer lists
      and
      directed its marketing efforts toward long-term care facilities that may be
      dissatisfied with services provided by a competitor. As a result of this
      strategy, as of November 1, 2008, Chem Rx New Jersey was servicing approximately
      9,425 beds.




18




We
      believe that the institutional pharmacy business will continue to grow due
      to
      general population aging and a resultant increase in chronic illnesses,
      increased rates of drug utilization and pharmaceutical price inflation. Our
      revenues are affected by the growth in beds under contract, changes in the
      number of drugs prescribed for each resident, brand drugs going generic and
      changes in the cost of pharmaceuticals.





**Industry,
      Sources of Revenue and Purchasing**





Competition
      in the institutional pharmacy services industry is intense and can impact our
      financial results. We compete against national, regional and local institutional
      pharmacies as well as local retail pharmacies. These competitors provide
      services comparable to ours and may have greater financial and other resources
      than we do. The consolidation of institutional pharmacies as well as
      consolidation among long-term care providers may impact the institutional
      pharmacy market.





The
      implementation of Medicare Part D on January 1, 2006 significantly
      altered the provision of pharmaceutical services to residents of long-term
      care
      facilities. Medicare Part D requires eligible individuals to choose a
      specific prescription drug plan to receive drug coverage. There are numerous
      approved prescription drug plans, and each plan has a unique formulary for
      its
      individual members. Institutional pharmacies must negotiate a service agreement
      with each prescription drug plan and follow that plan’s formulary and
      reimbursement and administrative processes in providing pharmaceutical services
      to long-term care facility residents who are members of the plan. Compliance
      with separate requirements of prescription drug plans may result in increased
      administrative costs. We have agreements with substantially all of the benchmark
      prescription drug plans via a group purchasing organization.





The
      implementation of Medicare Part D has changed the mix of payment sources in
      the institutional pharmacy business. Prior to implementation of Part D,
      institutional pharmacies received payments for products and services from
      Medicaid, long-term care facilities and third party payors such as insurance
      companies and health maintenance organizations. Since implementation of
      Part D, we receive a substantial portion of our reimbursements from
      prescription drug plans (who in turn receive their reimbursements from the
      Centers for Medicare and Medicaid Services (“CMS”)), with the result that direct
      reimbursements from long-term care facilities have been substantially reduced
      and payments are more timely received.





We
      receive rebates from certain manufacturers of pharmaceutical products via
      agreements negotiated through a group purchasing organization or directly by
      us.
      Rebates for brand name products are generally based upon achieving a defined
      market share tier within a therapeutic class. Rebates for generic products
      are
      more likely to be based upon achieving stated volume requirements. We believe
      that since Part D implementation, manufacturers may be focusing rebates to
      a greater extent on prescription drug plans. In addition, CMS continues to
      question whether institutional pharmacies should be permitted to receive access
      / performance rebates from manufacturers with respect to prescriptions covered
      under Medicare Part D.




19





From
      time
      to time we receive discounts for bulk purchases of certain products. These
      discounts vary from period to period depending on how extensively we take
      advantage of discount offers made by wholesalers.





**Results
      of Operations**





The
      Company was unable to file its Quarterly Report on Form 10-Q for the quarter
      ended March 31, 2008 by the required filing date of May 15, 2008
      because the Company determined that it was necessary to reconsider its use
      of
      the cash basis of accounting for manufacturer rebates. The Company subsequently
      completed this evaluation and concluded that sufficient information was
      available in prior periods for the Company to make a reasonable estimate of
      manufacturer rebates and account for such rebates on an accrual basis. The
      Company further determined that the adjustments required to previously reported
      amounts under the accrual method of accounting would be immaterial.





As
      a
      result, the consolidated balance sheet as of December 31, 2007 has been
      revised to correct immaterial errors in the Company’s accounting for
      manufacturer rebates, as well as other income and certain professional fees.
      The
      effect of this correction was to decrease goodwill, inventory and retained
      earnings by $2,083, $504 and $142, respectively, and increase other assets,
      accounts receivable and accrued expenses by $2,143, $425 and $127, respectively.
      The Company believes that the effect of this correction was not material, either
      quantitatively or qualitatively, to 2007 or any prior year.





The
      following tables set forth certain unaudited summary financial information
      for
      our operating subsidiary B.J.K. Inc. for the three and nine months ended
      September 30, 2007, prior to our acquisition of B.J.K. Inc. on
      October 26, 2007, on a pro forma basis, certain unaudited summary financial
      information for Chem Rx Corporation for the three and nine months ended
      September 30, 2007 as described below in the section titled “Unaudited Pro Forma
      Consolidated Financial Information,” and unaudited summary financial information
      for Chem Rx Corporation the three and nine months ended September 30,
      2008.




**For
        the Three Months Ended September 30, 2007 and
        2008**


**Chem Rx Corporation****Unaudited****B.J.K. Inc.**
            
            **Consolidated****Unaudited**
              **Three months**
              **ended**
            
            **Pro Forma**
              **Three months**
              **ended**
            
            **Three months**
              **ended****September
                30, 2007**
            
            **September
                30, 2007**
            
            **September
                30, 2008****Corrected (1)**
            
            **Corrected (1)**Net
                Sales
            
            $
            80,805
            
            $
            80,805
            
            $
            89,929Cost
                of Sales
            
            
            61,175
            
            
            61,175
            
            
            66,236Gross
                Profit
            
            
            19,630
            
            
            19,630
            
            
            23,693Selling,
                General and Administrative Expenses
            
            
            14,248
            
            
            16,473
            
            
            20,564Operating
                Income
            
            
            5,382
            
            
            3,157
            
            
            3,129Other
                Income (expense)Interest
                income
            
            
            8
            
            
            8
            
            
            18Interest
                expense
            
            
            (834
            )
            
            (3,739
            )
            
            (3,387
            )Other
                income, net
            
            
            204
            
            
            204
            
            
            471Total
                Other Expense
            
            
            (622
            )
            
            (3,527
            )
            
            (2,898
            )


Income
                (Loss) before Minority Interest and Income Taxes
            
            
            4,760
            
            
            (370
            )
            
            231Minority
                Interest
            
            
            (266
            )
            
            —
            
            
            —Income
                (Loss) before Income Taxes
            
            
            4,494
            
            
            (370
            )
            
            231Provision
                (Benefit) for Income Taxes
            
            
            87
            
            
            (148
            )
            
            428Net
                Income (Loss)
            
            $
            4,407
            
            $
            (222
            )
            $
            (197
            )




20






**For
                the Nine Months Ended September 30, 2007 and
                2008****Chem Rx Corporation****Unaudited****B.J.K. Inc.**
            
            **Consolidated****UnauditedNine monthsended**
            
            
            **Pro
                Forma**
              **Nine
                months**
              **ended**
            
            
            **Nine
                months**
              **ended****September
                30, 2007**
            
            
            **September
                30, 2007**
            
            
            **September
                30, 2008****Corrected (1)**
            
            
            **Corrected
                (1)**Net
                Sales
            
            $
            233,051
            
            $
            233,051
            
            $
            267,206Cost
                of Sales
            
            
            175,321
            
            
            175,321
            
            
            198,217Gross
                Profit
            
            
            57,730
            
            
            57,730
            
            
            68,989Selling,
                General and Administrative Expenses
            
            
            40,754
            
            
            46,860
            
            
            60,613Operating
                Income
            
            
            16,976
            
            
            10,870
            
            
            8,376Other
                Income (expense)Interest
                income
            
            
            19
            
            
            19
            
            
            66Interest
                expense
            
            
            (2,120
            )
            
            (11,218
            )
            
            (10,554
            )Other
                income, net
            
            
            594
            
            
            594
            
            
            1,171Total
                Other Expense
            
            
            (1,507
            )
            
            (10,605
            )
            
            (9,317
            )Income
                (Loss) before Minority Interest and Income Taxes
            
            
            15,469
            
            
            265
            
            
            (941
            )Minority
                Interest
            
            
            (808
            )
            
            —
            
            
            —Income
                (Loss) before Income Taxes
            
            
            14,661
            
            
            265
            
            
            (941
            )Provision
                (Benefit) for Income Taxes
            
            
            267
            
            
            122
            
            
            (88
            )Net
                Income (Loss)
            
            $
            14,394
            
            $
            143
            
            $
            (853
            )


( 1)
        The
        following tables represent the impact of the corrections on the unaudited
        operating results of B.J.K. Inc. for the three and nine months ended September
        30, 2007


21




**For
                the Three months ended September 30, 2007****Reported**
            
            **Adjustment**
            
            **Corrected**Net
                Sales
            
            $
            80,690
            
            $
            115
            
            $
            80,805Cost
                of Sales(a)
            
            $
            60,650
            
            $
            525
            
            $
            61,175Gross
                Profit
            
            $
            20,040
            
            $
            (410)
            
            $
            19,630Selling,
                General and Administrative Expenses(a)
            
            $
            14,248
            
            $
            0
            
            $
            14,248Operating
                Income
            
            $
            5,792
            
            $
            (410)
            
            $
            5,382Other
                Income, net
            
            $
            164
            
            $
            40
            
            $
            204Total
                Other Expense
            
            $
            (662
            )
            $
            40
            
            $
            (622
            )Income
                before Minority Interest and Income Taxes
            
            $
            5,130
            
            $
            (370)
            
            $
            4,760Income
                before Income Taxes
            
            $
            4,864
            
            $
            (370)
            
            $
            4,494Provision
                for Income Taxes
            
            $
            94
            
            $
            (7)
            
            $
            87Net
                Income
            
            $
            4,770
            
            $
            (363)
            
            $
            4,407





**For
                the Nine months ended September 30, 2007****Reported**
            
            **Adjustment**
            
            **Corrected**Net
                Sales
            
            $
            232,739
            
            $
            312
            
            $
            233,051Cost
                of Sales(a)
            
            $
            174,794
            
            $
            527
            
            $
            175,321Gross
                Profit
            
            $
            57,945
            
            $
            (215)
            
            $
            57,730Selling,
                General and Administrative Expenses(a)
            
            $
            40,754
            
            $
            0
            
            $
            40,754Operating
                Income
            
            $
            17,191
            
            $
            (215)
            
            $
            16,976Other
                Income, net
            
            $
            538
            
            $
            56
            
            $
            594Total
                Other Expense
            
            $
            (1,563
            )
            $
            56
            
            $
            (1,507
            )Income
                before Minority Interest and Income Taxes
            
            $
            15,628
            
            $
            (159)
            
            $
            15,469Income
                before Income Taxes
            
            $
            14,820
            
            $
            (159)
            
            $
            14,661Provision
                for Income Taxes
            
            $
            271
            
            $
            (4)
            
            $
            267Net
                Income
            
            $
            14,549
            
            $
            (155)
            
            $
            14,394





(a)
        Represents a re-class between Cost of Sales and Selling, General and
        Administrative Expenses to conform to current year
        presentation.


22





**UNAUDITED
      PRO FORMA CONSOLIDATED FINANCIAL INFORMATION**





The
      following tables set forth unaudited summary financial information for our
      pro
      forma consolidated statement of operations for the three and nine months ended
      September 30, 2007. The unaudited pro forma financial information includes
      the
      consolidated statement of operations of Chem Rx Corporation and the combined
      statement of income for B.J.K. Inc. for the three and nine months ended
      September 30, 2007, adjusted to illustrate the estimated pro forma effects
      of
      the Business Combination, the financing transactions, and related non-recurring
      items.





The
      unaudited pro forma consolidated statement of operations gives effect to the
      Business Combination and the financing transactions as of January 1, 2007.
      The unaudited pro forma adjustments are based upon available information and
      certain assumptions that we believe are directly attributable to these
      transactions and are factually supportable. The unaudited pro forma financial
      information should be read in conjunction with the consolidated financial
      statements of Chem Rx Corporation and its subsidiary, and other financial
      information appearing elsewhere in this Form 10-Q, as well as the financial
      information and footnotes contained in the Company’s 2007 Annual report on
      Form 10-K.





The
      unaudited pro forma financial information is for informational purposes only
      and
      is not intended to represent or be indicative of the consolidated results of
      operations that we would have reported had the Business Combination and the
      financing transactions been completed as of the date presented, and should
      not
      be taken as representative of our future consolidated results of
      operations.





**Unaudited
      Pro Forma Consolidated Statement of Operations**


**For
      the Three Months Ended September 30, 2007**


**(amounts
      in thousands)**





**Chem Rx**
              **Corporation**
              **Three months**
              **ended**
              **September
                30,**
              **2007**
            
            **B.J.K. Inc.**
              **Three months**
              **ended**
              **September
                30,**
              **2007
                (a)**
            
            **Adjustments**
            
            
            
            **Chem Rx**
              **Corporation**
              **Pro Forma**
              **consolidated**
              **Three months**
              **ended**
              **September
                30,**
              **2007**Net
                Sales
            
            $
            —
            
            $
            80,805
            
            $
            —
            
            
            
            $
            80,805Cost
                of Sales
            
            
            —
            
            
            61,175
            
            
            —
            
            
            
            
            61,175Gross
                Profit
            
            
            —
            
            
            19,630
            
            
            —
            
            
            
            
            19,630Selling,
                General and Administrative Expenses
            
            
            253
            
            
            14,248
            
            
            1,972
            
            (b)
            
            
            16,473Operating
                Income (Loss)
            
            
            (253
            )
            
            5,382
            
            
            (1,972
            )
            
            
            
            3,157Other
                Income (Expense)Interest
                income
            
            
            504
            
            
            8
            
            
            (504
            )
            (c)
            
            
            8




23





**Chem Rx**
              **Corporation**
              **Three months**
              **ended**
              **September
                30,**
              **2007**
            
            **B.J.K. Inc.**
              **Three months**
              **ended**
              **September
                30,**
              **2007
                (a)**
            
            **Adjustments**
            
            
            
            **Chem Rx**
              **Corporation**
              **Pro Forma**
              **consolidated**
              **Three months**
              **ended**
              **September
                30,**
              **2007**Interest
                expense
            
            
            —
            
            
            (834
            )
            
            (2,905
            )
            (d)
            
            
            (3,739
            )Other
                income, net
            
            
            —
            
            
            204
            
            
            —
            
            
            
            
            204Total
                Other Income (Expense)
            
            
            504
            
            
            (622
            )
            
            (3,409
            )
            
            
            
            (3,527
            )Income
                (Loss) before Minority Interest and Income Taxes
            
            
            251
            
            
            4,760
            
            
            (5,381
            )
            
            
            
            (370
            )Minority
                Interest
            
            
            —
            
            
            (266
            )
            
            266
            
            (e)
            
            
            —Income
                (Loss) before Income Taxes
            
            
            251
            
            
            4,494
            
            
            (5,115
            )
            
            
            
            (370
            )Provision
                (Benefit) for Income Taxes
            
            
            —
            
            
            87
            
            
            (235
            )
            (f)
            
            
            (148
            )Net
                Income (Loss)
            
            $
            251
            
            $
            4,407
            
            $
            (4,880
            )
            
            
            $
            (222
            )





**For
      the Nine Months Ended September 30, 2007**


**(amounts
      in thousands)**





**Chem Rx**
              **Corporation**
              **Nine months**
              **ended**
              **September
                30,**
              **2007**
            
            **B.J.K. Inc.**
              **Nine months**
              **ended**
              **September
                30,**
              **2007
                (a)**
            
            **Adjustments**
            
            
            
            **Chem Rx**
              **Corporation**
              **Pro Forma**
              **consolidated**
              **Nine months**
              **ended**
              **September
                30,**
              **2007**Net
                Sales
            
            $
            —
            
            $
            233,051
            
            $
            —
            
            
            
            $
            233,051Cost
                of Sales
            
            
            —
            
            
            175,321
            
            
            —
            
            
            
            
            175,321Gross
                Profit
            
            
            —
            
            
            57,730
            
            
            —
            
            
            
            
            57,730Selling,
                General and Administrative Expenses
            
            
            529
            
            
            40,754
            
            
            5,577
            
            (b)
            
            
            46,860Operating
                Income (Loss)
            
            
            (529
            )
            
            16,976
            
            
            (5,577
            )
            
            
            
            10,870Other
                Income (Expense)Interest
                income
            
            
            1,475
            
            
            19
            
            
            (1,475
            )
            (c)
            
            
            19




24





**Chem Rx**
              **Corporation**
              **Nine months**
              **ended**
              **September
                30,**
              **2007**
            
            **B.J.K. Inc.**
              **Nine months**
              **ended**
              **September
                30,**
              **2007
                (a)**
            
            **Adjustments**
            
            
            
            **Chem Rx**
              **Corporation**
              **Pro Forma**
              **consolidated**
              **Nine months**
              **ended**
              **September
                30,**
              **2007**Interest
                expense
            
            
            —
            
            
            (2,120
            )
            
            (9,098
            )
            (d)
            
            
            (11,218
            )Other
                income, net
            
            
            —
            
            
            594
            
            
            —
            
            
            
            
            594Total
                Other Income (Expense)
            
            
            1,475
            
            
            (1,507
            )
            
            (10,573
            )
            
            
            
            (10,605
            )Income
                (Loss) before Minority Interest and Income Taxes
            
            
            946
            
            
            15,469
            
            
            (16,150
            )
            
            
            
            265Minority
                Interest
            
            
            —
            
            
            (808
            )
            
            808
            
            (e)
            
            
            —Income
                (Loss) before Income Taxes
            
            
            946
            
            
            14,661
            
            
            (15,342
            )
            
            
            
            265Provision
                (Benefit) for Income Taxes
            
            
            1
            
            
            267
            
            
            (146
            )
            (f)
            
            
            122Net
                Income (Loss)
            
            $
            945
            
            $
            14,394
            
            $
            (15,196
            )
            
            
            $
            143


**Notes
        to Unaudited Pro Forma Consolidated Statement of
        Operations**





(a)
            See
                note (1) on the unaudited summary financial information table
                above.





(b)
            Reflects
                deconsolidation of 750 Park Place and increased rent expense paid
                to 750
                Park Place, which is an affiliate that was not acquired in the Business
                Combination. In addition, the adjustment reflects excess salaries
                paid
                over senior management’s pro forma contractual levels and an estimated
                increase of $1.8 million and $5.3 million of additional amortization
                expense for the three and nine months ended September 30, 2007,
                respectively, related to intangible assets created by Chem Rx
                Corporation’s acquisition of the B.J.K.
                Entities.





(c)
            Reflects
                exclusion of interest income unrelated to the B.J.K. Entities prior
                to the
                acquisition.





(d)
            Reflects
                estimated pro forma interest expense resulting from our new capital
                structure after the close of the acquisition, using an assumed 3-month
                LIBOR rate of 5.00% and inclusive of deferred financing cost amortization
                expense.





(e)
            Reflects
                exclusion of the minority interest related to 750 Park Place, an
                affiliate
                that was not acquired in the
                transaction.





(f)
            Reflects
                an adjustment for the assumed corporate tax rate of
                40%.





***Three
      months ended September 30, 2008 compared with the three months ended September
      30, 2007***





Net
      sales
      were $89.9 million for the three months ended September 30, 2008, as compared
      to
      pro forma net sales of $80.8 million for the three months ended September 30,
      2007, an increase of $9.1 million or 11.3%. This growth in net sales was
      principally due to increased beds serviced by our New Jersey, Pennsylvania
      and
      Albany, New York facilities, primarily as a result of our continued focus on
      relationship management and high quality of service. In addition, our Florida
      facility commenced operations during the second quarter, and is producing sales.
      During the 2008 period, net sales reflects the impact of  $.5
      million due to the introduction of generic equivalents to certain existing
      brand
      drugs.





Gross
      profit was $23.7 million for the three months ended September 30, 2008 as
      compared to pro forma gross profit of $19.6 million for the three months ended
      September 30, 2007, an increase of $4.1million or 20.7%. Gross profit as a
      percentage of net sales was 26.3% and 24.3% for the three months ended September
      30, 2008 and 2007, respectively. The increase
      in the gross profit dollars and percent was attributable to the growth in net
      sales, coupled with efficiencies resulting from greater utilization of our
      facilities, other fixed-cost resources and the introduction of generic
      equivalents to certain existing brand drugs.


25




Selling,
      general and administrative expenses were $20.6 million for the three months
      ended September 30, 2008 as compared to pro forma SG&A of $16.5 million for
      the three months ended September 30, 2007. Of this $4.1 million increase in
      selling, general and administrative expenses, approximately $2.6 million was
      attributable to higher expenditures, of which $1.2 million related to salaries
      and benefits and $.4 million to additional depreciation expense, to support
      the
      revenue growth in our South Plainfield, New Jersey; Albany and Long Beach,
      NY;
      and Sciota, PA facilities and costs of our recently opened Deerfield Beach,
      Florida location. In addition, we incurred $.7 million of increased professional
      fees and other costs related primarily to the cost of being a public company,
      an
      increase in delivery expenses of $0.4 million due to increased sales and higher
      fuel costs, higher bad debt expense of $.2 million and higher recruitment fees
      and temporary employees of $.2 million. Selling, general and administrative
      expenses as a percentage of net sales was 22.9% and 20.4% for the three months
      ended September 30, 2008 and 2007, respectively





Interest
      expense was $3.4 million for the three months ended September 30, 2008 as
      compared to pro forma interest expense of $3.7 million for the three months
      ended September 30, 2007. The Company recorded a provision for income taxes
      of
      $428 for the three months ended September 30, 2008, based on the Company’s
      expected effective tax rate on reforecasted pre-tax results from operations
      for
      the year ended December 31, 2008. The Company recorded a pro forma income tax
      benefit of $148 for the three months ended September 30, 2007 based on the
      Company’s expected effective tax rate of 40% for the year ended
      December 31, 2007.





***Nine
      months ended September 30, 2008 compared with nine months ended September 30,
      2007***





Net
      sales
      were $267.2 million for the nine months ended September 30, 2008, as compared
      to
      pro forma net sales of $233.1 million for the nine months ended September 30,
      2007, an increase of $34.1 million or 14.7%. This growth in net sales was
      principally due to increased beds serviced by our New Jersey, Pennsylvania
      and
      Albany, New York facilities, primarily as a result of our continued focus on
      relationship management and high quality of service. In addition, our Florida
      facility commenced operations during the second quarter, and started to produce
      sales.





Gross
      profit was $69.0 million for the nine months ended September 30, 2008 as
      compared to pro forma gross profit of $57.7 million for the nine months ended
      September 30, 2007, an increase of $11.3 million or 19.6%. Gross profit as
      a
      percentage of net sales was 25.8% and 24.8% for the nine months ended September
      30, 2008 and 2007, respectively. The increase in the gross profit dollars and
      percent was attributable to the growth in net sales, coupled with efficiencies
      resulting from greater utilization of our facilities, other fixed-cost resources
      and the introduction of generic equivalents to certain existing brand drugs
      during the three months ended September 30, 2008.





Selling,
      general and administrative expenses were $60.6 million for the nine months
      ended
      September 30, 2008 as compared to pro forma SG&A of $46.9 million for the
      nine months ended September 30, 2007. Of this $ 13.7 million increase in
      selling, general and administrative expenses, approximately $7.9 million was
      attributable to higher expenditures, of which $3.6 million related to salaries
      and benefits and $1.1 million to additional depreciation expense, to support
      the
      revenue growth in our South Plainfield, New Jersey; Albany and Long Beach,
      NY;
      and Sciota, PA facilities and start up costs of our recently opened Deerfield
      Beach, Florida location. In addition, we incurred $2.8 million of increased
      professional fees and other costs related primarily to the cost of being a
      public company, an increase in delivery expenses of $1.8 million due to
      increased sales and higher fuel costs, higher bad debt expense of $.7 million
      and higher consulting and recruitment fees of $.5 million. Selling, general
      and
      administrative expenses as a percentage of net sales was 22.7% and 20.1% for
      the
      nine months ended September 30, 2008 and 2007, respectively. Excluding expenses
      associated with the increased professional fees and other costs, selling,
      general and administrative expenses as a percentage of net sales would have
      been
      21.6% for the nine months ended September 30, 2008.




26





Interest
      expense was $10.6 million for the nine months ended September 30, 2008 as
      compared to pro forma interest expense of $11.2 million for the nine months
      ended September 30, 2007. The Company recorded a benefit from income taxes
      of
      $88 for the nine months ended September 30, 2008, based on the Company’s
      expected effective tax rate on reforecasted pre-tax results from operations
      for
      the year ending December 31, 2008. The tax provision for the three months
      ended September 30, 2008 was affected by a change in the expected effective
      annual tax rate, resulting from a change to forecasted pre-tax results from
      operations for 2008. The Company recorded a pro forma income tax provision
      of
      $122 for the nine months ended September 30, 2007 based on the Company’s
      expected effective tax rate of 40% for the year ended December 31, 2007.




**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company’s liquidity needs arise primarily from debt service on its substantial
      indebtedness and from funding of capital expenditures, ongoing operating costs
      and working capital.





Principal
      and interest payments under the Credit Facilities represent significant
      liquidity requirements for the Company. The Company expects that cash flow
      from
      operating activities and expected available borrowings under the revolving
      commitments of the Credit Facilities will provide sufficient working capital
      to
      operate the Company’s business, to fund expected capital expenditures and to
      meet foreseeable liquidity requirements, including debt service on the Company’s
      outstanding debt. No assurance can be given, however, that the Company’s
      business will, in fact, generate sufficient cash flows or that future borrowings
      will, in fact, be available in an amount sufficient to enable the Company to
      service its debt or to fund its other liquidity needs.





The
      Credit Facilities





In
      connection with the Business Combination on October 26, 2007, the Company
      entered into a first lien credit and guaranty agreement in an aggregate amount
      not to exceed $125,000, consisting of $80,000 aggregate principal amount of
      initial term loan, $20,000 aggregate principal amount of delayed draw term
      loan
      commitments, and up to $25,000 aggregate principal amount of revolving
      commitments. Additionally, on October 26, 2007, the Company entered into a
      second lien credit and guaranty agreement which consists of a second lien term
      loan facility in an aggregate amount not to exceed $37,000, collectively herein
      referred to as the “Credit Facilities.” On October 26, 2007, the Company
      utilized an aggregate of $121,000 of the Credit Facility to fund the purchase
      of
      the B.J.K. Entities.





The
      initial term loan matures on October 26, 2013 and, prior to the amendment
      on March 31, 2008, described below, bore interest at the lender’s prime
      rate plus an applicable margin, as defined, of 3% or LIBOR plus 4%, at the
      option of the Company. At September 30, 2008, $78,500 was outstanding under
      the
      initial term loan. Principal payments related to the initial term loan are
      $2,000 per annum from 2008 through 2010 and $4,000 per annum in 2011 and 2012,
      payable quarterly. The interest rate on the initial term loan, as amended,
      approximated 8.26% as of September 30, 2008.





The
      delayed draw term commitments expired on July 31, 2008. Any borrowings
      under the delayed loan draw term commitments mature on October 26, 2013
      and, prior to the amendment on March 31, 2008, bore interest at the lender’s
      prime rate plus 3% or LIBOR plus 4%, at the option of the Company. Effective
      May 14, 2008, the delayed draw term commitments were terminated. At
      September 30, 2008, there were no borrowings due under the delayed draw term
      loan commitments.





The
      revolving commitments expire on October 26, 2012 and, prior to the
      amendment on March 31, 2008, bore interest at the lender’s prime rate plus
      3% or LIBOR plus 4%, at the option of the Company (at rates of 5.00% for prime
      and 3.76% for LIBOR at September 30, 2008). As of September 30, 2008, $3,000
      was
      outstanding under the revolving commitments at an interest rate of approximately
      8.26%. As of November 13, 2008 $14,000 was outstanding under the Revolving
      Loans, with $11,000 available to borrow.





The
      second lien term loan facility matures on October 26, 2014 and, prior to
      the amendment on March 31, 2008, bore interest at an agreed upon base rate
      plus an applicable margin of 7.0% or the adjusted Eurodollar rate (as defined
      in
      the Credit Facilities) plus 8.0%, at the option of the Company. As of September
      30, 2008, $37,000 was outstanding under the second lien term loan facility.
      There are no principal repayment requirements under the second lien term loan
      facility until the maturity date. The interest rate on the second lien term
      loan, as amended, was 13.25% as of September 30, 2008.




27





The
      Credit Facilities are collateralized by substantially all the assets of the
      Company. The Credit Facilities provide for certain mandatory prepayments in
      the
      event cash proceeds are received from the sale of certain assets, the issuance
      of equity securities, the issuance of debt and in the event the Company has
      consolidated excess cash flow (as defined) in any fiscal year commencing in
      2008. The Credit Facilities also provide for a reduction in the applicable
      margin, as defined, based on the total leverage ratio of the
      Company.





The
      Company is also required to comply with certain restrictive and financial
      covenants, including, among other things, limits or restrictions on the
      Company’s and its subsidiaries abilities to dispose of assets, incur additional
      indebtedness, incur guarantee obligations, prepay other indebtedness, make
      dividends, create liens, make investments, make acquisitions, modify the terms
      of the documents governing the indebtedness, engage in mergers, make capital
      expenditures or engage in certain transactions with affiliates. The Credit
      Facilities also require the Company to comply with minimum coverage ratios
      of
      Consolidated Adjusted EBITDA, as defined, to Consolidated Fixed Charges and
      Consolidated Adjusted EBITDA to Total Debt.





Effective
      March 31, 2008, the Company and its Lenders amended the Credit Facilities.
      The amendments were made in connection with certain violations of the financial
      covenants relating to fixed charge coverage ratios and total leverage ratios.
      The covenant violations arose because the definition of “Consolidated Adjusted
      EBITDA” in the Credit Facilities excluded only $5,350 of employee bonuses which
      were paid at the time of the Business Combination, instead of the entire $11,000
      of such employee bonuses which were intended to be excluded for this purpose.
      Accordingly, after the amendments, the definition of “Consolidated Adjusted
      EBITDA” provides that the entire $11,000 of employee bonuses paid in conjunction
      with the Business Combination is excluded from such calculation, effective
      as of
      the original date of the Credit Facilities.





The
      amendment of the first lien credit and guaranty agreement included an increase
      to the applicable margin ranges for LIBOR loans from 4.0% to 4.5% (from the
      original range of 3.5% to 4.0%) and for base rate loans from 3.00% to 3.50%
      (from the original range of 2.5% to 3.0%), respectively, as well as an amendment
      fee of $245,500 on the outstanding first lien indebtedness. The amendment fee
      has been added to deferred financing fees, and is being amortized over the
      life
      of the loan. The amendment to the second lien credit and guaranty agreement
      established a LIBOR-based loan floor interest rate of 13.25%, and a base
      rate-based loan floor interest rate of 14.25%. As a result, the applicable
      interest rate beginning March 28, 2008 for the second lien debt will be
      either (i) for Eurodollar rate loans, the greater of 13.25% or a rate equal
      to LIBOR plus the applicable original margin of 8.00%, or (ii) for
      non-Eurodollar loans, the greater of 14.25% or a rate equal to the prime rate
      plus the applicable original margin of 7.0%.





The
      Credit Facilities require the Company to enter into interest rate protection
      agreements to provide interest rate protection for a minimum of 50% of the
      Company’s consolidated total funded indebtedness under the first lien and second
      lien credit and guaranty agreements for a term of not less than three years.
      Effective January 28, 2008, the Company entered into a swap agreement (the
“Swap”) with CIBC to provide the required interest rate protection and to manage
      its exposure to changes in LIBOR. The Swap is for a notional amount of $58,500
      expiring on January 28, 2011 with a fixed rate of LIBOR interest of 3.07%.
      The Swap has been designated as a cash flow hedge of the variability of the
      cash
      flows due to changes in LIBOR and has been deemed to be highly effective.
      Accordingly, the Company records the fair value of the Swap as an asset or
      liability on its consolidated balance sheet, and any unrealized gain or loss
      is
      included in accumulated other comprehensive income. As of September 30, 2008,
      the Company recorded an asset of $547, included in other assets, in the
      accompanying consolidated balance sheet and other comprehensive (loss) income
      of
      ($206) (net of tax of $144) and $323 (net of tax of $224) for the three and
      nine
      months ended September 30, 2008, respectively, to account for the change in
      the
      fair value of the Swap. No hedge ineffectiveness was recorded during the three
      months ended September 30, 2008.


28





Borrowings
      under the revolving commitments of the Credit Facilities are a key source of
      the
      Company’s liquidity, and the Company’s ability to borrow thereunder is material
      to the Company’s liquidity and operations. As of September 30, 2008, the Company
      was in compliance with the covenants contained in the Credit Facilities. While
      the Company currently believes that it will continue to be in compliance with
      the bank covenants in the future, failure to comply with the minimum
      Consolidated Fixed Charge Coverage Ratio test or the Total Leverage test (each
      as defined) would result in a violation of the Credit Facilities which, absent
      a
      waiver or an amendment, would permit the lenders to accelerate repayment of
      borrowings thereunder. If the debt under the Credit Facilities is accelerated,
      there can be no assurance that the Company would have sufficient assets to
      pay
      amounts due under the Credit Facilities, or have access to other sources of
      funding.





Subordinated
      Notes Payable—Related Parties





As
      part
      of the financing of the Business Combination, the Company issued subordinated
      notes totaling $8,259 ($9,059 at September 30, 2008 including $800 of unpaid
      earned interest) to the former stockholders of the B.J.K. Entities. The notes
      mature on April 15, 2015 and bear interest at an interest rate of 10%.
      Interest is paid in-kind (by increasing the outstanding principal amount of
      the
      notes by the amount of such unpaid interest, and thereafter the principal amount
      of the notes is deemed to be such increased amount for all purposes, including
      the calculation of interest) and not in cash.





Operating
      Activities





Net
      cash
      provided by operating activities for the nine months ended September 30, 2008
      of
      $12,753 was principally the result of $9,121 in cash generated from operations
      (net loss of ($853) plus depreciation and amortization of $6,892 and other
      non
      cash items of $3,082) and decreases in inventory of $5,270 offset by an increase
      in accounts receivable of $11,872, and prepaid expenses and other assets of
      $133
      and higher accounts payable and accrued expenses of $10,367.





Net
      cash
      provided by operating activities for the nine months ended September 30, 2007
      of
      $2,949 was principally the result of interest income and an increase in accounts
      payable.





Investing
      Activities





Net
      cash
      used in investing activities of $2,647 for the nine months ended September
      30,
      2008 is due to expenditures for property and equipment. The Company currently
      expects that total expenditures for property and equipment for 2008 will be
      approximately $2,850.





Net
      cash
      used in investing activities of $3,199 for the nine months ended September
      30,
      2007 was related to trust fund investments and the deferral of certain
      acquisition costs.





Financing
      Activities





Net
      cash
      used in financing activities for the nine months ended September 30, 2008 of
      $12,778 was primarily due to net payments under the revolving commitments of
      the
      Company’s Credit Facilities of $11,000 and required repayments of the initial
      term loan of $1,500. The Company anticipates that its debt service requirements
      for the balance of 2008 will be approximately $3,500, representing $500 of
      required initial term loan repayments and interest of approximately
      $3,000.





Net
      cash
      used in financing activities for the nine months ended September 30, 2007 was
      $203, due to the payment of deferred offering costs.


29





Off-Balance
      Sheet Arrangements





As
      of
      September 30, 2008, the Company has not entered into any off-balance sheet
      financing arrangements, established any special purpose entities, guaranteed
      any
      debt or commitments of other entities, or entered into any options on
      non-financial assets.





Under
      the
      Credit Facilities, which are dated as of October 26, 2007, the Company has
      pledged all of its assets (including the assets of its subsidiary) to guaranty
      the obligations of the Company. On April 8, 2008, the Company arranged for
      one of the Company’s major pharmaceutical vendors to extend certain benefits to
      the Company.  The vendor, AmerisourceBergen Drug Corporation (“ABDC”), and
      the Company are parties to a prime vendor agreement.  The prime vendor
      agreement was amended in connection with the Company’s Business Combination to
      provide, among other things, that the Company would be required to maintain
      a
      cash deposit of $2,500 as security for its pharmaceutical purchases from
      ABDC.  On April 8, 2008, Jerry Silva delivered to ABDC a personal
      letter of credit in the amount of $2,500 as security for pharmaceutical
      purchases by the Company under the prime vendor agreement.  In exchange for
      the delivery of this letter of credit, ABDC agreed, among other things, to
      return to the Company the $2,500 cash deposit.  No payment or other
      financial accommodation was given by the Company to Jerry Silva with respect
      to
      the letter of credit.





DISCUSSION
      OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES





Our
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States. In connection with the preparation
      of
      our financial statements, management is required to make assumptions, estimates
      and judgments that affect the reported amounts of assets, liabilities,
      stockholders’ equity, revenues and expenses and the related disclosure of
      commitments and contingencies. On a regular basis, we evaluate the estimates
      used, including those related to the allowance for doubtful accounts, sales
      discounts, inventory valuation, and valuation and recoverability of long lived
      assets, indefinite lived intangibles (including the values assigned to acquired
      intangible assets) and income taxes. Our management bases its estimates on
      a
      combination of factors, including historical experience, current conditions,
      feedback from outside advisors where feasible and on various other assumptions
      that are believed to be reasonable at the time and under the current
      circumstances. Further information regarding these policies appears within
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” included in the Company’s 2007 Annual Report on
      Form 10-K.





Since
      December 31, 2007, there have been no significant changes to the Company’s
      critical accounting policies or to the related assumptions and estimates
      involved in applying these policies, except for a change in the accounting
      for
      manufacturer rebates. The change in accounting for manufacturing rebates, from
      a
      cash basis of accounting to the accrual method, has been accounted for as a
      correction of previously issued financial reports, as discussed above in this
      Item 2 under the caption “Results of Operations.”.





**Recent
      Accounting Pronouncements**




In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 159, *“* The
      Fair
      Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard
      permits entities to measure many financial instruments and certain other items
      at fair value. The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. The provisions of SFAS No. 159 are
      effective beginning in the Company’s 2008 fiscal year.  The
      adoption of SFAS No. 159 did not have an impact on the Company’s consolidated
      financial statements as the  Company
      did not elect the fair value option for any of its financial assets and
      liabilities.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141R”). Among other changes, SFAS 141R requires the
      acquiring entity in a business combination to recognize all (and only) the
      assets acquired and liabilities assumed in the transaction at fair value; and
      establishes the acquisition-date fair value as the measurement objective for
      all
      assets acquired and liabilities assumed, including earn-out provisions. SFAS
      141R is effective for business combinations occurring in the first annual
      reporting period beginning after December 15, 2008. The Company is
      evaluating the anticipated effect of this recently issued standard on its
      consolidated results of operations, financial position and cash
      flows.


30




In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling
      Interests in Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS 160”). Among other items, SFAS 160 requires all entities to report
      non-controlling (minority) interests in subsidiaries in the same way as equity
      in the consolidated financial statements. SFAS 160 is effective for the first
      annual reporting period beginning after December 15, 2008. The Company is
      evaluating the anticipated effect of this recently issued standard on its
      consolidated results of operations, financial position and cash
      flows.





In
      December 2007, the FASB issued SFAS No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities, an amendment of FASB Statement
      No. 133” (“SFAS 161”). Among other items, SFAS 161 requires qualitative
      disclosures about objectives and strategies for using derivatives, quantitative
      disclosures about fair value amounts of, and gains and losses on, derivative
      instruments, and disclosures about credit-risk-related contingent features
      in
      derivative agreements. SFAS 161 is effective for the first annual reporting
      period beginning after November 15, 2008. The Company is evaluating the
      anticipated effect of this recently issued standard on its consolidated results
      of operations, financial position and cash flows.




In
      April
      2008, the FASB issued FASB Staff Position No. 142-3, *“* Determination
      of the Useful Life of Intangible Assets ” (“FSP
      No.
      142-3”), which amends the factors that should be considered when developing
      renewal or extension assumptions used to determine the useful life of an
      intangible asset under Statement of Financial Accounting Standards No. 142
      (“SFAS No. 142”), *“* Goodwill
      and Other Intangible Assets”, in order to improve consistency between SFAS No.
      142 and the period of expected cash flows to measure the fair value of the
      asset
      under Statement of Financial Accounting Standards No. 141 (revised 2007), *“* Business
      Combinations” and other U.S. generally accepted accounting practices. This FASB
      Staff Position is effective for fiscal periods beginning on or after December
      15, 2008. The adoption of FSP No. 142-3 is not expected to have a material
      impact on the Company’s financial statements.




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS 162”). This statement identifies the sources of
      accounting principles and the framework for selecting the principles used in
      the
      preparation of financial statements of nongovernmental entities that are
      presented in accordance with GAAP. With the issuance of this statement, the
      FASB
      concluded that the GAAP hierarchy should be directed toward the entity and
      not
      its auditor, and reside in the accounting literature established by the FASB
      as
      opposed to the American Institute of Certified Public Accountants (AICPA)
      Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
      Conformity With Generally Accepted Accounting Principles.” This statement is
      effective 60 days following the SEC’s approval of the Public Company Accounting
      Oversight Board amendments to AU Section 411, “The Meaning of Present
      Fairly in Conformity With Generally Accepted Accounting Principles.” We have
      evaluated the new statement and have determined that it will not have a
      significant impact on the determination or reporting of our financial
      results.




Effective
      January 1, 2008,  the
      Company  adopted
      SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a
      framework for measuring fair value and requires enhanced disclosures about
      fair
      value measurements. SFAS No. 157 clarifies that fair value is an exit
      price, representing the amount that would be received to sell an asset or paid
      to transfer a liability in an orderly transaction between market participants.
      SFAS No. 157 also requires disclosure about how fair value is determined
      for assets and liabilities and establishes a hierarchy for which these assets
      and liabilities must be grouped, based on significant levels of inputs as
      follows:




**Level
      1** quoted prices in active markets for identical assets or liabilities;




**Level
      2** quoted prices in active markets for similar assets and liabilities and inputs
      that are observable for the asset or liability; or




**Level
      3** unobservable inputs, such as discounted cash flow models or
      valuations.






31




The
      determination of where assets and liabilities fall within this hierarchy is
      based upon the lowest level of input that is significant to the fair value
      measurement.  The
      Company has a derivative interest rate swap, which has been designated as a
      cash
      flow hedge.    The
      initial fair value of this instrument was determined by  the
      counterparties using inputs that are available in the public swap markets for
      similarly termed instruments and then making adjustments for the terms specific
      to its instrument.   The Company  continues
      to value this security based on quotes from its counterparties. Since the inputs
      used to value this option contract are observable,  the
      Company has classified  it
      as
      level 2 inputs. There was no ineffectiveness relating to the interest rate
      swap
      for the three and nine months ended September 30, 2008, with all of
      the unrecognized gains and losses being recorded in accumulated other
      comprehensive income in stockholders’ equity.




In
      February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2
“Effective Date of FASB Statement No. 157”, which delays the effective date
      of SFAS No. 157 for non-financial assets and non-financial liabilities,
      except items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis. FSP FAS No. 157-2 defers the effective
      date of SFAS No. 157 to fiscal years beginning after November 15,
      2008, and for interim periods within those fiscal years.  The
      Company is currently evaluating whether the adoption of SFAS No. 157, for
      items within the scope of FSP FAS No. 157-2, will have an impact on its
      consolidated financial position, results of operations or cash
      flows.





Management
      does not believe that any other recently issued, but not yet effective,
      accounting standards if currently adopted would have a material effect on the
      accompanying financial statements.





**Forward
      Looking Statements**





Management’s
      Discussion and Analysis of Financial Condition and Results of Operations and
      other sections of this Quarterly Report on Form 10-Q include
“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”). All statements other than
      statements of historical facts included in this Quarterly Report on
      Form 10-Q, including, without limitation, statements regarding the
      Company’s liquidity, future financial results, economic conditions, trends,
      certain risks and uncertainties, business strategy and plans and objectives
      of
      management for future operations are forward-looking statements. These
      forward-looking statements are based on the beliefs of management, as well
      as
      assumptions made by and information currently available to management.
      Forward-looking statements generally can be identified by the use of
      forward-looking terminology such as “may,” “expect,” “intend,” “estimate,”
“anticipate,” “seek,” “should,” “look forward to,” “indications,” “plan,”
“momentum,” “believe” or “continue” or the negative thereof or variations
      thereon or similar terminology. These statements reflect our current view with
      respect to future events and are subject to risks, uncertainties and
      assumptions. Many factors could affect our actual financial results and could
      cause actual results to differ materially from those expressed in the
      forward-looking statements. Important factors that could cause actual results
      to
      differ materially from the Company’s expectations, or “cautionary statements,”
include, without limitation:





32







·
            our
                substantial amount of debt;





·
            outcomes
                of government reviews, inquiries, investigations and related
                litigation;





·
            continued
                compliance with government
                regulations;





·
            legislation
                or regulatory environments, requirements or changes adversely affecting
                the businesses in which we are
                engaged;





·
            fluctuations
                in customer demand;





·
            management
                of rapid growth;





·
            intensity
                of competition from other providers of institutional pharmacy
                services;





·
            timing,
                approval and market acceptance of new product introductions and
                institutional pharmacy locations;





·
            general
                economic conditions;





·
            availability
                of financial and other resources to
                us;





·
            interest
                rate changes affecting the Company;





·
            the
                effects of the loss or bankruptcy of or default by a significant
                customer,
                supplier or other entity relevant to our
                operations;





·
            the
                Company’s estimates of required reserves for doubtful accounts, if future
                economic conditions, or competitive conditions differ from
                expectations;





·
            our
                ability to control costs, particularly labor and employee benefit
                costs,
                rising pharmaceutical costs and regulatory compliance
                costs;





·
            the
                effects of healthcare reform and government regulations, interpretation
                of
                regulations and changes in the nature and enforcement of regulations
                governing the healthcare and institutional pharmacy services 
                industries;





·
            changes
                in the reimbursement rates or methods of payment from Medicare and
                Medicaid and other third party payors, or the implementation of other
                measures to reduce the reimbursement for our services or the services
                of
                our customers and the impact of Medicare
                Part D;





·
            our
                ability and the ability of our customers, to comply with Medicare
                or
                Medicaid reimbursement regulations or other applicable
                laws;





·
            further
                consolidation of managed care organizations and other third party
                payors;





33





·
            our
                ability to implement our business
                strategy;





·
            our
                estimates of costs and benefits, cash flow from operations and capital
                expenditures;





·
            our
                ability to list our common stock on stock
                exchanges;





·
            natural
                disasters, war, civil unrest, terrorism, fire, floods, earthquakes,
                hurricanes or other matters beyond our
                control;





·
            elimination
                of, changes in or our failure to satisfy pharmaceutical manufacturers’
                rebate programs;





·
            our
                ability to attract and retain key executives, pharmacists and other
                healthcare personnel;





·
            changes
                in the laws, regulations and policies, including changes in accounting
                standards, that affect, or will affect, the
                Company;





·
            our
                ability to ensure and maintain an effective system of internal controls
                over financial reporting; and





·
            geopolitical
                events and regulatory changes.





Readers
      are cautioned not to place undue reliance on these forward-looking statements,
      which reflect management’s analysis, judgment, belief or expectation only as of
      the date hereof. The Company undertakes no obligation to update or publicly
      revise these forward-looking statements to reflect events or circumstances
      that
      arise after the date hereof. In addition to the disclosure contained herein,
      readers should carefully review any disclosure of risks and uncertainties
      contained in other documents the Company files or has filed from time to time
      with the Securities and Exchange Commission pursuant to the Exchange
      Act.





**Item
      3. Quantitative and Qualitative Disclosures about Market Risk.**





The
      market risk inherent in the Company’s market risk sensitive instruments is the
      potential loss arising from material adverse changes in interest
      rates.





Interest
      Rate Risk





The
      Company’s borrowings at September 30, 2008 under the Credit Facilities expose
      earnings to changes in short-term interest rates. Interest rates on the
      underlying obligations are either variable or fixed for such a short period
      of
      time as to effectively become variable. Effective January 28, 2008, the
      Company entered into the Swap with CIBC for a notional amount of $58,500 to
      hedge its exposure to changes in interest rates on approximately 50% of the
      first lien credit and second lien credit and guaranty agreements of the Credit
      Facilities.





**Item
      4. Controls and Procedures.**





(a) Evaluation
      of Disclosure Controls and Procedures





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in reports we file or submit under the Securities
      Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and that such information is accumulated and
      communicated to management, including our chief executive officer (“CEO”) and
      chief financial officer (“CFO”), as appropriate to allow timely decisions
      regarding required disclosure.


34







We
      carried out the evaluation required by paragraph (b) of Exchange Act
      Rules 13a-15 and 15d-15, under the supervision and with the participation
      of our management, including the CEO and CFO, of the effectiveness of our
      disclosure controls and procedures (as defined in the Exchange Act
      Rules 13a-15(e) and 15d-15(e)).  Based upon this evaluation, the
      CEO and CFO concluded that our disclosure controls and procedures were not
      effective as of March 31, 2008, and certain of these issues continued to be
      ineffective through September 30, 2008, because of the material weakness in
      our
      internal controls over financial reporting identified by management. The initial
      material weakness was due
      to a lack of adequately skilled resources for the preparation and review of
      the
      financial statements, an inadequate review over non routine events and
      transactions, lack of an integrated accounting system, and lack of adequate
      documentation and assessment of internal controls over financial reporting. The
      Company’s Quarterly Report on Form 10-Q for the period ended March 31,
      2008 contains additional information related to this material weakness in
      Management’s Report on Internal Controls Over Financial Reporting in Item 4
—Controls and Procedures.




(b) Changes
      in Internal Control Over Financial Reporting




There
      have been no significant changes in our internal control over financial
      reporting that occurred during our quarter ended September 30, 2008 that
      have materially affected, or are reasonably likely to materially affect, our
      internal control over financial reporting.




To
      address the material weakness we have identified in our internal control over
      financial reporting, management and the Board developed the following
      remediation plan:





·
            The
                Company has hired candidates with appropriate education and experience
                in
                accounting and financial reporting.  During the second quarter and
                continuing in the third quarter of 2008 we supplemented our financial
                accounting staff, as appropriate. As of this point, we have added
                four new
                professionals to the finance and accounting team, including a Director
                of
                Compliance.


·
            We
                have implemented a process that ensures the timely review and approval
                of
                complex accounting transactions by qualified accounting personnel. 
                In addition, we now require that all significant non-routine transactions
                be reviewed by senior financial management.  We have also developed
                improved monitoring controls in the finance
                department.


·
            The
                Company has completed the installation of a general ledger software
                package and is continuing to implement both an integrated perpetual
                inventory system as well as an integrated revenue recognition / accounts
                receivable process.


·
            During
                the second quarter, and continuing through the third quarter, we
                retained
                a nationally recognized accounting firm to assist management in
                documenting, reviewing, and assessing our internal control over financial
                reporting, identifying any material weaknesses in such internal control
                over financial reporting, assisting in the review and assessment
                of
                appropriate disclosure controls and procedures, and assisting in
                the
                development of any remedial
                actions.




We
      continue to take steps to strengthen our disclosure controls and procedures
      in
      order to remediate these and potentially other weaknesses through ongoing
      process improvements, the implementation of additional enhanced policies and
      controls and the ongoing re-assessment of the technical accounting capabilities
      of our financial accounting staff during our year ending December 31,
      2008.  We intend for these to be ongoing efforts to which we will devote
      significant resources and which we will review, maintain and update over
      time.  In addition, we have initiated the systems and process evaluation
      testing of our internal control over financial reporting, as required by
      Section 404 of the Sarbanes-Oxley Act, in order to allow management to
      report on the internal control over financial reporting which will be required
      for the year ending December 31, 2008.


35


**PART II
      - OTHER INFORMATION.**





**Item
      1. Legal Proceedings.**





On
      December 20, 2007, JMP Securities LLC and Shattuck Hammond
      Partners LLC filed a complaint in the Superior Court of California for the
      City and County of San Francisco against B.J.K. Inc., the Company, and
      certain individuals affiliated with the Company. The plaintiffs alleged that
      they were entitled to compensation as a result of the Company’s acquisition of
      B.J.K. Inc. on October 26, 2007. The complaint asserted various claims
      including breach of contract, breach of implied covenant of good faith and
      fair
      dealing, fraud, negligent misrepresentation and unjust enrichment, and sought
      various damages including compensatory damages of not less than $2.23 million,
      punitive damages, the reimbursement of the plaintiffs’ legal fees and court
      costs, and a declaratory judgment as to the validity and enforceability of
      a
      financial advisory and investment banking services agreement entered into by
      B.J.K. Inc. Following mediation, the parties entered into a settlement agreement
      and caused the lawsuit to be dismissed with prejudice. Jerry Silva, Steven
      Silva, and certain of their affiliates are obligated to indemnify the Company
      for any costs associated with these claims under the terms of the stock purchase
      agreement dated as of June 1, 2007, pursuant to which these parties sold
      B.J.K. Inc. to the Company. Accordingly, these parties funded the settlement
      payment to the plaintiffs. The Company therefore believes that this lawsuit
      does
      not have an adverse effect on the Company’s results of operations or financial
      position.





**Item
      1A.    Risk Factors.**





There
      have been no material changes from the risk factors previously disclosed in
      our
      Annual Report on Form 10-K for the year ended December 31, 2007,
      except as noted below.




Concentration
      of Ownership of Common Stock in Certain Executive Officers .
      As
      described in Note 3 (“Related Party Transactions”) to the financial statements
      set forth in Item 1 of this quarterly report on Form 10-Q, in a series of
      transactions completed during October 2008, Jerry Silva, the Company’s chairman
      and chief executive officer, and Steven Silva, the Company’s president and chief
      operating officer, in their individual capacities and in their respective
      capacities as life tenant and remainderman of a life tenancy (the “Silvas”),
      acquired an aggregate of 5,169,749 additional shares of our outstanding common
      stock from certain investors pursuant to three put option agreements entered
      into between the Silvas and the investors during October 2007. As a result
      of
      these acquisitions of our common stock by the Silvas, Jerry Silva is deemed
      to
      hold an aggregate of 43.9% of the outstanding shares of our common stock and
      Steven Silva holds an aggregate of 9.1% of the outstanding shares of our common
      stock. In addition, a trust of which the Silvas are joint trustees holds an
      aggregate of 1.2% of the outstanding shares of our common stock. The combined
      holdings of the Silvas (including shares held by the trust) represent 54.2%
      of
      the outstanding shares of our common stock.





Pursuant
      to a voting agreement dated October 26, 2007, each of the parties thereto agreed
      that, at any meeting of our stockholders or in any written action by consent
      of
      our stockholders, such party will cause all shares of common stock owned by
      such
      party or its affiliates to be voted as provided in the voting agreement with
      respect to the election and re-election of certain persons as our directors.
      For
      purposes of Section 13(d) of the Securities Exchange Act of 1934, as a result
      of
      the acquisition of additional shares of our common stock by Jerry Silva and
      Steven Silva as described above, a total of 11,737,749 shares may be deemed
      to
      be beneficially owned by virtue of the voting agreement, consisting of 9,744,749
      shares currently outstanding and 1,993,000 shares issuable pursuant to exercise
      of immediately exercisable warrants. These 11,737,749 shares constitute
      approximately 74.4% of the total outstanding shares of our cosmon Stock,
      inclusive of the shares issuable upon exercise of such warrants. Excluding
      the
      1,993,000 shares issuable pursuant to exercise of immediately exercisable
      warrants, the 9,744,749 currently outstanding shares of our common stock subject
      to the voting agreement constitute approximately 70.6% of the total outstanding
      shares of our common stock.





Other
      than by virtue of their obligations under the foregoing voting agreement, Jerry
      Silva and Steven C. Silva have informed us that they disclaim any beneficial
      ownership of shares held by each other, and disclaim membership in any “group”
as contemplated by section 13(d) of the Securities Exchange Act of 1934.


36





Because
      of a concentration of ownership of our common stock due to the voting agreement,
      it will be difficult for other stockholders to affect the outcome of elections
      for our directors. Moreover, because of a concentration of ownership of our
      common stock in Jerry Silva and Steven Silva, two of our executive officers,
      it
      will be difficult for other stockholders to affect the outcome of other matters
      submitted for stockholder vote. For example, if Jerry Silva and Steven C. Silva
      vote in the same way on any matter submitted for stockholder vote, a majority
      vote of the stockholders is assured as to such matter.


This
      concentration of ownership of our common stock could therefore delay or prevent
      a change in control transaction by us or with respect to our common stock or
      discourage a potential acquirer from attempting to obtain control of us, which
      in turn could have an adverse effect on the market price of our common stock
      or
      prevent our stockholders from realizing a premium over the market price for
      their shares of our common stock.





**Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds.**





On
      January 24, 2008, the compensation committee of our board of directors made
      restricted stock awards to each of the board’s five non-employee directors and
      to a consultant to the board. The awards were made pursuant to a compensation
      package approved by the board of directors. The number of shares of our common
      stock awarded was 4,717 shares for each of the six individuals, or an aggregate
      of 28,302 shares. During the quarter ending June 30, 2008, the consultant
      resigned and therefore forfeited his restricted shares of 4,717. No separate
      consideration was required to be paid for these shares. The shares were awarded
      in a private placement in reliance upon the exemption provided under section
      4(2) of the Securities Act of 1933 as a transaction by an issuer not
      involving any public offering.





As
      of
      February 15, 2008, May 15, 2008 and Augist 15, 2008, the Company issued
      three common stock purchase warrants to a financial advisor to the Company
      pursuant to which the financial advisor may purchase an aggregate of 75,000
      shares. These warrants are exercisable at a price of $7.00 per share. No
      separate consideration was required to be paid for these warrants. The warrants
      were issued in a private placement in reliance upon the exemption provided
      under
      section 4(2) of the Securities Act of 1933 as a transaction by an issuer
      not involving any public offering.





On
      April 16, 2008, the compensation committee of our board of directors made
      stock awards to each of the board’s five non-employee directors and to a
      consultant to the board. The awards were made pursuant to a compensation package
      approved by the board of directors. The number of shares of our common stock
      awarded was 481 shares for each of the six individuals, or an aggregate of
      2,886
      shares. No separate consideration was required to be paid for these shares.
      On
      July 16, 2008, the compensation committee of our board of directors made
      stock awards to each of the board’s five non-employee directors. The awards were
      made pursuant to a compensation package approved by the board of directors.
      The
      number of shares of our common stock awarded was 496 shares for each of the
      five
      individuals, or an aggregate of 2,480 shares. On October 16, 2008, the
      compensation committee of our board of directors made stock awards to each
      of
      the board’s five non-employee directors. The awards were made pursuant to a
      compensation package approved by the board of directors. The number of shares
      of
      our common stock awarded was 1,016 shares for each of the five individuals,
      or
      an aggregate of 5,080 shares. No separate consideration was required to be
      paid
      for these shares. The shares were awarded in a private placement in reliance
      upon the exemption provided under section 4(2) of the Securities Act of
      1933 as a transaction by an issuer not involving any public
      offering.





On
      April 29, 2008 and June 12, 2008, respectively, the Board granted stock
      options to employees for the purchase of 459,470 shares of common stock at
      $5.18
      per share and stock options to an executive for the purchase of 50,000 shares
      of
      common stock at $4.93 per share, the respective fair values per share as of
      the
      dates of grant.  The employee stock options are subject to the execution
      and delivery of stock option agreements.  The employee stock options will
      be exercisable in three equal annual installments beginning with the first
      anniversary of the date of grant, and will expire in seven years. The options
      were granted under the 2007 Incentive Compensation Plan (the “Plan”), which was
      approved by the stockholders of the Company on October 22, 2007. The Plan
      authorized up to 1,350,000 shares for award.  The Plan provides for the
      grant of a variety of equity instruments including stock options, restricted
      stock, stock appreciation rights, share units, performance units, and dividend
      equivalents.  Eligible recipients include the Company’s directors,
      officers, employees and certain third-party service providers.  Awards
      under the Plan are determined by the Company’s board of directors or a committee
      thereof.  The board has delegated its authority to grant awards under the
      Plan to the compensation committee of the board.




37







**Item
      6. Exhibits.**





**Exhibit**
              **Number**
            
            **Description**31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.32.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





38





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





Chem
                Rx CorporationNovember
                14, 2008
            /s/
                Jerry SilvaJerry
                SilvaChief
                Executive OfficerNovember
                14, 2008
            /s/
                Gary M. JacobsGary
                M. JacobsChief
                Financial Officer




39