**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

----

 

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly period endedSeptember 30, 2006**

**or**

** ̈**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the transition period from                        to                         **

**Commission file number 0-19878**

**OPTION CARE, INC.**(Exact name of registrantas specified in its charter)

| **Delaware**                                                                        | **36-3791193**                     |
|-------------------------------------------------------------------------------------|------------------------------------|
| (State or other jurisdiction of incorporation or  organization)                     | (IRS Employer  Identification No.) |
|                                                                                |                               |
| **485 Half Day Road, Suite 300  Buffalo Grove, Illinois**                           | **60089**                          |
| (Address of principal executive offices)                                            | (zip code)                         |
|                                                                                |                               |
| **(847) 465-2100**                                                             |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |                               |
| **Not  applicable**                                                                 |
| (Former name,  former address and former fiscal year, if changed since last report) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Largeaccelerated filer o  Acceleratedfiler x  Non-accelerated filer o

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| Class                          | ** ** | **Issued and Outstanding  as of November 1, 2006** |
|--------------------------------|------------|----------------------------------------------------|
|                           |       |                                               |
| Common Stock - $0.01 par value |       | 34,361,439                                         |

 

 

----

**INDEX**

**OPTION CARE, INC. ANDSUBSIDIARIES**
| DESCRIPTION      | ** **                                                                                                      |
|------------------|-----------------------------------------------------------------------------------------------------------------|
| ** **       | ** **                                                                                                      | ** ** |
| **PART I**  | **FINANCIAL INFORMATION**                                                                                       | ** ** |
| ** **       | ** **                                                                                                      | ** ** |
| Item 1.          | Financial Statements (Unaudited)                                                                                |   |
|             |                                                                                                            |   |
|             | Condensed consolidated  balance sheets—September 30, 2006 and December 31, 2005                  |   |
|             |                                                                                                            |   |
|             | Condensed consolidated  statements of income—Three and nine months ended September 30, 2006 and  2005 |   |
|             |                                                                                                            |   |
|             | Condensed consolidated  statements of cash flows—Nine months ended September 30, 2006 and 2005        |   |
|             |                                                                                                            |   |
|             | Notes to condensed  consolidated financial statements—September 30, 2006                              |   |
|             |                                                                                                            |   |
| Item  2.         | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                     |   |
|             |                                                                                                            |   |
| Item  3.         | Quantitative and Qualitative  Disclosures about Market Risk                                                     |   |
|             |                                                                                                            |   |
| Item  4.         | Controls and Procedures                                                                                         |   |
| ** **       | ** **                                                                                                      | ** ** |
| **PART II** | **OTHER INFORMATION**                                                                                           | ** ** |
| ** **       | ** **                                                                                                      | ** ** |
| Item 1.          | Legal Proceedings                                                                                               |   |
|             |                                                                                                            |   |
| Item 1A.         | Risk Factors                                                                                                    |   |
|             |                                                                                                            |   |
| Item  2.         | Unregistered Sales of Equity  Securities and Use of Proceeds                                                    |   |
|             |                                                                                                            |   |
| Item  3.         | Defaults Upon Senior  Securities                                                                                |   |
|             |                                                                                                            |   |
| Item  4.         | Submission of Matters to a  Vote of Security Holders                                                            |   |
|             |                                                                                                            |   |
| Item 5.          | Other Information                                                                                               |   |
|             |                                                                                                            |   |
| Item 6.          | Exhibits                                                                                                        |   |
|             |                                                                                                            |   |
| **SIGNATURES**   |                                                                                                            |

 

2

----

**PART I.  FINANCIALINFORMATION**

**Item1.  Financial Statements**

**Option Care, Inc. andSubsidiariesCondensed Consolidated Balance Sheets**(in thousands, except per share amounts)
| ** **                                                                                                                                                                                    | ** ** | **September 30, 2006 ** | ** ** | **December 31, 2005 ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **(Unaudited)**                        | ** ** | **(Restated-Note 1)**            | ** ** |
| Assets                                                                                                                                                                                        |       |                                   |       |                                  |       |
| Current assets:                                                                                                                                                                               |       |                                   |       |                                  |       |
| Cash and cash  equivalents                                                                                                                                                                    |       | $                                      | 12,456     |                                  | $          | 7,816 |   |
| Short-term  investments                                                                                                                                                                       |       | 9,200                                  |       | 41,042                                |       |
| Accounts  receivable, net                                                                                                                                                                     |       | 101,981                                |       | 95,297                                |       |
| Inventory                                                                                                                                                                                     |       | 18,954                                 |       | 15,490                                |       |
| Deferred income  tax benefit                                                                                                                                                                  |       | 4,236                                  |       | 2,856                                 |       |
| Other current  assets                                                                                                                                                                         |       | 8,553                                  |       | 9,942                                 |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Total current assets                                                                                                                                                                          |       | 155,380                                |       | 172,443                               |       |
| Equipment and other  fixed assets, net                                                                                                                                                        |       | 22,648                                 |       | 18,905                                |       |
| Goodwill, net                                                                                                                                                                                 |       | 164,232                                |       | 112,220                               |       |
| Other assets                                                                                                                                                                                  |       | 12,269                                 |       | 12,996                                |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Total assets                                                                                                                                                                                  |       | $                                      | 354,529    |                                  | $          | 316,564 |   |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Liabilities and stockholders’  equity                                                                                                                                                    |       |                                   |       |                                  |       |
| Current liabilities:                                                                                                                                                                          |       |                                   |       |                                  |       |
| Trade accounts  payable                                                                                                                                                                       |       | $                                      | 29,325     |                                  | $          | 29,958 |   |
| Current portion  of long-term debt                                                                                                                                                            |       | 32                                     |       | 48                                    |       |
| Other current  liabilities                                                                                                                                                                    |       | 14,433                                 |       | 9,743                                 |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Total current  liabilities                                                                                                                                                                    |       | 43,790                                 |       | 39,749                                |       |
| Long-term debt, less current  portion                                                                                                                                                         |       | 86,284                                 |       | 86,306                                |       |
| Deferred income tax  liability                                                                                                                                                                |       | 11,537                                 |       | 9,084                                 |       |
| Other liabilities                                                                                                                                                                             |       | 1,140                                  |       | 665                                   |       |
| Minority interest                                                                                                                                                                             |       | 771                                    |       | 593                                   |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Total liabilities                                                                                                                                                                             |       | 143,522                                |       | 136,397                               |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Stockholders’ equity:                                                                                                                                                                    |       |                                   |       |                                  |       |
| Common stock,  $.01 par value per share, 60,000 shares authorized, 34,330 and 32,838 shares  issued and outstanding at September 30, 2006 and December 31, 2005,  respectively |       | 343                                    |       | 328                                   |       |
| Common stock to  be issued, 108 and 134 shares at September 30, 2006 and  December 31, 2005, respectively                                                                           |       | 1,179                                  |       | 1,311                                 |       |
| Additional  paid-in capital                                                                                                                                                                   |       | 146,193                                |       | 128,158                               |       |
| Retained  earnings                                                                                                                                                                            |       | 63,292                                 |       | 50,370                                |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Total stockholders’  equity                                                                                                                                                              |       | 211,007                                |       | 180,167                               |       |
|                                                                                                                                                                                          |       |                                   |       |                                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                                      | 354,529    |                                  | $          | 316,564 |   |

 

*Seenotes to condensed consolidated financial statements*

3

----

 

**Option Care, Inc. andSubsidiariesCondensed Consolidated Statements of Income**(Unaudited)(in thousands, except per share amounts)
| ** **                                            | ** ** | **Three months ended   September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | ** **                                                 | ** ** | **(Restated-Note 1)**                                | ** ** | ** ** | ** ** | **(Restated-Note 1)** | ** ** |
| Revenue:                                              |       |                                                       |       |                                                      |       |   |   |   |   |
| Specialty pharmacy services                           |       | $                                                          | 84,640     |                                                      | $          | 67,239 |   | $ | 269,873 |   | $ | 209,736 |   |
| Infusion and related healthcare services              |       | 66,657                                                     |       | 51,178                                                    |       | 188,292 |   | 141,716 |   |
| Other                                                 |       | 1,592                                                      |       | 3,476                                                     |       | 7,023 |   | 10,687 |   |
| Total revenue                                         |       | 152,889                                                    |       | 121,893                                                   |       | 465,188 |   | 362,139 |   |
| Cost of revenue:                                      |       |                                                       |       |                                                      |       |   |   |   |   |
| Cost of goods sold                                    |       | 90,709                                                     |       | 71,680                                                    |       | 282,721 |   | 219,122 |   |
| Cost of services provided                             |       | 17,720                                                     |       | 13,718                                                    |       | 51,306 |   | 38,383 |   |
| Total cost of  revenue                                |       | 108,429                                                    |       | 85,398                                                    |       | 334,027 |   | 257,505 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Gross profit                                          |       | 44,460                                                     |       | 36,495                                                    |       | 131,161 |   | 104,634 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Selling, general  and administrative expenses         |       | 30,627                                                     |       | 25,318                                                    |       | 90,846 |   | 72,165 |   |
| Provision for  doubtful accounts                      |       | 3,542                                                      |       | 2,248                                                     |       | 10,461 |   | 6,727 |   |
| Depreciation and  amortization                        |       | 1,227                                                      |       | 915                                                       |       | 3,597 |   | 2,668 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Total operating  expenses                             |       | 35,396                                                     |       | 28,481                                                    |       | 104,904 |   | 81,560 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Operating income                                      |       | 9,064                                                      |       | 8,014                                                     |       | 26,257 |   | 23,074 |   |
| Interest income  (expense), net                       |       | (261                                                       | )          | 108                                                       |       | (470 | ) | 258 |   |
| Other expense,  net                                   |       | (260                                                       | )          | (73                                                       | )          | (688 | ) | (20 | ) |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Income before  income taxes                           |       | 8,543                                                      |       | 8,049                                                     |       | 25,099 |   | 23,312 |   |
| Income tax  provision                                 |       | 3,337                                                      |       | 3,137                                                     |       | 9,265 |   | 8,925 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net income from  continuing operations                |       | $                                                          | 5,206      |                                                      | $          | 4,912 |   | $ | 15,834 |   | $ | 14,387 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Discontinued  operations:                             |       |                                                       |       |                                                      |       |   |   |   |   |
| Loss on discontinued  operations, net of income taxes |       | (256                                                       | )          | —                                                    |       | (893 | ) | — |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Net income                                            |       | $                                                          | 4,950      |                                                      | $          | 4,912 |   | $ | 14,941 |   | $ | 14,387 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Basic net income  (loss) per common share:            |       |                                                       |       |                                                      |       |   |   |   |   |
| Continuing operations                                 |       | $                                                          | 0.15       |                                                      | $          | 0.15 |   | $ | 0.47 |   | $ | 0.44 |   |
| Discontinued operations                               |       | $                                                          | (0.01      | )                                                         | $          | — |   | $ | (0.03 | ) | $ | — |   |
| Total                                                 |       | $                                                          | 0.14       |                                                      | $          | 0.15 |   | $ | 0.44 |   | $ | 0.44 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Diluted net  income (loss) per common share:          |       |                                                       |       |                                                      |       |   |   |   |   |
| Continuing operations                                 |       | $                                                          | 0.15       |                                                      | $          | 0.14 |   | $ | 0.45 |   | $ | 0.42 |   |
| Discontinued operations                               |       | $                                                          | (0.01      | )                                                         | $          | — |   | $ | (0.03 | ) | $ | — |   |
| Total                                                 |       | $                                                          | 0.14       |                                                      | $          | 0.14 |   | $ | 0.42 |   | $ | 0.42 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Shares used in  computing net income per share:       |       |                                                       |       |                                                      |       |   |   |   |   |
| Basic                                                 |       | 34,324                                                     |       | 32,771                                                    |       | 33,822 |   | 32,496 |   |
| Diluted                                               |       | 35,460                                                     |       | 34,679                                                    |       | 35,310 |   | 34,231 |   |
|                                                  |       |                                                       |       |                                                      |       |   |   |   |   |
| Cash dividends per  share                             |       | $                                                          | 0.0200     |                                                      | $          | 0.0200 |   | $ | 0.0600 |   | $ | 0.0533 |   |

 

*Seenotes to condensed consolidated financial statements*

4

----

**Option Care, Inc. andSubsidiariesCondensed Consolidated Statements of Cash Flows**(Unaudited)(in thousands)
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | ** **                                          | ** ** | **(Restated-Note 1)** | ** ** |
| ** **                                                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 14,941     |   | $ | 14,387 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation and  amortization                                                     |       | 6,082                                               |       | 4,607 |   |
| Provision for  doubtful accounts                                                   |       | 10,682                                              |       | 6,727 |   |
| Income from  equity investees                                                      |       | 396                                                 |       | — |   |
| Loss on  disposals                                                                 |       | 49                                                  |       | — |   |
| Non-cash stock  compensation expense                                               |       | 1,047                                               |       | 2,540 |   |
| Deferred income  taxes                                                             |       | 511                                                 |       | 371 |   |
| Changes in  assets and liabilities, net of acquisitions:                           |       |                                                |       | — |   |
| Accounts and  notes receivable                                                     |       | (3,048                                              | )          | (8,450 | ) |
| Inventory                                                                          |       | (984                                                | )          | 2,974 |   |
| Accounts payable                                                                   |       | (11,513                                             | )          | (4,971 | ) |
| Income taxes  receivable/payable                                                   |       | 317                                                 |       | (273 | ) |
| Change in other  assets and liabilities                                            |       | 2,853                                               |       | (1,995 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash provided by  operating activities                                         |       | 21,333                                              |       | 15,917 |   |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                |       |   |   |
| Purchases of  short-term investments                                               |       | (13,200                                             | )          | (170,840 | ) |
| Sales of  short-term investments                                                   |       | 45,042                                              |       | 192,566 |   |
| Purchases of  equipment and other, net                                             |       | (7,874                                              | )          | (7,094 | ) |
| Payments for  acquisitions, net of cash acquired                                   |       | (43,817                                             | )          | (46,367 | ) |
| Proceeds from  disposals                                                           |       | 462                                                 |       | — |   |
|                                                                               |       |                                                |       |   |   |
| Net cash used in  investing activities                                             |       | (19,387                                             | )          | (31,735 | ) |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                |       |   |   |
| Increase in  deferred financing costs                                              |       | (55                                                 | )          | (166 | ) |
| Income tax  benefit from exercise of stock options                                 |       | 994                                                 |       | 1,973 |   |
| Payments on  capital leases and other debt                                         |       | (38                                                 | )          | (30 | ) |
| Proceeds from  issuance of stock                                                   |       | 3,812                                               |       | 6,060 |   |
| Payments of cash  dividends to common shareholders                                 |       | (2,019                                              | )          | (1,728 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash provided by  financing activities                                         |       | 2,694                                               |       | 6,109 |   |
|                                                                               |       |                                                |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                              |       | 4,640                                               |       | (9,709 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 7,816                                               |       | 19,816 |   |
| Cash and cash equivalents, end of period                                           |       | $                                                   | 12,456     |   | $ | 10,107 |   |

 

*Seenotes to condensed consolidated financial statements*

5

----

**Option Care, Inc. andSubsidiariesNotes to Condensed Consolidated Financial StatementsSeptember 30, 2006**(Unaudited)

**1.      Basis of Presentation**

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toQuarterly Report on Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the three and nine months ended September30, 2006 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2006.

Thebalance sheet at December 31, 2005 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements.  For furtherinformation, refer to the consolidated financial statements and footnotes theretoincluded in Option Care’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

Inaddition, the balance sheet at December 31, 2005 and statements of income andcash flows for the three and nine months ended September 30, 2005 have been restatedto reflect the impact of the adoption of Statement of Financial AccountingStandards (“SFAS”) No. 123(R), *Share-Based Payment*, as of January 1, 2006utilizing the modified retrospective method (see also Note 9, *Stock-based Compensation)*and to reflect the correction oferrors in previously reported pro-forma disclosures of stock-based compensationas then required by SFAS No. 123, *Accounting for Stock-BasedCompensation*.  The errors inpreviously reported pro-forma disclosures of stock-based compensation were dueto improper tax treatment of compensation expense from our employee stockpurchase plan and improper accelerated expensing of certain prior years’grants.

The following table setsforth the impact of the adoption of SFAS No. 123(R) utilizing the modifiedretrospective method and the correction of errors in previously reportedpro-forma disclosures of stock-based compensation on the Condensed ConsolidatedBalance Sheet as of December 31, 2005 (in thousands):

|                                                        | ** ** | **As Reported** | ** ** | **Effect of FAS  123(R) Adoption** | ** ** | **As Restated** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|---------------------------------------------------|------------|----------------------|------------|
|                                                   |       |                 |       |                                              |       |                 |       |
| Total current  assets                                  |       | $                    | 172,443    |                                              | $          | —               |       | $ | 172,443 |   |
| Equipment and  other fixed assets, net                 |       | 18,905               |       | —                                            |       | 18,905               |       |
| Goodwill, net                                          |       | 112,220              |       | —                                            |       | 112,220              |       |
| Other intangible  assets, net(1)                       |       | 3,450                |       | —                                            |       | 3,450                |       |
| Investment in  affiliates(1)                           |       | 4,911                |       | —                                            |       | 4,911                |       |
| Non-current  portion of deferred income tax benefit(1) |       | 230                  |       | 2,886                                             |       | 3,116                |       |
| Other long-term  assets(1)                             |       | 1,519                |       | —                                            |       | 1,519                |       |
|                                                   |       |                 |       |                                              |       |                 |       |
| Total assets                                           |       | $                    | 313,678    |                                              | $          | 2,886                |       | $ | 316,564 |   |
|                                                   |       |                 |       |                                              |       |                 |       |
| Total liabilities                                      |       | 136,397              |       | —                                            |       | 136,397              |       |
|                                                   |       |                 |       |                                              |       |                 |       |
| Common stock and  common stock to be issued            |       | 1,639                |       | —                                            |       | 1,639                |       |
| Additional  paid-in capital                            |       | 113,686              |       | 14,472                                            |       | 128,158              |       |
| Retained  earnings                                     |       | 61,956               |       | (11,586                                           | )          | 50,370               |       |
|                                                   |       |                 |       |                                              |       |                 |       |
| Total stockholders’ equity                        |       | 177,281              |       | 2,886                                             |       | 180,167              |       |
|                                                   |       |                 |       |                                              |       |                 |       |
| Total  liabilities and stockholders’ equity       |       | $                    | 313,678    |                                              | $          | 2,886                |       | $ | 316,564 |   |

 

----

(1) Included in the accompanying restated CondensedConsolidated Balance as of December 31, 2005 within “Other assets”.

6

----

The following table setsforth the impact of the adoption of SFAS No. 123(R) utilizing the modifiedretrospective method and the correction of errors in previously reportedpro-forma disclosures of stock-based compensation on the Condensed ConsolidatedStatement of Income for the three and nine months ended September 30, 2005 (inthousands, except per share amounts):
| ** **                                      | ** ** | **Three months ended September 30, 2005** | ** ** | **Nine months ended September 30, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **As  Reported**                                                   | ** ** | **Effect of  FAS 123(R)  Adoption**                     | ** ** | **As  Restated** | ** ** | **As  Reported** | ** ** | **Effect of  FAS 123(R)  Adoption** | ** ** | **As  Restated** | ** ** |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total revenue                                   |       | $                                                                  | 121,893    |                                                              | $          | — |   | $ | 121,893 |   | $ | 362,139 |   | $ | — |   | $ | 362,139 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Cost of goods  sold                             |       | 71,680                                                             |       | —                                                            |       | 71,680 |   | 219,122 |   | — |   | 219,122 |   |
| Cost of services  provided                      |       | 13,688                                                             |       | 30                                                                |       | 13,718 |   | 38,269 |   | 114 |   | 38,383 |   |
| Total cost of revenue                           |       | 85,368                                                             |       | 30                                                                |       | 85,398 |   | 257,391 |   | 114 |   | 257,505 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Gross profit                                    |       | 36,525                                                             |       | (30                                                               | )          | 36,495 |   | 104,748 |   | (114 | ) | 104,634 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses   |       | 24,689                                                             |       | 629                                                               |       | 25,318 |   | 69,739 |   | 2,426 |   | 72,165 |   |
| Other operating  expenses                       |       | 3,163                                                              |       | —                                                            |       | 3,163 |   | 9,395 |   | — |   | 9,395 |   |
| Total operating  expenses                       |       | 27,852                                                             |       | 629                                                               |       | 28,481 |   | 79,134 |   | 2,426 |   | 81,560 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Operating income                                |       | 8,673                                                              |       | (659                                                              | )          | 8,014 |   | 25,614 |   | (2,540 | ) | 23,074 |   |
| Interest income                                 |       | 108                                                                |       | —                                                            |       | 108 |   | 258 |   | — |   | 258 |   |
| Other expense, net                              |       | (73                                                                | )          | —                                                            |       | (73 | ) | (20 | ) | — |   | (20 | ) |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Income before income  taxes                     |       | 8,708                                                              |       | (659                                                              | )          | 8,049 |   | 25,852 |   | (2,540 | ) | 23,312 |   |
| Income tax provision                            |       | 3,348                                                              |       | (211                                                              | )          | 3,137 |   | 9,798 |   | (873 | ) | 8,925 |   |
| Net income                                      |       | $                                                                  | 5,360      |                                                              | $          | (448 | ) | $ | 4,912 |   | $ | 16,054 |   | $ | (1,667 | ) | $ | 14,387 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net income per common  share:                   |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                                                  | 0.16       |                                                              | $          | (0.01 | ) | $ | 0.15 |   | $ | 0.49 |   | $ | (0.05 | ) | $ | 0.44 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Diluted                                         |       | $                                                                  | 0.16       |                                                              | $          | (0.02 | ) | $ | 0.14 |   | $ | 0.47 |   | $ | (0.05 | ) | $ | 0.42 |   |
|                                            |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Shares used in  computing net income per share: |       |                                                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 32,771                                                             |       | —                                                            |       | 32,771 |   | 32,496 |   | — |   | 32,496 |   |
| Diluted                                         |       | 34,566                                                             |       | 113                                                               |       | 34,679 |   | 34,163 |   | 68 |   | 34,231 |   |

 

7

----

The following table setsforth the impact of the adoption of SFAS No. 123(R) utilizing the modifiedretrospective method and the correction of errors in previously reportedpro-forma disclosures of stock-based compensation on the Condensed ConsolidatedStatement of Cash Flows for the nine months ended September 30, 2005 (inthousands):

|                                                                                | ** ** | **As Reported** | ** ** | **Effect of FAS  123(R)  Adoption** | ** ** | **As Restated** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------------------------------|------------|----------------------|------------|
|                                                                           |       |                 |       |                                          |       |                 |       |
| Cash flows from  operating activities:                                         |       |                 |       |                                          |       |                 |       |
| Net income                                                                     |       | $                    | 16,054     |                                          | $          | (1,667               | )          | $ | 14,387 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                 |       |                                          |       |                 |       |
| Non-cash stock compensation expense                                            |       | —               |       | 2,540                                         |       | 2,540                |       |
| Deferred income taxes                                                          |       | 1,244                |       | (873                                          | )          | 371                  |       |
| Income tax benefit from exercise of stock options                              |       | 1,973                |       | (1,973                                        | )          | —               |       |
| Other adjustments                                                              |       | (1,381               | )          | —                                        |       | (1,381               | )          |
|                                                                           |       |                 |       |                                          |       |                 |       |
| Net cash provided by operating activities                                      |       | 17,890               |       | (1,973                                        | )          | 15,917               |       |
|                                                                           |       |                 |       |                                          |       |                 |       |
| Net cash used in investing activities                                          |       | (31,735              | )          | —                                        |       | (31,735              | )          |
|                                                                           |       |                 |       |                                          |       |                 |       |
| Cash flows from  financing activities:                                         |       |                 |       |                                          |       |                 |       |
| Income tax benefit from exercise of stock options                              |       | —               |       | 1,973                                         |       | 1,973                |       |
| Other cash flows from financing activities                                     |       | 4,136                |       | —                                        |       | 4,136                |       |
|                                                                           |       |                 |       |                                          |       |                 |       |
| Net cash provided by financing activities                                      |       | 4,136                |       | 1,973                                         |       | 6,109                |       |
|                                                                           |       |                 |       |                                          |       |                 |       |
| Net decrease in  cash and cash equivalents                                     |       | (9,709               | )          | —                                        |       | (9,709               | )          |
| Cash and cash equivalents, beginning of period                                 |       | 19,816               |       | —                                        |       | 19,816               |       |
| Cash and cash  equivalents, end of period                                      |       | $                    | 10,107     |                                          | $          | —               |       | $ | 10,107 |   |

 

**2.      Long-Term Debt**

In November 2004, wecompleted an offering of $86.3 million of 2.25% convertible senior notes due2024 in a private placement to qualified institutional buyers.  We filed a Registration Statement on Form S-3on January 24, 2005, as subsequently amended, to register the notes under theSecurities Act of 1933.  The notes areconvertible into cash and, if applicable, shares of our common stock based onan initial conversion rate, subject to adjustment, of 55.5278 shares per $1,000principal amount of notes (which represents an initial conversion price of$18.01 per share), in certain circumstances. The conversion rate and conversion price were subsequently adjusted to83.5519 and $11.97 per share, respectively, pursuant to the terms of the notesas a result of our 3-for-2 common stock split on March 31, 2005 and the$0.02 per share dividends paid each quarter thereafter.  Holders may convert their notes into cashand, if applicable, shares of our common stock prior to the stated maturityonly under the following circumstances: (1) during any calendar quarter afterthe calendar quarter ended December 31, 2004, if the closing sale price of ourcommon stock for each of 20 or more consecutive trading days in a period of 30consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 120% of the conversion price in effect onthe last trading day of the immediately preceding calendar quarter; (2) duringthe five business day period after any five consecutive trading day period (the“note measurement period”) in which the average trading price per $1,000principal amount of notes was equal to or less than 97% of the average conversionvalue of the notes during the note measurement period; (3) upon the occurrenceof specified corporate transactions; or (4) if we have called the notes forredemption.  In general, upon conversion,the holder of each note will receive the conversion value of the note payablein cash, up to the principal amount of the note, and common stock for the note’sconversion value in excess of such principal amount (plus an additional cashpayout in lieu of fractional shares).  Ifthe notes are surrendered for conversion in connection with certain fundamentalchanges that occur before November 1, 2009, holders will in certaincircumstances also receive a make-whole premium in addition to the cash andshares to which holders are otherwise entitled to receive upon conversion.  The convertible senior notes will mature onNovember 1, 2024 and will not be redeemable by us prior to November 1,2009.  Holders of the convertible notesmay require us to repurchase all or a portion of the convertible notes for cashon November 1, 2009, November 1, 2014 and November 1, 2019.  Interest will be paid at 2.25% per annum,payable semi-annually in arrears on May 1 and November 1 of each year to theholders of record at the close of business on the preceding April 15 andOctober 15, respectively.  The notes aresenior unsecured obligations and rank equally with all of our existing andfuture senior unsecured indebtedness. None of the required conditions for potential conversion of the notes bythe holders occurred during the nine months ended September 30, 2006.  The holders of the notes possess nostockholder rights, such as dividend or voting rights, unless and until theyconvert their notes into cash and shares of our common stock.

On May 5, 2006, weentered into a five-year revolving Credit Agreement with LaSalle Bank NationalAssociation (the “Agreement”).  Theinitial revolving loan commitment under the Agreement is $35 million.  Provided there is no event of default, wehave the option to increase the revolving loan commitment to a maximum of $100million during the first two years of the

8

----

Agreement.  We will pay interest on borrowings at ratesranging from prime plus zero or LIBOR plus 1.00% to a maximum of prime plus0.25% or LIBOR plus 1.75% based on our debt to EBITDA ratio for the applicableperiod.  We will also pay a non-use feeranging from 0.15% to 0.225% of the unused portion of the revolving loancommitment. The interest rates and non-use fee rates payable are based on ourTotal Debt to EBITDA Ratio, as defined in the agreement, for the applicableperiod. We must maintain compliance with various financial and other covenantsduring the life of the Agreement. We incurred fees of approximately $150,000related to negotiating this Agreement. We have had no borrowings under theAgreement from inception through September 30, 2006.

**3.      Earnings Per Share Data**

The followingtable sets forth the computation of basic and diluted earnings per share forthe periods indicated. (in thousands, except per share amounts):
| ** **                                                                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic:                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net income from  continuing operations                                          |       | $                                                    | 5,206      |                                                | $          | 4,912 |   | $ | 15,834 |   | $ | 14,387 |   |
| Net loss from  discontinued operations                                          |       | (256                                                 | )          | —                                              |       | (893 | ) | — |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                      |       | $                                                    | 4,950      |                                                | $          | 4,912 |   | $ | 14,941 |   | $ | 14,387 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Average shares  outstanding                                                     |       | 34,324                                               |       | 32,771                                              |       | 33,822 |   | 32,496 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings  from continuing operations per share                            |       | $                                                    | 0.15       |                                                | $          | 0.15 |   | $ | 0.47 |   | $ | 0.44 |   |
| Basic loss from  discontinued operations per share                              |       | (0.01                                                | )          | —                                              |       | (0.03 | ) | — |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings  per share                                                       |       | $                                                    | 0.14       |                                                | $          | 0.15 |   | $ | 0.44 |   | $ | 0.44 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted:                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net income from  continuing operations                                          |       | $                                                    | 5,206      |                                                | $          | 4,912 |   | $ | 15,834 |   | $ | 14,387 |   |
| Net loss from  discontinued operations                                          |       | (256                                                 | )          | —                                              |       | (893 | ) | — |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                      |       | $                                                    | 4,950      |                                                | $          | 4,912 |   | $ | 14,941 |   | $ | 14,387 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Average shares  outstanding                                                     |       | 34,324                                               |       | 32,771                                              |       | 33,822 |   | 32,496 |   |
| Net effect of  dilutive stock options – Based on the treasury stock method |       | 873                                                  |       | 1,073                                               |       | 985 |   | 1,070 |   |
| Net effect of  dilutive contingently convertible debt (1)                       |       | 263                                                  |       | 835                                                 |       | 503 |   | 665 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Total diluted  shares                                                           |       | 35,460                                               |       | 34,679                                              |       | 35,310 |   | 34,231 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings  from continuing operations per share                          |       | $                                                    | 0.15       |                                                | $          | 0.14 |   | $ | 0.45 |   | $ | 0.42 |   |
| Diluted loss  from discontinued operations per share                            |       | (0.01                                                | )          | —                                              |       | (0.03 | ) | — |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings per  share                                                     |       | $                                                    | 0.14       |                                                | $          | 0.14 |   | $ | 0.42 |   | $ | 0.42 |   |

----

(1) Weighted average shares issuableupon conversion of all $86.3 million of our 2.25% convertible senior notes due2024.

**4.      Operating Segments**

We report our results of operations from one identifiable segment, withthree service lines: specialty pharmacy services, infusion and relatedhealthcare services, and other.

**Specialty pharmacy services**involve the distribution of injectable and infused pharmaceuticals to treat awide range of chronic health conditions. We purchase specialty pharmaceuticals from manufacturers and wholesaledistributors, fill prescriptions provided by physicians, and label, package anddeliver the pharmaceuticals to patients’ homes or physicians’ offices, eitherourselves or through contract couriers. These pharmaceuticals may requirerefrigeration during shipping as well as special handling to prevent potencydegradation. Depending on therapy, we may also administer the specialtypharmaceuticals to the patient at one of our ambulatory infusion centers.Patients receiving treatment are often provided special counseling andeducation regarding their condition and treatment program.

**Infusion and related healthcareservices** typically involve the intravenous administration ofmedications at the patient’s home or other non-hospital sites such as one ofour ambulatory infusion suites.  Infusion pharmacy services treat a widerange of acute and

9

----

chronic health conditions, including infections, dehydration, cancer,pain and nutritional deficiencies.  All of our company-owned pharmaciesprovide infusion pharmacy services.  Several of our company-ownedpharmacies also provide home health nursing services, respiratory therapyservices and home medical equipment sales and rentals.  Wealso have one location that provides home hospice services.

**Otherrevenue** consists of royalties and other fees generated fromour franchised pharmacy network and, for the three and nine months endedSeptember 30, 2005, software licensing and support revenue generated by oursubsidiary, Management by Information, Inc. (“MBI”).  The MBI business was sold during the fourthquarter of 2005 and therefore generated no revenue during the three and ninemonths ended September 30, 2006.

**5.      Significant Customers and Concentration ofCredit Risk**

We generate the majorityof our revenue from managed care contracts and other agreements with commercialthird party payors by providing health care services to their members. Our principal managed care contract is with Blue Cross and Blue Shield ofFlorida, to whose members we provide infusion pharmacy services and specialtypharmacy services.  The contract may be terminated by either party on 90days’ notice and, unless terminated, renews annually each September for anadditional one-year term.  We also generate revenue from governmenthealthcare programs such as Medicare and Medicaid.

The following table setsforth information regarding revenue and accounts receivable related to our mostsignificant payors as of the dates and for the periods presented:
| ** **                             | ** ** | **Revenue**                                              | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                             | ** ** | **Three months ended**                         | ** ** | **Nine months ended**                          | ** ** | **Accounts Receivable**                             | ** ** |
| ** **                             | ** ** | **September 30,**                                   | ** ** | **September 30,**                                   | ** ** | **September 30,**                                   | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                   |       |                                                     |       |                                                     |       |                                                     |       |   |   |   |   |   |   |
| Blue Cross and  Blue Shield of Florida |       | 14                                                       | %          | 14                                                       | %          | 13                                                       | %          | 14 | % | 8 | % | 9 | % |
| Medicare &  Medicaid          |       | 21                                                       | %          | 15                                                       | %          | 20                                                       | %          | 17 | % | 20 | % | 22 | % |
| All other payors  (1)                  |       | 65                                                       | %          | 71                                                       | %          | 67                                                       | %          | 69 | % | 72 | % | 69 | % |
|                                   |       |                                                     |       |                                                     |       |                                                     |       |   |   |   |   |   |   |
| Total                                  |       | 100                                                      | %          | 100                                                      | %          | 100                                                      | %          | 100 | % | 100 | % | 100 | % |

 

----

(1) No other payor represents 10% or more of ourrevenue or accounts receivable as of the dates and for the periods presented.

**6.      Seasonal Revenue Trends**

Synagis®, one of thespecialty pharmaceuticals that we provide to patients, is seasonal. Synagis® is a drug used for the prevention of respiratory syncytial virus (RSV)in high-risk pediatric patients. RSV infection is a seasonal condition, withthe season generally lasting from October through April.

OptionCare’s quarterly Synagis® revenue for the year 2005 and the first threequarters of 2006 was as follows (in thousands):

|                                   | ** ** | **Synagis®  revenue** | ** ** | ****% of Total  Revenue (1) | ** ** |
|-----------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|
| Quarter ended  March 31, 2005     |       | $                          | 15,536     |                                       | 12.9       | % |
| Quarter ended  June 30, 2005      |       | 4,492                      |       | 3.8                                        | %          |
| Quarter ended  September 30, 2005 |       | 862                        |       | 0.7                                        | %          |
| Quarter ended  December 31, 2005  |       | 15,905                     |       | 11.2                                       | %          |
| Fiscal year 2005                  |       | $                          | 36,795     |                                       | 7.3        | % |
|                              |       |                       |       |                                       |       |
| Quarter ended  March 31, 2006     |       | $                          | 27,102     |                                       | 17.5       | % |
| Quarter ended  June 30, 2006      |       | $                          | 8,372      |                                       | 5.3        | % |
| Quarter ended  September 30, 2006 |       | $                          | 1,780      |                                       | 1.2        | % |

 

----

(1)Percent of total revenue is calculated based on total revenue from continuingoperations.

10

----

**7.**                 Acquisitions

We completed twoacquisitions and entered into a binding agreement for a third acquisitionduring the nine months ended September 30, 2006. The results of operations foreach business were consolidated as of the effective date of the acquisition. Thepurpose of each acquisition was to increase our revenue and net income byaccomplishing one or both of the following goals: (1) expanding our geographiccoverage, and (2) consolidating our position in the markets we serve.

Effective May 15, 2006,we acquired all of the outstanding stock of our Eatontown, New Jerseyfranchise.  The initial purchase pricewas $18.2 million, paid $14.0 million in cash and $4.2 million in shares of ourcommon stock. We may owe additional consideration of up to $7.4 million,payable in 2007, 2008 and/or 2009 based on achievement of certain financialperformance targets. Concurrent with the acquisition of this franchise, werecorded a gain of $1.2 million related to settlement of their pre-existingfranchise relationship. This gain is included within Other Revenue on ourCondensed Consolidated Statements of Income for the nine months ended September30, 2006. Related to this acquisition, we have recorded goodwill of $16.4million, all of which is expected to be deductible for income tax purposes.

Effective March 13, 2006 (the “Effective Date”), weentered into a binding purchase agreement to acquire a home infusion businesswith operations in New York. The purchase price was $25.0 million, of which$16.5 million was paid in cash on the Effective Date, $7.5 million was paid in unregisteredshares of our common stock and $1.0 million is payable pursuant to the terms ofa note. Pursuant to terms contained in the binding purchase agreement, theunregistered shares will be repurchased by us during the quarter endingDecember 31, 2006 in exchange for a cash payment of $7.5 million. Under theterms of the purchase agreement, we will receive the acquired interest in thebusiness at the closing date, which is the earlier of two days following thereceipt of approval from the New York Department of Health or 270 dayssubsequent to the Effective Date. The total cost of the acquisition is subjectto working capital and earn-out adjustments. The total purchase price has beenallocated $22.2 million to goodwill and the remainder to accounts receivableand other working capital items. We anticipate that all of the goodwill will bedeductible for tax purposes. Financial Accounting Standards BoardInterpretation No. 46 (Revised December 2003), *Consolidationof Variable Interest Entities*, addresses the consolidation ofbusiness enterprises to which customary conditions of consolidation, such as amajority voting interest, do not apply. As a result of the purchase agreementand related joint coordination agreement, the acquired business is deemed to bea variable interest entity (“VIE”) and we are the primary beneficiary of thisVIE as of the Effective Date. Accordingly, we have included the business in ourconsolidated financial reporting as of the Effective Date. Prior to the closingdate, and subsequent to the Effective Date, creditors of the VIE will not haverecourse to the assets of our company. Subsequent to the closing date, theacquired business will cease to be a VIE and will become a wholly-ownedsubsidiary of our company. As of September 30, 2006, the closing date had notyet been reached for this acquisition.

EffectiveMarch 1, 2006, we acquired a home infusion and RT/DME business with operationsin Connecticut, Illinois, New Jersey and Ohio. Through this acquisition weacquired full equity ownership of one “C” corporation and one limited liabilitycompany for $5.0 million in cash, subject to certain adjustments. In connectionwith this acquisition, we recorded goodwill of $5.5 million, subject toadjustment related to contingencies involving the value of acquired assets. Weanticipate that substantially all of the goodwill will be deductible for income tax purposes.

During the nine months ended September 30, 2006, werecorded additional goodwill of $7.9 million related to additionalconsideration paid and payable to the former owners of businesses we acquiredin 2005 and 2004. We paid the additional consideration $7.5 million in cash and$1.0 million in 70,000 shares of our common stock.

For our current yearacquisitions, the allocation of purchase price is tentative and subject toadjustment. The following table sets forth the allocation of purchase price forthe nine months ended September 30, 2006 for our current year acquisition andadditional consideration for our prior year acquisitions (in thousands):

|                                                     | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **Purchase  Price:**                                | ** ** | ** **                                                    | ** ** |
| Paid in cash                                        |       | $                                                             | 43,817     |   |
| Paid/payable in  shares of Option Care common stock |       | 12,636                                                        |       |
| Earn-out payable                                    |       | 1,559                                                         |       |
| Liabilities  assumed                                |       | 12,533                                                        |       |
|                                                |       | $                                                             | 70,545     |   |
|                                                |       |                                                          |       |
| **Allocation  of Purchase Price:**                  | ** ** | ** **                                                    | ** ** |
| Goodwill                                            |       | $                                                             | 52,400     |   |
| Accounts  receivable, net                           |       | 14,044                                                        |       |
| Other tangible  assets                              |       | 3,627                                                         |       |
| Other intangible  assets                            |       | 475                                                           |       |
|                                                |       | $                                                             | 70,545     |   |

 

11

----

The following table sets forth information regarding the changes in ourgross and net goodwill during the nine months ended September 30, 2006 (inthousands):

|                            | ** ** | **Goodwill** | ** ** | **Accumulated  Amortization** | ** ** | **Goodwill, net** | ** ** |
|----------------------------|------------|--------------|------------|-------------------------------|------------|------------------------|------------|
|                       |       |         |       |                          |       |                   |       |
| December 31,  2005         |       | $            | 116,160    |                          | $          | (3,940                 | )          | $ | 112,220 |   |
| Current year  acquisitions |       | 44,486       |       | —                        |       | 44,486                 |       |
| Prior year  acquisitions   |       | 7,914        |       | —                        |       | 7,914                  |       |
| Current year  disposals    |       | (388         | )          | —                        |       | (388                   | )          |
|                       |       |         |       |                          |       |                   |       |
| September 30,  2006        |       | $            | 168,172    |                          | $          | (3,940                 | )          | $ | 164,232 |   |

 

**8.****              DiscontinuedOperations**

On August 1, 2006, wecompleted the sale of our home health agency in Portland, Oregon for $500,000. Werecorded a pre-tax gain of $242,000 on this sale. In addition, during thequarter ended September 30, 2006 we ceased operations of our home health agencyin Phoenix, Arizona and recorded a pre-tax loss of $291,000 on this disposal. Theoperations and cash flows of these home health agencies have been eliminatedfrom our ongoing operations as a result of these transactions, and we will nothave any significant continuing involvement in their operations. Accordingly,the results of operations of these home health agencies, including any gains orlosses on sale or disposal, are now reported as discontinued operations, net oftax, in our condensed consolidated statements of income. There was no impact tothe reported results for the three or nine months ended September 30, 2005 aswe acquired both home health agencies on or after October 1, 2005.

Selected financial information related to ourdiscontinued operations is summarized as follows (in thousands):

|                                                        | ** ** | **Three months ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                   |       |                                                           |       |                                                          |       |
| Total revenue                                          |       | $                                                              | 498        |                                                          | $          | 4,436 |   |
|                                                   |       |                                                           |       |                                                          |       |
| Pre-tax loss on  disposal of discontinued operations   |       | (49                                                            | )          | (49                                                           | )          |
| Loss from  discontinued operations before income taxes |       | (367                                                           | )          | (1,350                                                        | )          |
| Income tax  benefit                                    |       | 160                                                            |       | 506                                                           |       |
| Loss on  discontinued operations, net of income taxes  |       | $                                                              | (256       | )                                                             | $          | (893 | ) |

 

**9.****                 Franchise-relatedRevenue**

We maintain a nationalfranchise network through which we generate a portion of our revenue.  Ourfranchise-related revenues include: (1) royalties; (2) vendor rebatesand administration fees; and (3) franchise settlement and related fees. Eachof these types of revenue can fluctuate over time, with the largest potentialfluctuations relating to franchise settlements. Franchise-related revenue isincluded within our “Other revenue” service line. The following table setsforth our franchise-related revenue for the periods indicated (in thousands):

|                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Franchise-related revenue:**     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Royalties                               |       | $                                                    | 1,270      |                                                | $          | 1,775 |   | $ | 4,064 |   | $ | 5,690 |   |
| Vendor rebates  and administration fees |       | 99                                                   |       | 113                                                 |       | 525 |   | 302 |   |
| Franchise  settlements and related fees |       | —                                               |       | 506                                                 |       | 1,427 |   | 2,997 |   |
|                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Total  franchise-related revenue        |       | $                                                    | 1,369      |                                                | $          | 2,393 |   | $ | 6,016 |   | $ | 8,989 |   |

 

During the nine monthsended September 30, 2006, we recorded franchise settlement revenue of $1.4million. Of this total, $1.2 million was related to settlement of ourpre-existing franchise relationship with a business we acquired and $200,000was related to the negotiated early termination of one of our franchises.

12

----

During the nine months ended September 30, 2005, we recorded franchisesettlement revenue of $3.0 million.  Of this total, $1.9 million wasrelated to early release of a franchise from our network and $800,000 wasrelated to our acquisition of a franchise. We also recorded $300,000 inadditional royalty revenue related to settlement of under-reported prior periodroyalties by the franchise that was early released from our network.

 

**10.****          Stock-based Compensation**

Effective January 1, 2006, we adopted SFAS No.123(R), *Share-Based Payment*,utilizing the modified retrospective method*.*Prior to January 1, 2006, we accounted for stock-based compensation under therecognition and measurement provisions of Accounting Principles Board (APB)Opinion No. 25, *Accounting for Stock Issuedto Employees*, as permitted by SFAS No. 123,*Accounting for Stock-Based Compensation*. SFASNo. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*,and amends SFAS No. 95, *Statement of CashFlows*. SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options and shares purchased under ouremployee stock purchase plan, to be recognized in the income statement based ontheir fair values. We have restated the results for all prior periods toinclude compensation cost for all share-based payments based on the grant datefair value estimated in accordance with the original provisions of SFAS No.123.

The following table sets forth the impact to our incomebefore taxes, net income and basic and diluted earnings per common share forthe three and nine months ended September 30, 2006 and 2005 of the adoption ofSFAS No. 123(R) utilizing the modified retrospective method (in thousands,except per share amounts):
| ** **                                               | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Impact on net  income for all stock-based compensation:  |       |                                                     |       |                                                    |       |   |   |   |   |
| Stock option grants                                      |       | $                                                        | (454       | )                                                       | $          | (315 | ) | $ | (1,173 | ) | $ | (1,075 | ) |
| Employee stock purchase plan withholdings                |       | (141                                                     | )          | (77                                                     | )          | (357 | ) | (286 | ) |
| Cumulative effect of a change in estimate                |       | —                                                   |       | —                                                  |       | 483 |   | — |   |
| Correction of pro-forma disclosure compensation  expense |       | —                                                   |       | (267                                                    | )          | — |   | (1,179 | ) |
|                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Total impact on income before income taxes               |       | (595                                                     | )          | (659                                                    | )          | (1047 | ) | (2,540 | ) |
|                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Provision for income taxes                               |       | 177                                                      |       | 153                                                     |       | 269 |   | 534 |   |
| Correction of pro-forma disclosure income tax  benefit   |       | —                                                   |       | 58                                                      |       | — |   | 339 |   |
| Total impact on  net income                              |       | $                                                        | (418       | )                                                       | $          | (448 | ) | $ | (778 | ) | $ | (1,667 | ) |
|                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Impact on net  income per common share:                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                    |       | $                                                        | (0.01      | )                                                       | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
| Diluted                                                  |       | $                                                        | (0.01      | )                                                       | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
|                                                     |       |                                                     |       |                                                    |       |   |   |   |   |

 

Priorto the adoption of SFAS No. 123(R), we presented all tax benefits of deductionsresulting from the exercise of stock options as operating cash flows in theStatement of Cash Flows. SFAS No. 123(R) requires the cash flows resulting fromthe tax benefits resulting from tax deductions in excess of the compensationcost recognized for those options (excess tax benefits) to be classified asfinancing cash flows. Accordingly, we have reclassified the $2.0 million excesstax benefit as a financing cash inflow on the Condensed Consolidated Statementof Cash Flows for the nine months ended September 30, 2005.

Weamortize the calculated fair value of our outstanding stock optionsstraight-line over the vesting period of the options. The fair value of optionsgranted under our stock option plan during the three and nine months endedSeptember 30, 2006 and 2005 was estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:
| ** **                                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Annual dividend  yield per share                          |       | $                                                    | 0.08       |                                                | $          | 0.08 |   | $ | 0.08 |   | $ | 0.08 |   |
| Expected  volatility                                      |       | 30                                                   | %          | 30                                                  | %          | 28 | % | 32 | % |
| Weighted average  risk-free interest rate                 |       | 4.92                                                 | %          | 4.08                                                | %          | 5.14 | % | 3.77 | % |
| Expected grant  life (years)                              |       | 4.6                                                  |       | 4.0                                                 |       | 4.6 |   | 4.0 |   |
| Weighted average per  share fair value of options granted |       | $                                                    | 3.58       |                                                | $          | 3.77 |   | $ | 3.58 |   | $ | 3.93 |   |

13

----

During the three and nine months ended September 30, 2006, we issued135,207 and 410,025 shares of our common stock from the exercise of optionsgranted through our stock incentive plan. In the quarter ended March 31, 2006,we issued 133,044 shares of our common stock to employees who participated inour employee stock purchase plan during 2005.

 

**11.****          Recently Issued Accounting Pronouncement**

In June 2006, theFinancial Accounting Standards Board published Interpretation 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”), whichis an interpretation of Statement 109, *Accounting for IncomeTaxes.* FIN 48 provides guidance on how entities should evaluate andreport on uncertain tax positions. This interpretation requires thatrealization of an uncertain income tax position must be “more likely than not”(i.e. greater than 50% likelihood of receiving a benefit) before it can berecognized in the financial statements. Further, this interpretation prescribesthe benefit to be recorded in the financial statements at the amount mostlikely to be realized assuming a review by tax authorities having all relevantinformation and applying current conventions. This interpretation alsoclarifies the financial statement classification of tax-related penalties andinterest and sets forth new disclosures regarding unrecognized tax benefits. Thisinterpretation is effective for fiscal years beginning after December 15, 2006,and we will be required to adopt this interpretation in the first quarter of2007. We are currently evaluating the requirements of FIN 48 to determine theeffects it will have, if any, on our accounting for income taxes.

In September 2006, theFinancial Accounting Standards Board issued SFAS No. 157, *Fair ValueMeasurements*, which defines fair value, establishes a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expands disclosures about fair value measurements. Theprovisions of SFAS No. 157 are effective for financial statements issued forfiscal years beginning after November 5, 2007. We will adopt the guidancecontained in SFAS No. 157 at the beginning of our fiscal year ending December31, 2008. We do not believe that adoption of the guidance contained in SFAS No.157 will have a material affect on our results of operations or financialcondition.

**12.****          Quarterly Dividends**

In May 2004, our Board ofDirectors authorized the adoption of a quarterly dividend policy. Each quarter,our Board of Directors will determine the dividend amount per share, if any. During each of the fiscal quarters beginningwith the quarter ended June 30, 2004 through the quarter ended March 31, 2005,our board declared a dividend of $0.0133 per share. During each of the fiscalquarters beginning with the quarter ended June 30, 2005 our Board declared a$0.02 per share dividend. The $0.02 per share dividend in the quarter endedSeptember 30, 2006 was paid August 28, 2006 to stockholders of record as ofAugust 14, 2006.

**13.****          Comprehensive Income**

Net income was our onlycomponent of comprehensive income for the three and nine months ended September 30,2006 and 2005.

14

----

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

**FORWARDLOOKING STATEMENTS**

The following discussionshould be read in conjunction with our Annual Report on Form 10-K for theyear ended December 31, 2005. The Private Securities Litigation Reform Actof 1995 provides a “safe harbor” for forward-looking statements. Certaininformation included in this Quarterly Report on Form 10-Q and othermaterials filed or to be filed by us with the Securities and Exchange Commission(as well as information included in oral statements or other written statementsmade or to be made by us) contain statements that are or will beforward-looking, such as statements relating to acquisitions and other businessdevelopment activities, future capital expenditures and the anticipated orpotential effects of future regulation and competition. Such forward-lookinginformation involves important risks and uncertainties that could significantlyaffect anticipated results in the future and, accordingly, such results maydiffer from those expressed in any forward-looking statements made by us, or onour behalf. These risks and uncertainties include, but are not limited to,uncertainties affecting our businesses and our franchisees relating to acquisitionsand divestitures (including continuing obligations with respect to completedtransactions), sales and renewals of franchises, government and regulatorypolicies (including federal, state and local efforts to reform the delivery ofand payment for healthcare services), changes in average wholesale price (“AWP”)and other benchmarks used to establish pricing for prescription drugs, generaleconomic conditions (including economic conditions affecting the healthcareindustry in particular), the pricing and availability of equipment andservices, technological developments and changes in the competitive environmentin which we operate. For a more comprehensive description of risks applicableto our business, see Risk Factors in our Annual Report on Form 10-K for theyear ended December 31, 2005. We do not undertake any obligation to releasepublicly any revisions to such forward-looking statements to reflect events orcircumstances occurring after the date of this Annual Report or to reflect theoccurrence of unanticipated events.

**OVERVIEW**

We provide specialtypharmacy services and infusion pharmacy and other related healthcare servicesto patients at home or at alternate sites such as infusion suites and physician’soffices. We contract with managed care organizations and other third partypayors who reimburse us for the services we provide to their subscribermembers. Our services are provided through our national network of 57company-owned and managed locations, our 54 franchise-owned pharmacies and ourtwo company-owned, high-volume distribution facilities.

We have three servicelines: specialty pharmacy services, infusion and related healthcare services,and other. Specialty pharmacy services involve the distribution of injectableand infused pharmaceuticals to treat a wide range of chronic health conditions.We purchase specialty pharmaceuticals from manufacturers and wholesaledistributors, fill prescriptions provided by physicians, and label, package anddeliver the pharmaceuticals to patients’ homes or physicians’ offices, eitherourselves or through contract couriers. These pharmaceuticals may requirerefrigeration during shipping as well as special handling to prevent potencydegradation. Depending on therapy, we may also administer the specialty pharmaceuticalsto the patient at one of our ambulatory infusion centers. Patients receivingtreatment are often provided special counseling and education regarding theircondition and treatment program. Infusion and related healthcare servicestypically involve the intravenous administration of medications at the patient’shome or other non-hospital sites such as one of our ambulatory infusion suites.Infusion pharmacy services treat a wide range of acute and chronic healthconditions, including infections, dehydration, cancer, pain and nutritionaldeficiencies. All of our company-owned pharmacies provide infusion pharmacyservices. Several of our company-owned pharmacies also provide home healthnursing services, respiratory therapy services and home medical equipment salesand rentals. Wealso have one location that provides home hospice services. Other revenueconsists of royalties, franchise settlements and other fees generated from ourfranchised pharmacy network and, for the quarter and nine months endedSeptember 30, 2005, software licensing and support revenue generated by oursubsidiary, Management by Information, Inc. (“MBI”). MBI was sold during thefourth quarter of 2005 and no software license and support revenue was recordedduring the three and nine months ended September 30, 2006.

**RECENT DEVELOPMENTS**

**Specialty Pharmacy Agreement with Blue Cross andBlue Shield of Michigan**

 

On June 15, 2006, wesigned a Specialty Pharmacy Agreement (the “Agreement”) with Blue Cross andBlue Shield of Michigan (“BCBSM”) and Blue Care Network of Michigan (“BCN”) tobe their exclusive provider of specialty pharmacy mail order services. Weexpect this contract to materially increase our revenue in future periods. Underthe Agreement, we will provide specialty pharmacy medications, ancillaryproducts and focused therapy management to BCBSM and BCN members. The Agreementshall remain in force for an initial term ending September 30, 2009, with anautomatic one year renewal beyond that date unless written notice of terminationis given by BCBSM, BCN, or us. The Agreement may be terminated by BCBSM or BCN,without cause, on ninety (90) days written notice. We began delivering servicesunder this contract in October 2006. We have incurred certain incrementalimplementation expenses of approximately $350,000 during the quarter endedSeptember 30, 2006 and anticipate incurring additional expenses in the quarterending December 31, 2006.

**Proposed Reductions to Average Wholesale PricesPublished by First DataBank**

 

The proposed settlementof a legal case involving First DataBank, the main publisher of “averagewholesale prices” (“AWP”s), could potentially have a material adverse effect onour financial performance, results of operations and financial condition infuture

15

----

periods. The case NewEngland Carpenters Health Benefits Fund, et al. v. First DataBank, et al.,Civil Action No. 1:05-CV-11148-PBS (D. Mass.), is a civil class action casebrought against First DataBank, alleging that the company colluded with aprescription drug wholesaler to artificially raise the average wholesale pricesof various prescription drugs to increase pharmacy profits. As part of aproposed settlement in the case, First DataBank has agreed to reduce thereported AWP of over 8,000 specific pharmaceutical products by four percent. Atthis time the proposed settlement has received neither preliminary nor finalcourt approval. We cannot predict the outcome of this case, or, if thesettlement is approved, the precise timing of any of the proposed AWP changes.

Our contracts withmanaged care organizations and other commercial payers generally use AWP as abenchmark for establishing pricing for the drugs we provide to patients. In theabsence of any mitigating action on our part, the proposed reduction in FirstDataBank’s AWP could have a material adverse effect on the margin we earn onthe home infusion and specialty drugs we sell, particularly those contractsthat identify AWP published by First DataBank as the sole resource for pricingunder that contract. However, most of our contracts with health insurers, thirdparty administrators, self-insured companies and other third party payorscontain terms that we believe will enable us to mitigate the adverseeffect of this proposed reduction in First DataBank’s reported AWP.  Further, we are party to a number of contractsunder which drug reimbursement is based on proprietary fee schedules which mayor may not be referenced to AWP, limiting the impact of reductions to the AWPspublished by First DataBank. If the proposed settlement should become final wewould exercise our contractual rights so as to mitigate the adverse impact tous.

**SUMMARIZED INFORMATION ABOUTREVENUE AND GROSS PROFIT**

Summarized informationabout revenues and gross profit for each of our service lines is provided inthe following table (amounts in thousands):

**REVENUE**
| ** **                                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **Revenue**                                              | ** ** | **% of  total**                                    | ** ** | **Revenue** | ** ** | **% of  total** | ** ** | **Revenue** | ** ** | **% of  total** | ** ** | **Revenue** | ** ** | **% of  total** | ** ** |
| Specialty pharmacy  services              |       | $                                                        | 84,640     |                                                    | 55.4       | % | $ | 67,239 |   | 55.2 | % | $ | 269,873 |   | 58.0 | % | $ | 209,736 |   | 57.9 | % |
| Infusion and related  healthcare services |       | 66,657                                                   |       | 43.6                                                    | %          | 51,178 |   | 42.0 | % | 188,292 |   | 40.5 | % | 141,716 |   | 39.1 | % |
| Other                                     |       | 1,592                                                    |       | 1.0                                                     | %          | 3,476 |   | 2.8 | % | 7,023 |   | 1.5 | % | 10,687 |   | 3.0 | % |
| Total revenue                             |       | $                                                        | 152,889    |                                                    | 100.0      | % | $ | 121,893 |   | 100.0 | % | $ | 465,188 |   | 100.0 | % | $ | 362,139 |   | 100.0 | % |

 

**GROSSPROFIT**
| ** **                                   | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **Gross  Profit**                                        | ** ** | **Gross  profit  margin**                               | ** ** | **Gross  Profit** | ** ** | **Gross  profit  margin** | ** ** | **Gross  Profit** | ** ** | **Gross  profit  margin** | ** ** | **Gross  Profit** | ** ** | **Gross  profit  margin** | ** ** |
| Specialty  pharmacy services                 |       | $                                                        | 13,507     |                                                    | 16.0       | % | $ | 11,507 |   | 17.1 | % | $ | 40,823 |   | 15.1 | % | $ | 33,367 |   | 15.9 | % |
| Infusion and  related healthcare services    |       | 29,361                                                   |       | 44.0                                                    | %          | 21,623 |   | 42.3 | % | 83,315 |   | 44.2 | % | 60,892 |   | 43.0 | % |
| Total gross  profit, excluding other revenue |       | 42,868                                                   |       | 28.3                                                    | %          | 33,130 |   | 28.0 | % | 124,138 |   | 27.1 | % | 94,259 |   | 26.8 | % |
| Other                                        |       | 1,592                                                    |       | 100.0                                                   | %          | 3,365 |   | 96.8 | % | 7,023 |   | 100.0 | % | 10,375 |   | 97.1 | % |
| Total gross profit                           |       | $                                                        | 44,460     |                                                    | 29.1       | % | $ | 36,495 |   | 29.9 | % | $ | 131,161 |   | 28.2 | % | $ | 104,634 |   | 28.9 | % |

 

We derive most of ourrevenue from contracts with third party payors, such as managed careorganizations, insurance companies, self-insured employers and Medicare andMedicaid programs. Our principal managed care contract is with Blue Cross andBlue Shield of Florida for the provision of specialty pharmacy services andinfusion pharmacy services to their members. Approximately 14% of our revenuefrom continuing operations for the quarter ended September 30, 2006 and 13% forthe nine months ended September 30, 2006 was generated from this contractcompared to 14% for the corresponding prior year periods. As ofSeptember 30, 2006 and December 31, 2005, respectively, 8% and 9% ofour accounts receivable was due from Blue Cross and Blue

16

----

Shield of Florida. Thecontract may be terminated by either party on 90 days’ notice and, unlessterminated, renews each September for an additional one-year term. Currently,no other single managed care payor represents more than 10% of our revenue.

We also provide servicesthat are reimbursable through government healthcare programs such as Medicareand state Medicaid programs. For the three and nine months ended September 30,2006, approximately 21% and 20% of our revenue, respectively, was generatedfrom government healthcare programs compared to 15% and 17% in thecorresponding prior year periods. The increase in percentage in the currentyear periods was primarily due to the impact of our 2006 acquisitions. As ofSeptember 30, 2006 and December 31, 2005, respectively, 20% and 22% of ourtotal accounts receivable was due from government healthcare programs.

**RESULTSOF OPERATIONS**

The followingtable shows the results of our operations for the three and nine months endedSeptember 30, 2006 and 2005, expressed in amounts and percentages ofrevenue (amounts in thousands):
| ** **                                             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **Amount**                                               | ** ** | **% of  Revenue**                                  | ** ** | **Amount** | ** ** | **% of  Revenue** | ** ** | **Amount** | ** ** | **% of  Revenue** | ** ** | **Amount** | ** ** | **% of  Revenue** | ** ** |
| Revenue:                                               |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  pharmacy services                           |       | $                                                        | 84,640     |                                                    | 55.4       | % | $ | 67,239 |   | 55.2 | % | $ | 269,873 |   | 58.0 | % | $ | 209,736 |   | 57.9 | % |
| Infusion and  related healthcare services              |       | 66,657                                                   |       | 43.6                                                    | %          | 51,178 |   | 42.0 | % | 188,292 |   | 40.5 | % | 141,716 |   | 39.1 | % |
| Other                                                  |       | 1,592                                                    |       | 1.0                                                     | %          | 3,476 |   | 2.9 | % | 7,023 |   | 1.5 | % | 10,687 |   | 3.0 | % |
| Total revenue                                          |       | 152,889                                                  |       | 100.0                                                   | %          | 121,893 |   | 100.0 | % | 465,188 |   | 100.0 | % | 362,139 |   | 100.0 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue:                                       |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of goods  sold                                    |       | 90,709                                                   |       | 59.3                                                    | %          | 71,680 |   | 58.8 | % | 282,721 |   | 60.8 | % | 219,122 |   | 60.5 | % |
| Cost of services  provided                             |       | 17,720                                                   |       | 11.6                                                    | %          | 13,718 |   | 11.3 | % | 51,306 |   | 11.0 | % | 38,383 |   | 10.6 | % |
| Total cost of  revenue                                 |       | 108,429                                                  |       | 70.9                                                    | %          | 85,398 |   | 70.1 | % | 334,027 |   | 71.8 | % | 257,505 |   | 71.1 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                           |       | 44,460                                                   |       | 29.1                                                    | %          | 36,495 |   | 29.9 | % | 131,161 |   | 28.2 | % | 104,634 |   | 28.9 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses          |       | 30,627                                                   |       | 20.1                                                    | %          | 25,318 |   | 20.8 | % | 90,846 |   | 19.5 | % | 72,165 |   | 19.9 | % |
| Provision for  doubtful accounts                       |       | 3,542                                                    |       | 2.3                                                     | %          | 2,248 |   | 1.8 | % | 10,461 |   | 2.3 | % | 6,727 |   | 1.9 | % |
| Depreciation and  amortization                         |       | 1,227                                                    |       | 0.8                                                     | %          | 915 |   | 0.8 | % | 3,597 |   | 0.8 | % | 2,668 |   | 0.7 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total operating  expenses                              |       | 35,396                                                   |       | 23.2                                                    | %          | 28,481 |   | 23.4 | % | 104,904 |   | 22.6 | % | 81,560 |   | 22.5 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income                                       |       | 9,064                                                    |       | 5.9                                                     | %          | 8,014 |   | 6.6 | % | 26,257 |   | 5.6 | % | 23,074 |   | 6.4 | % |
| Interest income  (expense), net                        |       | (261                                                     | )          | (0.2                                                    | )%         | 108 |   | 0.1 | % | (470 | ) | (0.1 | )% | 258 |   | — | % |
| Other expense,  net                                    |       | (260                                                     | )          | (0.1                                                    | )%         | (73 | ) | (0.1 | )% | (688 | ) | (0.1 | )% | (20 | ) | — | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from  continuing operations before income taxes |       | 8,543                                                    |       | 5.6                                                     | %          | 8,049 |   | 6.6 | % | 25,099 |   | 5.4 | % | 23,312 |   | 6.4 | % |
| Income tax  provision                                  |       | 3,337                                                    |       | 2.2                                                     | %          | 3,137 |   | 2.6 | % | 9,265 |   | 2.0 | % | 8,925 |   | 2.4 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income from  continuing operations                 |       | $                                                        | 5,206      |                                                    | 3.4        | % | $ | 4,912 |   | 4.0 | % | $ | 15,834 |   | 3.4 | % | $ | 14,387 |   | 4.0 | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discontinued  operations:                              |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss on  discontinued operations, net of income taxes  |       | $                                                        | (256       | )                                                       | (0.2       | )% | $ | — |   | — | % | $ | (893 | ) | (0.2 | )% | $ | — |   | — | % |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                             |       | $                                                        | 4,950      |                                                    | 3.2        | % | $ | 4,912 |   | 4.0 | % | $ | 14,941 |   | 3.2 | % | $ | 14,387 |   | 4.0 | % |

 

17

----

**Three andNine Months Ended September 30, 2006 and 2005**

For the quarter endedSeptember 30, 2006, we generated revenue from continuing operations of$152.9 million, an increase of 25.4% over the corresponding prior year quarter.For the nine months ended September 30, 2006, our revenue was $465.2 million,an increase of 28.5% over the corresponding prior year period. This revenuegrowth was the result of acquisitions, new location start-ups and increasedsame store sales. Our overall gross profit margin remained consistent. Withinour service lines, gross profit margins on infusion and related healthcareservices improved slightly and margins on specialty pharmacy services declinedslightly in the current year, primarily due to shifts in product mix withinthese service lines. Our net income from continuing operations for the quarterended September 30, 2006 was $5.2 million, an increase of $300,000, or6.0%, over the corresponding prior year quarter. Net income from continuingoperations for the nine months ended September 30, 2006 was $15.8 million,an increase of $1.4 million, or 10.1%, over the corresponding prior yearperiod. Net income per diluted share from continuing operations was $0.15 forthe quarter and $0.45 for the nine months ended September 30, 2006, comparedto $0.14 and $0.42 for the corresponding prior year periods. Additionally, wepaid a cash dividend of $0.02 per share during the quarter endedSeptember 30, 2006.

During the quarter endedSeptember 30, 2006, we divested two home health agencies that did not fitour strategic objectives. We incurred losses from these discontinuedoperations, net of tax, in the amount of $300,000 for the quarter and $900,000for the nine months ended September 30, 2006. Neither of these home healthagencies was in operation during the prior year periods.

We acquired two infusionbusinesses during the nine months ended September 30, 2006 and reached a bindingagreement to acquire a third. We continue to evaluate potential acquisitionsthat we believe will complement our existing operations.

We generated positiveoperating cash flow of $21.3 million for the nine months ended September 30,2006 and ended the period with $21.7 million in cash and short-terminvestments. Our long-term debt as of September 30, 2006 consisted primarily of$86.3 million of 2.25% convertible senior notes due November 2024. Weexecuted a $35 million revolving Credit Agreement with LaSalle Bank effectiveMay 5, 2006. We have not borrowed against this Credit Agreement.

**Revenue:**

We report our operatingresults in one segment, consisting of three service lines: specialty pharmacyservices; infusion and related healthcare services; and other. For the quarterended September 30, 2006, our revenue from continuing operations was $152.9million, an increase of $31.0 million, or 25.4%, over the quarter endedSeptember 30, 2005. For the nine months ended September 30, 2006, ourrevenue from continuing operations was $465.2 million, an increase of $103.0million, or 28.5%, over the corresponding prior year period. These increases inrevenue from continuing operations during the current year periods wereprimarily due to same store sales growth, business acquisitions and newpharmacy start-ups.

**Specialty pharmacy services revenue:**

Our specialty pharmacyservices generated revenue from continuing operations of $84.6 million for thequarter ended September 30, 2006, representing an increase of $17.4million, or 25.9%, over the corresponding prior year quarter. For the ninemonths ended September 30, 2006, our specialty pharmacy revenue fromcontinuing operations was $269.9 million, an increase of $60.1 million, or28.7%, over the corresponding prior year period. These increases were due toacquisitions and startups, as well as increased market penetration for variousspecialty drugs and therapies. Specialty pharmacy revenue is expected toincrease sequentially in the quarter ended December 31, 2006 due to seasonalsales of Synagis.

**Infusion and related healthcareservices revenue:**

Our infusion and relatedhealthcare services revenue from continuing operations for the quarter endedSeptember 30, 2006 was $66.7 million, an increase of $15.5 million, or30.2%, over the corresponding prior year quarter. For the nine months endedSeptember 30, 2006, infusion and related healthcare services revenue fromcontinuing operations was $188.3 million, an increase of $46.6 million, or32.9%, over the corresponding prior year period. The primary drivers of theseincreases were the acquisitions we completed in 2005 and the first six monthsof 2006 as well as same store sales increases throughout our network of local,company-owned infusion pharmacies.

**Other revenue:**

Other revenue was $1.6million for the quarter ended September 30, 2006 compared to $3.5 millionin the corresponding prior year quarter. For the nine months endedSeptember 30, 2006, other revenue was $7.0 million compared to $10.7million in the prior year period. The decreases were primarily due to a declinein franchise settlement revenue, decline in royalties as a result of our acquisitionof several franchises in 2005 and 2006 and the absence of software-relatedrevenue in 2006 resulting from our sale of MBI in November 2005. Franchise-relatedrevenue may continue to fluctuate significantly in future periods due to ourpotential acquisition, audit or termination of various franchises.

**Cost of revenue:**

Cost of revenue consistsof the cost of goods and the cost of service provided. Our cost of revenue fromcontinuing operations was $108.4 million for the quarter and $334.0 million forthe nine months ended September 30, 2006, representing increases of 27.0% and29.7% over the corresponding prior year periods. These increases were relatedto the revenue increases of 25.4% and 28.5%

18

----

during these periods.

Cost of goods sold fromcontinuing operations was $90.7 million, or 59.3% of revenue, for the quarterended September 30, 2006 and $282.7 million, or 60.8% of revenue, for the ninemonths ended September 30, 2006. In the prior year periods, cost of goods soldfrom continuing operations was $71.7 million, or 58.8% of revenue, for thequarter and $219.1 million, or 60.5% of revenue, for the nine months endedSeptember 30, 2005. The slight increases in cost of goods sold as a percentageof revenue in the current year periods was due to the decline in other revenue,which typically has no associated cost of goods.

Cost of service consistsof salaries and related costs for employees directly involved in patient care,as well as the cost of shipping or delivering products and services to thepatient. Our cost of service from continuing operations was $17.7 million, or11.6% of revenue, for the quarter ended September 30, 2006 and $51.3 million,or 11.0% of revenue, for the nine months ended September 30, 2006. In the prioryear periods, our cost of service was $13.7 million, or 11.3% of revenue, forthe quarter and $38.4 million, or 10.6% of revenue, for the nine months ended September30, 2005. The increases in costs of service as a percentage of revenue in thecurrent year periods was due to a variety of factors, including acquisitionscompleted in 2005 and 2006 which increased our RT/DME and home health nursingand therapy services in the current year.

**Grossprofit margin.** The following table sets forth the grossprofit margin for each of our three service lines: specialty pharmacy services;infusion and related healthcare services; and other:
|                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross profit  margin:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Specialty pharmacy services                   |       | 16.0                                                 | %          | 17.1                                                | %          | 15.1 | % | 15.9 | % |
| Infusion and related healthcare services      |       | 44.0                                                 | %          | 42.3                                                | %          | 44.2 | % | 43.0 | % |
| Gross profit  margin, excluding other revenue |       | 28.3                                                 | %          | 28.0                                                | %          | 27.1 | % | 26.8 | % |
| Other                                         |       | 100.0                                                | %          | 96.8                                                | %          | 100.0 | % | 97.1 | % |
| Total gross profit  margin                    |       | 29.1                                                 | %          | 29.9                                                | %          | 28.2 | % | 28.9 | % |

 

Our overall gross profitmargins from continuing operations declined slightly in the current yearperiods due to the decline in other revenue from franchise settlements and adecline in royalties as a result of our acquisition of several of ourfranchises in 2005 and 2006. Within our service lines, the gross profit marginon our specialty pharmacy services decreased due to an unfavorable contract mixwithin our managed care specialty services, while the gross profit margin onour infusion and related healthcare services increased due to lower drug costsand favorable therapy mix in the current year. Other revenue, which primarilyconsists of franchise-related revenues and software sales and support, hasminimal direct costs and therefore produces a high gross profit margin.

**Selling, general and administrativeexpenses:**

For the quarter endedSeptember 30, 2006, selling, general and administrative expenses relatedto continuing operations were $30.6 million, an increase of $5.3 million, or21.0% over the corresponding prior year quarter. For the nine months endedSeptember 30, 2006, selling, general and administrative expenses fromcontinuing operations were $90.8 million, an increase of $18.7 million, or25.9%, over the corresponding prior year period. These increases were primarilydue to the incremental expenses from the businesses we acquired in 2005 and2006. The largest increases were in salaries and related expenses, whichincreased $3.2 million for the quarter and $10.3 million for the nine monthsended September 30, 2006 compared to the corresponding prior year periods. Inthe quarter ended September 30, 2006, selling, general and administrativeexpenses included $300,000 of implementation costs related to ourrecently-signed specialty pharmacy contract with Blue Cross / Blue Shield ofMichigan. As a percentage of revenue from continuing operations, selling,general and administrative expense declined by 70 basis points in the quarterand 40 basis points in the nine months ended September 30, 2006 compared to thecorresponding prior year periods.

**Provision for doubtful accounts:**

Our provision fordoubtful accounts for the quarter ended September 30, 2006 was $3.5million, or 2.3% of revenue, compared to $2.2 million, or 1.8% of revenue, inthe prior year quarter. For the nine months ended September 30, 2006, ourprovision for doubtful accounts was $10.5 million, or 2.3% of revenue, comparedto $6.7 million, or 1.9% of revenue, in the corresponding prior year period. Theslight increase in our provision for doubtful accounts as a percentage ofrevenue was due to the effects of our acquisitions and a proportional increasein sales billed through major medical benefit versus prescription drug benefit.

**Depreciation and amortization:**

For the quarter endedSeptember 30, 2006, depreciation and amortization expense was $1.2million, an increase of $300,000, or 34.1%, over the corresponding prior yearquarter. For the nine months ended September 30, 2006, our depreciationand amortization expense was $3.6 million, an increase of $900,000, or 34.8%,over the corresponding prior year period. These increases are primarily due toacquisitions and additional investments in computer hardware and softwaretechnology. The depreciation expense contained within this caption on ourstatements of income relates to non-revenue producing assets only. Depreciationfor revenue-producing equipment such as rental medical equipment and deliveryvehicles is included in cost of revenue.

19

----

**Operating income:**

Our operating income was$9.1 million for the quarter ended September 30, 2006, an increase of $1.1million, or 13.1%, over the corresponding prior year quarter.  For thenine months ended September 30, 2006, our operating income was $26.3million, which represents an increase of $3.2 million, or 13.8%, over the prioryear period.  These increases in operating income were primarily theresult of acquisitions completed in 2005 and 2006 and increased profitabilityfrom existing locations.  Our operating income equaled 5.9% of revenue forthe quarter ended September 30, 2006 compared to 6.6% for thecorresponding prior year quarter.  For the nine months ended September 30,2006, our operating income was equal to 5.6% of revenue compared to 6.4%in the prior year periods. These declines were primarily attributable to adecline in other revenue from franchise terminations in the current yearperiods.

**Interest income/(expense):**

In the quarter endedSeptember 30, 2006, we recorded net interest expense of $300,000 compared tonet interest income of $100,000 in the corresponding prior year quarter.  For the nine months ended September 30, 2006,our net interest expense was $500,000 compared to net interest income of $300,000in the corresponding prior year period. During the three and nine month periods ended September 30 in bothyears, our interest expense was related to our $86.3 million of 2.25%convertible senior notes while our interest income was primarily related toshort-term investments and cash reserves. Acquisitions completed in 2005 and 2006 have reduced these reserves,resulting in lower interest income in the current year periods compared to theprior year.

**Income taxes:**

Our income tax provisionrelated to continuing operations was $3.3 million for the quarter and $9.3million for the nine months ended September 30, 2006.  In the prioryear, our income tax provision was $3.1 million for the quarter and $8.9million for the nine months ended September 30, 2005.  As apercentage of pre-tax income, our provision for income taxes was 39.1% for thequarter and 36.9% for the nine months ended September 30, 2006 compared to39.0% and 38.3% for the corresponding prior year periods.  The decline in incometax provision as a percentage of pre-tax income in nine months ended September30, 2006 compared to the prior year period was primarily due to reduction of anexcess provision for prior year income taxes and various tax planninginitiatives.  The effect of these taxplanning initiatives was partly offset in the quarter ended September 30, 2006due to an increase in pre-tax income in states with higher tax rates.

**Net income from continuingoperations:**

Our net income fromcontinuing operations was $5.2 million for the quarter and $15.8 million forthe nine months ended September 30, 2006 compared to $4.9 million for thequarter and $14.4 million for the nine months ended September 30, 2005. The current year increases in net income from continuing operations were primarilythe result of our growth in revenue from acquisitions, as well as increases insame store sales.  As a percentage of revenue, our net income fromcontinuing operations was 3.4% for the quarter and nine months endedSeptember 30, 2006 compared to 4.0% for the corresponding prior yearperiods.  These declines are primarily due to the reduction infranchise-related revenue in the current year.

**Diluted shares & earningsper share:**

For the quarter endedSeptember 30, 2006, our diluted shares were 35,460,000 compared to 34,679,000for the corresponding prior year quarter.  This increase was primarily dueto shares issued in connection with business acquisitions completed thisyear.  For the nine months ended September 30, 2006, diluted shares were 35,310,000compared to 34,231,000 for the corresponding prior year period.  Thisincrease was due to shares issued in connection with business acquisitions,stock options exercises and shares purchased through our employee stockpurchase plan.  Our earnings per diluted share from continuing operationswere $0.15 for the quarter and $0.45 for the nine months endedSeptember 30, 2006, compared to $0.14 for the quarter and $0.42 for thenine months ended September 30, 2005.  These increases in earnings per dilutedshares were due to the positive effects of our acquisitions and increases insame store sales.

**Loss on discontinued operations, netof income taxes:**

During the nine monthsended September 30, 2006, we discontinued operations of two home healthagencies.  As of March 31, 2006, wedetermined that our home health agency in Portland, Oregon (“Portland HHA”) wasnot a strategic asset of our company and we adopted a plan to sell or terminatethe business.  On August 1, 2006, we completed the sale of Portland HHAfor $500,000 in cash, plus the assumption of certain liabilities by thepurchaser.  During the quarter endedSeptember 30, 2006, we terminated the operations of a non-accretive home healthagency operating in Phoenix, Arizona.  Werecorded losses, net of income tax, of $300,000 for the quarter and $900,000for the nine months ended September 30, 2006 related to the operations of thesehome health agencies.  Neither of thesehome health agencies was under our ownership or part of our CondensedConsolidated Statements of Income during the corresponding prior year periodsso there were no gains or losses from discontinued operations reported for thequarter and nine months ended September 30, 2005.

**LIQUIDITYAND CAPITAL RESOURCES**

During the nine monthsended September 30, 2006, we financed our operations and businessacquisitions through operating cash flows, the use of cash reserves and oursales of short-term investments.  We generated $21.3 million in positivecash flow from operations during this period and used $43.8 million in cash tocomplete business acquisitions.  As of September 30, 2006, we hadcash and short-term investments totaling $21.7 million and long-term debt of$86.3 million.  In order to gain access to additional

20

----

capital, we signed a $35million revolving Credit Agreement with LaSalle Bank National Association onMay 5, 2006.  This agreement grants us the option to increase the creditcommitment from $35 million to a maximum of $100 million during the first twoyears of the agreement.  We had no borrowings under the Credit Agreementfrom inception through September 30, 2006 and were in compliance with all debtcovenants as of September 30, 2006.

**Operating Cash Flows:**

We generated $21.3 million in positive cash flow from operations in thenine months ended September 30, 2006.  This positive cash flow wasprimarily the result of our net income of $14.9 million for the nine monthsended September 30, 2006, plus non-cash expenses of $18.8 million, partiallyoffset by our payment of accounts payable assumed through businessacquisitions.

During the nine monthsended September 30, 2005, we generated $15.9 million in positive cash flow fromoperations.  This positive cash flow was primarily the result of ourpositive net income of $14.4 million during the period.

**Investing Cash Flows:**

We used $19.4 million incash for investing activities during the nine months ended September 30,2006.  During this period, we used $43.8 million in cash to completebusiness combinations and pay additional consideration due on prior yearacquisitions.  We generated $31.8 million in cash from the net sale ofshort-term investments to provide the cash to complete theseacquisitions.  We also used $7.9 million in cash during the nine monthsended September 30, 2006 to acquire depreciable assets, of which $4.1 millionwas used for infrastructure items such as furniture and fixtures and computerhardware and software, while $3.8 million was used to acquirerevenue-generating medical equipment such as infusion pumps and durable medicalequipment.

We used $31.7 million incash in investing activities during the nine months ended September 30,2005.  We used $46.4 million in cash to complete seven businessacquisitions of which two were completed in the quarter endedSeptember 30, 2005 for a cost of $20.2 million in cash.  During thenine months ended September 30, 2005, we generated $21.7 million in cashfrom the liquidation of short-term investments in order to fund our acquisitionactivities.  We also used $7.1 million in cash to acquire equipment andother fixed assets of which $2.5 million was used to purchase revenue-producingmedical equipment such as infusion pumps and other durable medical equipment,$2.2 million was used for infrastructure items such as furniture, fixtures and computerhardware, $1.6 million was used to purchase computer software and $800,000 wasused for internal software development projects.

**Financing Cash Flows:**

We generated $2.7 millionfrom financing activities in the nine months ended September 30, 2006.  Wegenerated $3.8 million from issuance of stock related to employee stock optionexercises and purchases under our employee stock purchase plan, and recognized$1.0 million in income tax benefits resulting from exercises of employee stockoptions.  These positive cash flow items were offset by our use of $2.0million to pay dividends to our shareholders and $100,000 to pay fees relatedto obtaining our $35 million credit agreement with LaSalle Bank NationalAssociation.

Financing activitiesgenerated a net $6.1 million in positive cash flow for the nine months endedSeptember 30, 2005.  We generated $6.1 million in cash from theissuance of shares of common stock through our employee stock purchase andstock option plans, and $2.0 million from in income tax benefits resulting fromexercises of stock options.  We used $1.7million to pay cash dividends to our shareholders and used $200,000 to paytrailing debt issuance costs related to our convertible debt offering completedin November 2004.

**Convertible Senior Notes:**

In November 1, 2004,we completed an $86.3 million offering of 2.25% convertible senior notes, due2024.  The purpose of the offering was to finance our future growthinitiatives.  The funds have been and may continue to be used for acquisitions,stock repurchases, operating cash needs and other general corporatepurposes.  The convertible notes pay interest at 2.25% interest per annumon the principal amount of the notes, payable semi-annually in arrears onMay 1 and November 1 of each year, with the first payment paid onMay 1, 2005.  The holders may convert the notes into cash and, ifapplicable, shares of our common stock if certain conversion criteria are met,such as our stock reaching a threshold market price or various other criteria. As of September 30, 2006, no triggering event has occurred that could leadto the potential conversion of the notes.  The notes cannot be redeemed byus prior to November 1, 2009.  On each of November 1, 2009,November 1, 2014 and November 1, 2019, the holders can require us topurchase all or a portion of the outstanding notes for their principal amountplus accrued interest.  At any time on or after November 1, 2009, wemay redeem the notes, in whole or in part, at a redemption price equal to 100% ofthe principal amount, plus any accrued and unpaid interest.  We haveincurred deferred financing costs of $3.2 million related to this offering,consisting of underwriting, legal and other related costs.  These costsare being amortized straight-line over a five-year period.

**Credit Agreement with LaSalle Bank N.A.:**

On May 5, 2006, we signeda five-year, $35 million revolving Credit Agreement with LaSalle Bank NationalAssociation (the “Agreement”).  Theinitial revolving loan commitment under the Agreement is $35 million.  Provided there is no event of default, wehave the option to increase the revolving loan commitment to a maximum of $100million during the first two years of the Agreement.  We will pay interest on borrowings at ratesranging from prime plus zero or LIBOR plus 1.00% to a maximum of prime plus0.25% or LIBOR plus 1.75% based on our debt to EBITDA ratio for the applicableperiod.  We will also pay a non-use feeranging from 0.15% to 0.225% of the unused portion of the revolving loancommitment.  The interest rates andnon-use fee rates payable are based on our Total Debt to EBITDA Ratio, asdefined in the agreement, for the applicable period.  We must maintain

21

----

compliance with variousfinancial and other covenants throughout the life of the Agreement.  We may use up to $2.5 million of ouravailable credit to secure Letters of Credit, as needed, payable applicablefees while the Letters of Credit are in place. We incurred fees of approximately $100,000 related to negotiating thisAgreement. We had no borrowings under the Agreement during the quarter and ninemonth periods ended September 30, 2006 and were in compliance with allcovenants.  In the nine months endedSeptember 30, 2006, we recorded non-use fees of $25,000 related to thisAgreement.

**Accounts Receivable:**

The following table setsforth information regarding our accounts receivable as of the dates indicated(dollar amounts in thousands):
|                                                              | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                         |       |                         |       |                    |       |                     |       |                        |       |
| Accounts  receivable                                         |       | $                            | 111,132    |                    | $          | 111,097                  |       | $                           | 120,983    |   | $ | 101,294 |   |
| Less allowance  for doubtful accounts                        |       | (9,151                       | )          | (8,566                  | )          | (7,435                   | )          | (5,997                      | )          |
|                                                         |       |                         |       |                    |       |                     |       |                        |       |
| Accounts  receivable, net of allowance for doubtful accounts |       | $                            | 101,981    |                    | $          | 102,531                  |       | $                           | 113,548    |   | $ | 95,297 |   |
|                                                         |       |                         |       |                    |       |                     |       |                        |       |
| Days sales  outstanding (DSO)(1)                             |       | 59 days                      |       | 58 days                 |       | 59 days                  |       | 59 days                     |       |

 

----

 (1)      DSO is based on trade accountsreceivable, net of allowance for doubtful accounts, and is calculated using theexhaustion method whereby the net accounts receivable balance is exhaustedagainst each preceding month’s or partial month’s net revenue.  The DSOcalculated above includes only our specialty pharmacy service line and infusionand related healthcare service line.

Our accounts receivable,net of bad debt reserves, was $102.0 million as of September 30, 2006 comparedto $102.5 million as of June 30, 2006 and $95.3 million as ofDecember 31, 2005.  The overall increase in our accounts receivablefrom December 31, 2005 to September 31, 2006 was primary due to acquisitions.  The increase in accounts receivable as ofMarch 31, 2006 and subsequent decline by June 30, 2006 was primarily due toseasonal sales of Synagis.  Our dayssales outstanding (DSO) has remained stable over the past four quarters.  Our DSO at September 30, 2006 was 59 comparedto 58 days as of June 30, 2006 and 59 days as of March 31, 2006 andDecember 31, 2005.

The following table setsforth the percentage breakdown of our trade accounts receivable by agingcategory and by major payor as of the dates indicated:
|                               | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **By  Aging Category (1):**   | ** ** | ** **                   | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                  | ** ** |
| 0-90 days                     |       | 69                           | %          | 70                      | %          | 76                       | %          | 78                          | %          |
| 91-180 days                   |       | 15                           | %          | 18                      | %          | 14                       | %          | 12                          | %          |
| 181-365 days                  |       | 12                           | %          | 9                       | %          | 7                        | %          | 7                           | %          |
| Over 365 days                 |       | 4                            | %          | 3                       | %          | 3                        | %          | 3                           | %          |
| Total                         |       | 100                          | %          | 100                     | %          | 100                      | %          | 100                         | %          |
|                          |       |                         |       |                    |       |                     |       |                        |       |
| **By  Major Payor:**          | ** ** | ** **                   | ** ** | ** **              | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Managed care and other payors |       | 80                           | %          | 82                      | %          | 77                       | %          | 78                          | %          |
| Medicare and Medicaid         |       | 20                           | %          | 18                      | %          | 23                       | %          | 22                          | %          |
| Total                         |       | 100                          | %          | 100                     | %          | 100                      | %          | 100                         | %          |

----

(1)     Accountsreceivable by aging category considers only accounts of our specialty pharmacyservice line and infusion and related healthcare service line.

**Capital Resources:**

As of September 30,2006 we had cash and cash equivalents of $12.5 million and short-terminvestments of $9.2 million for a combined total of $21.7 million, compared tocash and cash equivalents of $7.8 million and short-term investments of $41.0million for a combined total of $48.8 million as of December 31, 2005. This overall decline of $27.1 million in cash, cash equivalents and short-terminvestments was primarily due to our use of $43.8 million in cash to fundbusiness acquisitions during 2006.

We believe that cash flowfrom operations, plus our current cash and short-term investments and availablecredit under our new $35 million revolving Credit Agreement with LaSalle BankNational Association will be sufficient to meet our operating cash needs for

22

----

the immediate future,including any interest due on our $86.3 million of 2.25% convertible seniornotes.  In the event that additional capital is required, there can be noassurance that such capital can be obtained from other sources on termsacceptable to us, if at all.

Our business strategyincludes the selective acquisition of additional local pharmacy facilities andspecialty pharmacy operations.  Accordingly, we may require additionalcapital in order to complete these acquisitions.  It is impossible topredict the amount of capital that may be required for acquisitions, and thereis no assurance that sufficient financing for these activities will beavailable on terms acceptable to us, if at all.

**Goodwilland Other Intangible Assets**

The following table setsforth the net value of our goodwill and other intangible assets as of September30, 2006 and December 31, 2005 (in thousands):
|                                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                      |       |                         |       |                        |       |
| Goodwill, net of  accumulated amortization                |       | $                            | 164,232    |                        | $          | 112,220 |   |
| Other intangible  assets, net of accumulated amortization |       | $                            | 1,196      |                        | $          | 1,003 |   |
| Total intangible assets,  net of accumulated amortization |       | $                            | 165,428    |                        | $          | 113,223 |   |

 

Other intangible assetsconsist of non-compete agreements, contracts and patient records acquiredthrough business acquisitions. During the nine months ended September 30,2006, goodwill increased $52.0 million as a result of the two acquisitionscompleted and binding agreement for a third during the period, as well asadditional consideration paid and payable related to prior yearacquisitions.  During the quarter and nine months ended September 30,2006, we wrote off goodwill of $300,000 and $400,000, respectively, related tobusiness disposals.  During the ninemonths ended September 30, 2006, other intangible assets increased by $500,000as a result of these acquisitions, offset by amortization of $300,000 duringthe period.

As required by Statementsof Financial Accounting Standards No. 142,*Goodwill and Other Intangible Assets (SFAS No. 142)*, we do notamortize goodwill, but test our goodwill for impairment annually eachOctober 1, or whenever we identify events or conditions that couldpotentially result in impairment of our goodwill.  During the quarterended June 30, 2006, no impairment of goodwill was identified.

**Regulatoryand Other Developments**

***HealthInsurance Portability and Accountability Act of 1996 (HIPAA)***

Toimprove the efficiency and effectiveness of the health care system, the HealthInsurance Portability and Accountability Act (HIPAA) of 1996, Public Law104-191, included “Administrative Simplification” provisions that required theDepartment of Health and Human Services (HHS) to adopt national standards forelectronic health care transactions. At the same time, Congress recognized thatadvances in electronic technology could erode the privacy of healthinformation. Consequently, Congress incorporated provisions into HIPAA thatmandated the adoption of Federal privacy protections for individuallyidentifiable health information. 

Inresponse to the HIPAA mandate, in December 2000, HHS published a finalregulation in the form of the Privacy Rule, which became effective onApril 14, 2001. This Privacy Rule set national standards for theprotection of health information, as applied to the three types of coveredentities: health plans, health care clearinghouses, and health care providerswho conduct certain health care transactions electronically. Pursuant to thePrivacy Rule, covered entities are required to have standards in place toprotect and guard against the misuse of individually identifiable healthinformation.

ThePrivacy Rule established a foundation of Federal protections for the privacy ofprotected health information. The Privacy Rule does not replace federal, state,or other laws that grant individuals even greater privacy protections, andcovered entities are free to retain or adopt more protective policies orpractices. We have implemented the standards set forth in the Privacy Rule, andbelieve that we and all of our franchisees are in compliance with the PrivacyRule or any more stringent federal or state laws relating to privacy. 

Additionally,the Administrative Simplification provisions address electronic health caretransactions and the security of electronic health information systems.  Providers are required to comply with thestandards by specific compliance dates established by HHS.  For standards relating to electronic healthcare transactions, all providers were required to comply by October 16,2003.  The security standards applicableto individually identifiable health information maintained electronically wererequired to be implemented by April 21, 2005. We were materially compliant with these standards by the applicablecompliance date.  The standards for aunique national health identifier for providers used in connection with theelectronic healthcare transactions must be

23

----

implementedby May 23, 2007.  We expect to be able tomaterially comply with this requirement by the applicable compliance date. 

Penaltiesfor non-compliance with the Privacy Rule and other HIPAA AdministrativeSimplification provisions range from a civil penalty of $100 for each violation(which can total up to $25,000 per person per year), to criminal penalties,including up to $50,000 and/or one year imprisonment, up to $100,000 and/orfive years imprisonment if the offense is committed under false pretenses andup to $250,000 and/or ten years imprisonment for violating a standard with theintent to sell, transfer or use individually identifiable health informationfor commercial advantage, personal gain or malicious harm.

Inaddition to regulating privacy of individual health information and otherprovisions relating to Administrative Simplification, HIPAA includes severalanti-fraud and abuse laws, extends criminal penalties to private health carebenefit programs and, in addition to Medicare and Medicaid, to other federalhealth care programs, and expands the Office of Inspector General’s authorityto exclude persons and entities from participating in the Medicare and Medicaidprograms.

**ITEM3.  Quantitative and Qualitative Disclosures about Market Risk**

We are subject to marketrisk primarily in relation to our cash and cash equivalents and short-terminvestments.  In May 2006, we signed a five-year, $35 million revolvingCredit Agreement with LaSalle Bank National Association (the “Agreement”).  The initial revolving loan commitment underthe Agreement is $35 million.  Providedthere is no event of default, we have the option to increase the revolving loancommitment to a maximum of $100 million during the first two years of the Agreement.  We will pay interest on borrowings at ratesranging from prime plus zero or LIBOR plus 1.00% to a maximum of prime plus0.25% or LIBOR plus 1.75% based on our debt to EBITDA ratio for the applicableperiod.  As of September 30, 2006,we had not borrowed against the Agreement and have no other variable rate debt.

In November 2004, wecompleted an $86.3 million offering of 2.25% convertible senior notes due2024.  The interest rate on this debt is fixed throughout the term of thenotes and therefore there is no market risk related to these notes.

The interest rate we mayearn on our cash reserves and short-term investments is subject to marketfluctuations.  We utilize a mix of investment maturities based on ouranticipated cash needs and evaluation of existing interest rates and marketconditions.

The following table setsforth our cash and cash equivalents and short-term investments as of the datesindicated (in thousands):
|                                | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Cash and cash  equivalents (1) |       | $                            | 12,456     |                    | $          | 15,444                   |       | $                           | 12,611     |   | $ | 7,816 |   |
| Short-term  investments (2)    |       | 9,200                        |       | 4,000                   |       | 14,250                   |       | 41,042                      |       |
| Total                          |       | $                            | 21,656     |                    | $          | 19,444                   |       | $                           | 26,861     |   | 48,858 |   |
|                                |            |                              |            |                         |            |                          |            |                             |            |  |  |  |  |

 

----

(1)     Cash equivalents includes highly-liquid investments having a maturity of threemonths or less at time of purchase.

(2)     Short-term investments consist of commercial paper with maturities of threemonths or more at time of acquisition, as well as variable-rate municipaldemand notes, preferred stocks and similar instruments that are eitherperpetual in nature or have final maturities greater than three months.

While we attempt tominimize market risk and maximize return, changes in market conditions maysignificantly affect the income we earn on our cash and cash equivalents andshort-term investments.  Based on our actual cash and cash equivalents andshort-term investment balances at September 30, 2006, a 100 basis pointdecline in interest rates would reduce our interest income by $217,000 on anannualized basis.

**ITEM4.  Controls and Procedures**

We carried out anevaluation, under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) under the SecuritiesExchange Act of 1934 (the Exchange Act)) as of September 30, 2006. Basedupon that evaluation, the chief executive officer and chief financial officerconcluded that our disclosure controls and procedures are effective as ofSeptember 30, 2006. Disclosure controls and procedures are controls andprocedures that are designed to ensure that information required to bedisclosed in our reports filed or submitted under the Exchange Act is (i)recorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and (ii)accumulated and communicated to our management, including our chief executive officerand chief financial officer, to allow timely decisions regarding requireddisclosures.

In addition, no change inour internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act)

24

----

occurred during ourfiscal quarter ended September 30, 2006 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

**PART II. OTHER INFORMATION**

**ITEM1.  Legal Proceedings**

We are subject to claimsand legal actions that may arise in the ordinary course of business. However,we maintain insurance to protect against such claims or legal actions. We arenot aware of any litigation, either pending or filed, that we believe is likelyto have a material adverse effect on our results of operation or financialcondition.

Wecurrently maintain insurance for general and professional liability claims inthe amount of $1 million per claim and $3 million in aggregate perpolicy year, plus $5 million in umbrella coverage. Accordingly, themaximum coverage for a first claim in any policy year is $6 million, andthe maximum aggregate coverage for all claims in a policy year is$8 million. We also require each franchisee to maintain general liabilityand professional liability insurance covering both the franchise and us, atcoverage levels that we believe to be sufficient. These policies providecoverage on a claims-made or occurrence basis and have certain exclusions fromcoverage. These insurance policies generally must be renewed annually. Therecan be no assurance that our insurance coverage will be adequate to coverliability claims that may be asserted against us.

**ITEM 1A.  Risk Factors**

Our Annual Report on Form10-K for the year ended December 31, 2005 includes a detailed discussion ofcertain risk factors in Part I, Item 1A. The information presented below updates and should be read inconjunction with the risk factors and information disclosed in that 10-K.  The risk factors listed below and in our AnnualReport on Form 10-K for the year ended December 31, 2005 are not the only risksand uncertainties that we face or that could develop.  Other risks and uncertainties that we havenot predicted or evaluated could also adversely affect our company.  If any of these risks and uncertaintiesactually occurs, our business, financial condition, operating results orliquidity could be materially and adversely affected.

***Ourgross profit could decrease if there are changes in the calculation of AverageWholesale Price (“AWP”) for the prescription drugs we sell, or if managed careorganizations and other private payors replace Average Wholesale Price with adifferent reimbursement system.***

Our gross margin marginsare largely controlled by our ability to purchase prescription drugs atdiscounted prices and to negotiate profitable managed care contracts. Contractsfor the services we provide generally reference certain published benchmarks toestablish pricing for prescription drugs. These benchmarks include averagewholesale price (“AWP”), wholesale acquisition cost (“WAC”) maximum allowablecost (“MAC”) and average sales price (“ASP”). Most of our contracts utilize theAWP standard as published by First DataBank and a number of other privatecompanies. Recent events have raised uncertainties as to whether the AWPspublished by First DataBank will decline resulting in a reduction of our grossprofit margins.

Specifically, in the recentlyannounced proposed settlement in the case New England Carpenters HealthBenefits Fund, et al. v. First DataBank, et al., Civil Action No.1:05-CV-11148-PBS (D. Mass.), a civil class action case brought against FirstDataBank, one of several companies that report data on prescription drugprices, First DataBank has agreed to reduce the reported AWP of over 8,000specific pharmaceutical products by four percent. At this time the proposedsettlement has received neither preliminary nor final court approval. We cannotpredict the outcome of this case, or, if the settlement is approved, theprecise timing of any of the proposed AWP changes. In the absence of anymitigating action on our part, the proposed reduction in First DataBank’spublished AWP could reduce our revenue and narrow our gross profit margins.

Some managed careorganizations are adopting ASP as the standard measure for determiningreimbursement rates in new or renegotiated contracts. To the extent that we arenot able to negotiate new ASP-based contracts with managed care organizationsthat produce gross profit margins comparable to our existing AWP-basedcontracts, our revenue and gross profit may be reduced.

25

----

**ITEM2.  Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**ITEM3.  Defaults Upon Senior Securities**

None.

**ITEM4.  Submission of Matters to a Vote of Securities Holders**

None.

**ITEM5.  Other Information**

None.

**ITEM6.  Exhibits**

See Exhibit Index.

26

----

**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Company has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                              | OPTION CARE, INC. |
|------------------------------|------------------------|
| Date:  November 9, 2006 | By:                    | /s/ Paul Mastrapa |   |
| * *                     | * *               | *Senior Vice President and Chief Financial Officer* |
| * *                     | * *               | *(Principal Accounting Officer and Principal  Financial Officer)* |

 

27

----

**EXHIBITINDEX**
| Exhibit Number | ** ** | ** **                                                                                                                                                                   |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                         |
| 31.1           |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|           |       |                                                                                                                                                                         |
| 31.2           |       | Certification of Senior Vice President and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               |
|           |       |                                                                                                                                                                         |
| 32             |       | Certification of Chief Executive Officer and Senior  Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section  1350, and Rule 13a-14(b) of the Exchange Act. |

 

28

----