UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q







x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended December 31, 2008




OR




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ________________________________ to
___________________________




Commission
File Number         000-20175




NYER MEDICAL GROUP,
INC.


(Exact
Name of Registrant as Specified in Its Charter)




Florida
                  
                  01-0469607(State
      or Other Jurisdiction of Incorporation
                  
                  (I.R.S.
      Employer Identification No.)or
      Organization)13 Water Street, Holliston, Massachusetts
                  
                  01746(Address
      of Principal Executive Offices)
                  
                  (Zip
      Code)




(508)
429-8506


(Registrant’s
Telephone Number, Including Area Code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes x No o




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




Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o
              Smaller
      reporting company x


(do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes oNo x




The
number of the registrant’s shares of common stock outstanding as of February 10,
2009:   3,978,199.









INDEX




Page No.PART
      I – FINANCIAL INFORMATIONItem
      1.
                    Financial
      StatementsConsolidated
      Balance Sheets as of December 31, 2008, (unaudited) and June 30,
      2008
                    3Consolidated
      Statements of Operations (unaudited) for the three and six months ended
      December 31, 2008 and 2007
                    4Consolidated
      Statements of Cash Flows (unaudited) for the six months ended December 31,
      2008 and 2007
                    5Selected
      Notes to Consolidated Financial Statements (unaudited)
                    6Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    14Item
      4T.
                    Controls
      and Procedures
                    19PART
      II – OTHER INFORMATIONItem
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    20Item
      6.
                    Exhibits
                    21Signatures
                    21




- 2
-


PART
      I—Financial InformationItem
      1.  Financial StatementsNYER
      MEDICAL GROUP, INC.Consolidated
      Balance Sheets
 
 December 31,
                                                                                
                                                                                
                                                                                June 30,2008
                                                                                
                                                                                
                                                                                2008(unaudited)AssetsCurrent
      assets:Cash
                                                                                
                                                                                $
                                                                                474,874
                                                                                
                                                                                
                                                                                $
                                                                                140,688Accounts
      receivable, net of allowance for doubtfulaccounts
      of $24,552 at December 31 and June 30, 2008
                                                                                
                                                                                
                                                                                5,592,505
                                                                                
                                                                                
                                                                                
                                                                                4,837,721Inventories
                                                                                
                                                                                
                                                                                7,305,770
                                                                                
                                                                                
                                                                                
                                                                                7,405,315Prepaid
      expenses and other current assets
                                                                                
                                                                                
                                                                                127,507
                                                                                
                                                                                
                                                                                
                                                                                308,461Refundable
      income taxes
                                                                                
                                                                                
                                                                                62,824
                                                                                
                                                                                
                                                                                
                                                                                36,000Current
      portion of deferred tax assets
                                                                                
                                                                                
                                                                                199,000
                                                                                
                                                                                
                                                                                
                                                                                194,000Assets
      to be disposed of from discontinued operations
                                                                                
                                                                                
                                                                                380,363
                                                                                
                                                                                
                                                                                
                                                                                929,415Total
      current assets
                                                                                
                                                                                
                                                                                14,142,843
                                                                                
                                                                                
                                                                                
                                                                                13,851,600Property
      and equipment, net
                                                                                
                                                                                
                                                                                1,351,436
                                                                                
                                                                                
                                                                                
                                                                                1,341,055Goodwill
                                                                                
                                                                                
                                                                                2,153,100
                                                                                
                                                                                
                                                                                
                                                                                2,153,100Other
      intangibles
                                                                                
                                                                                
                                                                                669,872
                                                                                
                                                                                
                                                                                
                                                                                725,118Long-term
      portion of deferred tax assets
                                                                                
                                                                                
                                                                                379,000
                                                                                
                                                                                
                                                                                
                                                                                444,000Long-term
      portion of deferred tax assets from discontinued
operations
                                                                                
                                                                                
                                                                                70,000
                                                                                
                                                                                
                                                                                
                                                                                70,000Total
      assets
                                                                                
                                                                                $
                                                                                18,766,251
                                                                                
                                                                                
                                                                                $
                                                                                18,584,873Liabilities
      and shareholders' equityCurrent
      liabilities:Current
      portion of long-term debt
                                                                                
                                                                                $
                                                                                115,583
                                                                                
                                                                                
                                                                                $
                                                                                183,958Current
      portion of long-term debt due related parties
                                                                                
                                                                                
                                                                                230,000
                                                                                
                                                                                
                                                                                
                                                                                230,000Accounts
      payable
                                                                                
                                                                                
                                                                                6,363,309
                                                                                
                                                                                
                                                                                
                                                                                5,726,820Accrued
      payroll and related taxes
                                                                                
                                                                                
                                                                                627,261
                                                                                
                                                                                
                                                                                
                                                                                608,209Accrued
      expenses and other current liabilities
                                                                                
                                                                                
                                                                                240,243
                                                                                
                                                                                
                                                                                
                                                                                442,802Income
      taxes payable
                                                                                
                                                                                
                                                                                190,854
                                                                                
                                                                                
                                                                                
                                                                                35,955Liabilities
      to be disposed of from discontinued operations
                                                                                
                                                                                
                                                                                381,530
                                                                                
                                                                                
                                                                                
                                                                                922,051Total
      current liabilities
                                                                                
                                                                                
                                                                                8,148,780
                                                                                
                                                                                
                                                                                
                                                                                8,149,795Long-term
      debt, net of current portion
                                                                                
                                                                                
                                                                                221,667
                                                                                
                                                                                
                                                                                
                                                                                256,667Long-term
      debt, net of current portion, due related parties
                                                                                
                                                                                
                                                                                1,603,333
                                                                                
                                                                                
                                                                                
                                                                                1,643,333Total
      liabilities
                                                                                
                                                                                
                                                                                9,973,780
                                                                                
                                                                                
                                                                                
                                                                                10,049,795Shareholders'
      equity:Preferred
      stock, Class A, $0.001 par value, 500,000 shares; none
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -outstandingPreferred
      stock, Class B, $0.001 par value, 2,500,000 shares
    authorized;2,500
      shares designated Series 1 Class B; none outstanding
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -2,000
      shares designated convertible Series 2 Class B; 2,000
    sharesissued
      and outstanding at December 31 and June 30, 2008
                                                                                
                                                                                
                                                                                400,000
                                                                                
                                                                                
                                                                                
                                                                                400,000Common
      stock, $0.0001 par value, 25,000,000 shares authorized;3,978,199
      shares issued and outstanding at December 31 andJune
      30, 2008;
                                                                                
                                                                                
                                                                                398
                                                                                
                                                                                
                                                                                
                                                                                398Additional
      paid-in capital
                                                                                
                                                                                
                                                                                17,813,450
                                                                                
                                                                                
                                                                                
                                                                                17,770,328Accumulated
      deficit
                                                                                
                                                                                
                                                                                (9,421,377
                                                                                )
                                                                                
                                                                                
                                                                                (9,635,648
                                                                                )Total
      shareholders' equity
                                                                                
                                                                                
                                                                                8,792,471
                                                                                
                                                                                
                                                                                
                                                                                8,535,078Total
      liabilities and shareholders' equity
                                                                                
                                                                                $
                                                                                18,766,251
                                                                                
                                                                                
                                                                                $
                                                                                18,584,873
 
 See
accompanying selected notes to consolidated financial
statements.
  - 3
-
 
 NYER
      MEDICAL GROUP, INC.Consolidated
      Statements of Operations
(unaudited)
 
 For the three months
                                    
                                    
                                    For the six monthsended December 31,
                                    
                                    
                                    ended December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2008
                                    
                                    
                                    2007Net
      revenues:Sales
                                    
                                    $
                                    17,446,053
                                    
                                    
                                    $
                                    16,369,382
                                    
                                    
                                    $
                                    34,165,135
                                    
                                    
                                    $
                                    31,925,502Dispensing
      fees
                                    
                                    
                                    1,540,716
                                    
                                    
                                    
                                    776,828
                                    
                                    
                                    
                                    2,446,142
                                    
                                    
                                    
                                    1,497,760Total
      net revenues
                                    
                                    
                                    18,986,769
                                    
                                    
                                    
                                    17,146,210
                                    
                                    
                                    
                                    36,611,277
                                    
                                    
                                    
                                    33,423,262Cost
      and expenses:Cost
      of sales
                                    
                                    
                                    13,990,704
                                    
                                    
                                    
                                    12,744,559
                                    
                                    
                                    
                                    26,964,744
                                    
                                    
                                    
                                    25,054,395Selling,
      general and administrative expenses
                                    
                                    
                                    4,933,177
                                    
                                    
                                    
                                    4,600,270
                                    
                                    
                                    
                                    9,306,182
                                    
                                    
                                    
                                    8,425,900Depreciation
      and amortization
                                    
                                    
                                    134,689
                                    
                                    
                                    
                                    134,835
                                    
                                    
                                    
                                    279,327
                                    
                                    
                                    
                                    272,626Total
      costs and expenses
                                    
                                    
                                    19,058,570
                                    
                                    
                                    
                                    17,479,664
                                    
                                    
                                    
                                    36,550,253
                                    
                                    
                                    
                                    33,752,921Income
      (loss) from operations
                                    
                                    
                                    (71,801
                                    )
                                    
                                    
                                    (333,454
                                    )
                                    
                                    
                                    61,024
                                    
                                    
                                    
                                    (329,659
                                    )Other
      income (expense):Interest
      expense
                                    
                                    
                                    (44,774
                                    )
                                    
                                    
                                    (8,522
                                    )
                                    
                                    
                                    (92,169
                                    )
                                    
                                    
                                    (15,927
                                    )Interest
      income
                                    
                                    
                                    1,280
                                    
                                    
                                    
                                    4,002
                                    
                                    
                                    
                                    4,403
                                    
                                    
                                    
                                    6,835Other
      income
                                    
                                    
                                    4,672
                                    
                                    
                                    
                                    15,370
                                    
                                    
                                    
                                    6,791
                                    
                                    
                                    
                                    16,891Total
      other income (expense), net
                                    
                                    
                                    (38,822
                                    )
                                    
                                    
                                    10,850
                                    
                                    
                                    
                                    (80,975
                                    )
                                    
                                    
                                    7,799Loss
      from continuing operations beforeprovision
      for income taxes and minority interest
                                    
                                    
                                    (110,623
                                    )
                                    
                                    
                                    (322,604
                                    )
                                    
                                    
                                    (19,951
                                    )
                                    
                                    
                                    (321,860
                                    )Benefit
      for income taxes
                                    
                                    
                                    58,083
                                    
                                    
                                    
                                    97,730
                                    
                                    
                                    
                                    8,579
                                    
                                    
                                    
                                    84,196Minority
      interest expense, net of income taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (10,253
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (38,134
                                    )Loss
      from continuing operations
                                    
                                    
                                    (52,540
                                    )
                                    
                                    
                                    (235,127
                                    )
                                    
                                    
                                    (11,372
                                    )
                                    
                                    
                                    (275,798
                                    )Discontinued
      operations:Loss
      from discontinued operations, net of $4,240, $22,849,$2,647,
      and $13,053 income tax benefit, for the threeand
      six months ended December 31, 2008 and 2007,respectively
                                    
                                    
                                    (7,751
                                    )
                                    
                                    
                                    (45,524
                                    )
                                    
                                    
                                    (11,236
                                    )
                                    
                                    
                                    (39,643
                                    )Gain
      on disposal, net of $215,000, $116,000, $190,203, and$116,000
      income taxes for the three and six monthsended
      December 31, 2008 and 2007, respectively
                                    
                                    
                                    285,000
                                    
                                    
                                    
                                    182,628
                                    
                                    
                                    
                                    236,879
                                    
                                    
                                    
                                    182,628Net
      gain from discontinued operations
                                    
                                    
                                    277,249
                                    
                                    
                                    
                                    137,104
                                    
                                    
                                    
                                    225,643
                                    
                                    
                                    
                                    142,985Net
      income (loss)
                                    
                                    $
                                    224,709
                                    
                                    
                                    $
                                    (98,023
                                    )
                                    
                                    $
                                    214,271
                                    
                                    
                                    $
                                    (132,813
                                    )Basic
      earnings per share:Basic
      loss per share, continuing operations
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    (0.06
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (0.07
                                    )Basic
      income per share, discontinued operations
                                    
                                    
                                    0.07
                                    
                                    
                                    
                                    0.04
                                    
                                    
                                    
                                    0.05
                                    
                                    
                                    
                                    0.04Basic
      income (loss) per share
                                    
                                    $
                                    0.06
                                    
                                    
                                    $
                                    (0.02
                                    )
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    (0.03
                                    )Diluted
      earnings per share:Diluted
      loss  per share, continuing operations
                                    
                                    $
                                    (0.01
                                    )
                                    
                                    $
                                    (0.06
                                    )
                                    
                                    $
                                    0.00
                                    
                                    
                                    $
                                    (0.07
                                    )Diluted
      income per share, discontinued operations
                                    
                                    
                                    0.06
                                    
                                    
                                    
                                    0.04
                                    
                                    
                                    
                                    0.05
                                    
                                    
                                    
                                    0.04Diluted
      income (loss) per share
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    (0.02
                                    )
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    (0.03
                                    )Shares
      used in computing earnings (loss) per share:Basic
                                    
                                    
                                    3,978,199
                                    
                                    
                                    
                                    3,978,199
                                    
                                    
                                    
                                    3,978,199
                                    
                                    
                                    
                                    3,978,199Diluted
                                    
                                    
                                    5,011,416
                                    
                                    
                                    
                                    3,978,199
                                    
                                    
                                    
                                    5,011,416
                                    
                                    
                                    
                                    3,978,199
 
 See
      accompanying selected notes to consolidated financial
      statements.
  - 4
-
 
 NYER
      MEDICAL GROUP, INC.Consolidated
      Statements of Cash Flows(unaudited)
 
 For the six months endedDecember 31,2008
                            
                            
                            2007Operating
      activities:Net
      loss from continuing operations
                            
                            $
                            (11,372
                            )
                            
                            $
                            (275,798
                            )Adjustments
      to reconcile net loss from continuing operationsto
      net cash provided by operating activities:Depreciation
                            
                            
                            234,749
                            
                            
                            
                            204,048Amortization
                            
                            
                            44,578
                            
                            
                            
                            68,578Stock-based
      compensation expense
                            
                            
                            43,122
                            
                            
                            
                            25,190Deferred
      income taxes
                            
                            
                            60,000
                            
                            
                            
                            (144,000
                            )Minority
      interest
                            
                            
                            -
                            
                            
                            
                            38,134Changes
      in operating assets and liabilities, net of effects ofacquisitions
      and disposals:Accounts
      receivable
                            
                            
                            (754,784
                            )
                            
                            
                            (286,779
                            )Inventories
                            
                            
                            (326,815
                            )
                            
                            
                            (601,080
                            )Prepaid
      expenses and other current assets
                            
                            
                            180,954
                            
                            
                            
                            83,616Refundable
      income taxes
                            
                            
                            (26,824
                            )
                            
                            
                            (35,695
                            )Accounts
      payable
                            
                            
                            636,489
                            
                            
                            
                            2,260,105Accrued
      expenses and other current liabilities
                            
                            
                            (183,507
                            )
                            
                            
                            (215,741
                            )Income
      taxes payable
                            
                            
                            154,899
                            
                            
                            
                            (67,445
                            )Net
      cash provided by operating activities
                            
                            
                            51,489
                            
                            
                            
                            1,053,133Investing
      activities:Acquisition
      of pharmacy, net of cash
                            
                            
                            -
                            
                            
                            
                            (552,115
                            )Purchase
      of property and equipment, net
                            
                            
                            (245,130
                            )
                            
                            
                            (229,370
                            )Net
      cash used in investing activities
                            
                            
                            (245,130
                            )
                            
                            
                            (781,485
                            )Financing
      activities:Payments
      on long-term debt
                            
                            
                            (143,375
                            )
                            
                            
                            (92,373
                            )Net
      cash used in financing activities
                            
                            
                            (143,375
                            )
                            
                            
                            (92,373
                            )Net
      cash (used in) provided by continuing operations
                            
                            
                            (337,016
                            )
                            
                            
                            179,275Cash
      flows from discontinued operations:Operating
      activities:Net
      gain from discontinued operations
                            
                            
                            225,643
                            
                            
                            
                            142,985Adjustments
      to reconcile net gain from discontinued operationsto
      net cash provided by operating activities:Gain
      on sale of pharmacy
                            
                            
                            (500,000
                            )
                            
                            
                            -Depreciation
      and amortization
                            
                            
                            10,668
                            
                            
                            
                            25,143Deferred
      income taxes
                            
                            
                            -
                            
                            
                            
                            49,000Other
                            
                            
                            8,531
                            
                            
                            
                            (8,432
                            )Net
      cash provided by (used in) operating activities
                            
                            
                            (255,158
                            )
                            
                            
                            208,696Investing
      activities:Proceeds
      from sale of pharmacy
                            
                            
                            926,360
                            
                            
                            
                            -Financing
      activities:Borrowings
      on line of credit
                            
                            
                            -
                            
                            
                            
                            140,000Net
      cash provided by discontinued operations
                            
                            
                            671,202
                            
                            
                            
                            348,696Net
      increase in cash
                            
                            
                            334,186
                            
                            
                            
                            527,971Cash
      at beginning of period
                            
                            
                            140,688
                            
                            
                            
                            1,135,677Cash
      at end of period
                            
                            $
                            474,874
                            
                            
                            $
                            1,663,648
 
 See
      accompanying selected notes to consolidated financial
      statements.
  - 5
-
 
 NYER
MEDICAL GROUP, INC.
  SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  1.
              Accounting
      Policies
  Basis
of Presentation
  The
consolidated financial statements included herein have been prepared by the
Company, without audit, in accordance with accounting principals generally
accepted in the United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principals generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not to be misleading. In the opinion of
management, the amounts shown reflect all adjustments necessary to present
fairly the financial position and results of operations for the periods
presented. All such adjustments are of a normal recurring nature.  The
consolidated financial statements include the accounts of the Company and its
subsidiaries, and all intercompany transactions have been
eliminated.
  It is
suggested that the financial statements be read in conjunction with the
financial statements and notes thereto included in the Company’s Form 10-K for
the year ended June 30, 2008.
  Reclassifications
  Prior
year information is reclassified whenever necessary to conform to current year’s
presentation.
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
  Fair
value of Financial Instruments
  The
carrying values of accounts receivable, accounts payables, and debt approximate
their fair values.  The carrying values and estimated fair values for
long-term debt based on quoted market rates of financial instruments were
approximately the same.
  - 6
-
  Recent
Accounting Pronouncements
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States.  This statement
shall be effective 60 days following the Securities and Exchange Commission’s
(“SEC”) approval of the Public Company Accounting Oversight Board’s amendments
to AU section 411, The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting
Principles.  The Company is in the process of evaluating the
potential effect of adoption of SFAS No. 162 on its consolidated results of
operations and financial condition.
  In April
2008, the FASB issued FASB Staff Position Accounting Principles Board 14-1,
Accounting for Convertible
Debt Instruments That May be Settled in Cash upon Conversion (Including Partial
Settlement) (“FSP APB 14-1”).  FSP APB 14-1 requires the issuer
of certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer’s nonconvertible debt borrowing rate.  FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008, and on a
retroactive basis.  The Company is evaluating the potential impact of
the adoption of FSP APB 14-1 on its consolidated results of operations and
financial condition.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)), which replaces SFAS No. 141, Business
Combinations.  The statement retains the purchase method of
accounting for acquisitions but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase
accounting.  It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141(R) is effective for the
Company beginning July 1, 2009, and will apply prospectively to business
combinations completed on or after that date. The Company is in the process of
evaluating the potential effect of adoption of SFAS No. 141(R) on its
consolidated results of operations and financial condition.
  2.
              Goodwill andOther
      Intangible Assets
  In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company’s policy is to evaluate goodwill for impairment on an
annual basis during the fourth quarter of its fiscal year or more frequently if
events or circumstances occur that would indicate a reduction in the fair value
of the Company.  Goodwill impairment is determined using a two-step
process.  The first step of the process is to identify potential
impairment by comparing the Company’s fair value with its net book value (or
carrying value).  If the fair value of the Company exceeds its
carrying amount, the Company’s goodwill is not considered to be impaired and the
second step of the impairment test is not performed.  If the carrying
amount of the Company’s goodwill exceeds its fair value, the second step is
performed to measure the amount of impairment loss, if any.  The
second step of the impairment test compares the implied fair value of the
Company’s goodwill with the carrying amount.  If the carrying amount
exceeds the implied fair value of the goodwill, an impairment loss is recognized
in an amount equal to that excess.
  - 7
-
  On
December 31, 2008, the Company performed an interim goodwill impairment
test.  The carrying value of the Company’s net assets was $8,792,471;
and the market capitalization of the Company’s outstanding shares, assuming
conversion of outstanding preferred shares, was $3,776,579.
  The
Company calculated the estimated fair value of the Company as of December 31,
2008, as that amount that would be received to sell the Company as a whole on
December 31, 2008.  It arrived at the estimated fair value by
preparing a discounted cash flow using updated forward-looking projections of
the Company’s estimated future operating results.  Based on the
results of the discounted cash flow analysis, the Company has concluded that the
Company’s fair value exceeds its carrying value as of December 31, 2008, and
that goodwill is not impaired.  The recent sale of Company’s Topsfield
store in December 2008 supports the conclusion that the Company’s fair value
exceeds its carrying value as of December 31, 2008.
  The
Company has concluded that the market value of the Company’s common stock as of
December 31, 2008, is not an indication of the Company’s market value due to the
fact that it is very thinly traded and that the implied fair value test is a
more accurate indication of whether or not there has been an impairment of
goodwill.  Inherent in such fair value determinations are certain
judgment and estimates, including the interpretation of economic indicators and
market valuations and assumptions about the Company’s strategic
plans.  To the extent that its strategic plans change or that economic
and market conditions worsen, it is possible that its conclusion regarding
goodwill impairment could change and result in a material effect on financial
position and results of operations of the Company.
  The
following is a summary of other intangible assets:
  December 31, 2008
                  
                  
                  June 30, 2008Amortization
                  
                  
                  Gross
                  
                  
                  
                  
                  
                  
                  
                  
                  Gross
                  
                  
                  
                  
                  
                  NetPeriod
                  
                  
                  Carrying
                  
                  
                  Accumulated
                  
                  
                  Carrying
                  
                  
                  Carrying
                  
                  
                  Accumulated
                  
                  
                  Carrying(in years)
                  
                  
                  Value
                  
                  
                  Amortization
                  
                  
                  Value
                  
                  
                  Value
                  
                  
                  Amortization
                  
                  
                  ValuePrescription
      lists
                  
                  
                  7.6
                  
                  
                  $
                  1,031,555
                  
                  
                  $
                  361,683
                  
                  
                  $
                  669,872
                  
                  
                  $
                  1,031,555
                  
                  
                  $
                  306,437
                  
                  
                  $
                  725,118
  Amortization
expense was $32,357 and $34,289 for the three months ended December 31, 2008 and
2007, respectively; and $55,246 and $68,578 for the six months ended December
31, 2008 and 2007, respectively.
  - 8
-
  Based on
the balance of intangible assets as of December 31, 2008, the remaining
amortization expense for the remainder of fiscal 2009 and each of the succeeding
five years is estimated to be as follows:
  AmortizationYear
                          
                          Amount2009
      (remaining 6 months)
                          
                          $
                          43,9112010
                          
                          
                          73,8192011
                          
                          
                          73,8192012
                          
                          
                          71,7132013
                          
                          
                          67,1532014
                          
                          
                          67,153Thereafter
                          
                          
                          272,304Total
                          
                          $
                          669,872
 
  3.
              Indebtedness and
      Related Parties
  December 31,
                      
                      
                      June 30,2008
                      
                      
                      2008Related
      parties:Convertible
      notes
                      
                      $
                      1,500,000
                      
                      
                      $
                      1,500,000Note
      payable, shareholder
                      
                      
                      333,333
                      
                      
                      
                      373,3331,833,333
                      
                      
                      
                      1,873,333Less
      current portion of debt due related parties
                      
                      
                      230,000
                      
                      
                      
                      230,000Long-term
      portion of debt due related parties
                      
                      $
                      1,603,333
                      
                      
                      $
                      1,643,333Other
      debt:Note
      payable, former shareholder
                      
                      $
                      291,667
                      
                      
                      $
                      326,667Note
      payable, pharmacy acquisition
                      
                      
                      45,583
                      
                      
                      
                      113,958337,250
                      
                      
                      
                      440,625Less
      current portion of debt
                      
                      
                      115,583
                      
                      
                      
                      183,958Long-term
      portion of debt
                      
                      $
                      221,667
                      
                      
                      $
                      256,667
  The
holders of the convertible notes have indicated that they do not intend to
redeem the convertible notes until after January 1, 2010.
  In
October 2004, the Company’s discontinued operation, ADCO Surgical Supply, Inc.
(“ADCO”), obtained a $300,000 line of credit which is collateralized by land and
a building not sold with the rest of ADCO’s assets owned by ADCO and guaranteed
by the Company.  Borrowings under this line bear interest at the Wall Street Journal prime
rate.  Repayment of the line of credit is in monthly payments of
interest only, with the principal being due at maturity, unless
renewed.   This credit agreement will expire on March 1, 2009,
and the Company is in the process of renewing it.  As of December 31,
2008, borrowings outstanding against the line of credit were $300,000 and are
classified in the liabilities to be disposed of from discontinued operations on
the Company’s balance sheet.
  4.
              Discontinued
      Operations
  In December 2008, the Company sold the
inventory and prescription lists of its Topsfield, Massachusetts, store
(“Topsfield”) to CVS Pharmacy L.L.C. (“CVS”).  In conjunction with
this sale, the Company also entered into a non-compete agreement with CVS,
whereby it has agreed not to compete for three years within a 10-mile radius of
the CVS’ store located in Danvers, Massachusetts, excluding two currently
operating Eaton Apothecary pharmacies.  A gain of $500,000 was
recognized on the sale of Topsfield.
  - 9
-
  In
September 2008, the Company sold certain assets and liabilities of ADCO, a
medical and surgical equipment and supplies company engaged in both the
wholesale and retail selling of medical equipment and surgical supplies
throughout New England and the Internet. A loss was recognized from discontinued
operations of $17,667 and a loss on disposal of certain assets and liabilities
of $48,118 was recognized. The Company retained ADCO’s building and land and its
line of credit of $300,000, which has been fully utilized.  The buyer
of ADCO’s assets had an option to purchase the building and land that was not
exercised and expired on January 31, 2009.   In connection with
this sale, the Company received a $50,000 note receivable that was payable
January 31, 2009.  The Company and the buyer are currently in dispute
over certain assets and liabilities that were included in the ADCO
sale, and the note receivable has not been paid.  The Company is
unable to determine the final outcome of this dispute, but it may result in an
additional charge to the disposal of discontinued operations.
  In June
2008, the Company sold ADCO South Medical Supplies, Inc. (“ADCO South”). ADCO
South engaged in the wholesale selling of medical equipment and surgical
supplies throughout Florida.  A loss was recognized on the sale of
ADCO South of $3,848.
  Effective
July 1, 2007, the Company’s consolidated financial statements have been
reclassified to reflect these businesses as discontinued operations in
accordance with SFAS No.144, Accounting for Disposal or
Impairment of Long-lived Assets.The following table shows the assets and
liabilities for the discontinued operations:
  December 31,
                        
                        
                        June 30,2008
                        
                        
                        2008Cash
                        
                        $
                        -
                        
                        
                        $
                        33,293Accounts
      receivable, net
                        
                        
                        131,362
                        
                        
                        
                        323,681Inventories
                        
                        
                        -
                        
                        
                        
                        279,208Prepaid
      expenses and other current assets
                        
                        
                        50,000
                        
                        
                        
                        12,828Current
      portion of deferred tax assets
                        
                        
                        87,000
                        
                        
                        
                        73,000Property
      and equipment, net
                        
                        
                        112,001
                        
                        
                        
                        120,942Goodwill
                        
                        
                        -
                        
                        
                        
                        86,463Long-term
      portion of deferred tax assets
                        
                        
                        70,000
                        
                        
                        
                        70,000Total
      assets
                        
                        $
                        450,363
                        
                        
                        $
                        999,415Line
      of credit
                        
                        $
                        300,000
                        
                        
                        $
                        300,000Accounts
      payable
                        
                        
                        66,012
                        
                        
                        
                        566,833Accrued
      payroll and related taxes
                        
                        
                        6,104
                        
                        
                        
                        28,187Accrued
      expenses and other liabilities
                        
                        
                        9,414
                        
                        
                        
                        27,031Total
      current liabilities
                        
                        $
                        381,530
                        
                        
                        $
                        922,051
 
 - 10
-
  The
following table shows the income statement for the discontinued
operations:
  For the three months
                                    
                                    
                                    For the six monthsended December 31,
                                    
                                    
                                    ended December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2008
                                    
                                    
                                    2007Sales
                                    
                                    $
                                    583,980
                                    
                                    
                                    $
                                    1,776,411
                                    
                                    
                                    $
                                    1,664,872
                                    
                                    
                                    $
                                    3,602,036Costs
      and expenses:Cost
      of sales
                                    
                                    
                                    483,137
                                    
                                    
                                    
                                    1,376,554
                                    
                                    
                                    
                                    1,291,464
                                    
                                    
                                    
                                    2,723,603Selling,
      general and administrative expenses
                                    
                                    
                                    101,253
                                    
                                    
                                    
                                    456,709
                                    
                                    
                                    
                                    374,352
                                    
                                    
                                    
                                    907,654Depreciation
      and amortization expense
                                    
                                    
                                    11,581
                                    
                                    
                                    
                                    12,052
                                    
                                    
                                    
                                    12,861
                                    
                                    
                                    
                                    25,143Total
      costs and expenses
                                    
                                    
                                    595,971
                                    
                                    
                                    
                                    1,845,315
                                    
                                    
                                    
                                    1,678,677
                                    
                                    
                                    
                                    3,656,400Operating
      loss
                                    
                                    
                                    (11,991
                                    )
                                    
                                    
                                    (68,904
                                    )
                                    
                                    
                                    (13,805
                                    )
                                    
                                    
                                    (54,364
                                    )Other
      (expense) income:Interest
      expense
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (193
                                    )
                                    
                                    
                                    (578
                                    )
                                    
                                    
                                    (193
                                    )Interest
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    724
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,861Gain
      on disposal
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    298,628
                                    
                                    
                                    
                                    427,082
                                    
                                    
                                    
                                    298,628Other
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    500
                                    
                                    
                                    
                                    -Total
      other income, net
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    299,159
                                    
                                    
                                    
                                    427,004
                                    
                                    
                                    
                                    300,296Income
      from discontinued operations beforeprovision
      for income taxes
                                    
                                    
                                    488,009
                                    
                                    
                                    
                                    230,255
                                    
                                    
                                    
                                    413,199
                                    
                                    
                                    
                                    245,932Provision
      for income tax
                                    
                                    
                                    210,760
                                    
                                    
                                    
                                    93,151
                                    
                                    
                                    
                                    187,556
                                    
                                    
                                    
                                    102,947Net
      income from discontinued operations
                                    
                                    $
                                    277,249
                                    
                                    
                                    $
                                    137,104
                                    
                                    
                                    $
                                    225,643
                                    
                                    
                                    $
                                    142,985
 
 5.
              Share-based
      Compensation
  Stock Option Plans
  The
Company’s share-based compensation consists of stock option awards, which are
accounted for as compensation expense at the fair value on the grant date, using
the Black-Scholes valuation model.  The Company recorded share-based
compensation expense of $22,044 and $11,833 for the three months ended December
31, 2008 and 2007, respectively; and $43,122 and $25,190 for the six months
ended December 31, 2008 and 2007, respectively.  There were no stock
option awards granted during the six months ended December 31, 2008 and
2007.
  The
Company has two stock option plans under which employees, consultants, and
directors have been granted options to purchase shares of the Company’s common
stock. The 1993 Stock Option Plan (the “1993 Plan”) was amended in fiscal 2003
to, among other things, (a) cease grants under such plan upon the effectiveness
of the 2002 Stock Option Plan of the Company (the “2002 Plan”) and (b) increase
the maximum aggregate number of shares available for award under such plan to
1,000,000. The maximum aggregate number of shares of common stock available for
award under the 2002 Plan is 3,000,000, and is subject to adjustment as set
forth therein. Under the 2002 Plan automatic options vest semi-annually to all
directors and certain officers and expire no later ten years from the date of
grant. Except with respect to certain incentive stock options (“ISOs”), options
under the 1993 Plan expire ten years from the date of grant. Under the 1999
Plan, except for ISOs and non-qualified options, which are not non-discretionary
options (as such term is used in the 1993 Plan), the exercise price for options
is the fair market value of the common stock of the Company at the date of
grant, as such fair market value is determined under the 1993 Plan. Under the
2002 Plan, except for certain ISOs and certain non-qualified options, the
exercise price is not to be less than the Market Price (as defined in the 2002
Plan) of the common stock of the Company on the date of the grant.
  - 11
-
  Stock
Options and Warrants
  In April
2005, the Company granted to investors warrants to purchase 53,320 common shares
over a five-year period at an exercise price of $2.60 per share. None of these
have been exercised as of December 31, 2008.
  As of
December 31, 2008, the Company had outstanding 150,000 stock options that were
granted in 1999 to a third party in connection with consulting
services. The options were not exercised and expired January
2009.
  6.
              Earnings per
      Share
  Below is
reconciliation of weighted average common shares outstanding for purposes of
calculating basic and diluted earnings (loss) per share:
  For the three months
                          
                          
                          For the six monthsended December 31,
                          
                          
                          ended December 31,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Numerator
      for earnings per common share calculation:Basic:Loss
      from continuing operations
                          
                          $
                          (52,540
                          )
                          
                          $
                          (235,127
                          )
                          
                          $
                          (11,372
                          )
                          
                          $
                          (275,798
                          )Income
      from discontinued operations, net of income tax benefit
                          
                          
                          277,249
                          
                          
                          
                          137,104
                          
                          
                          
                          225,643
                          
                          
                          
                          142,985Net
      income (loss), basic
                          
                          $
                          224,709
                          
                          
                          $
                          (98,023
                          )
                          
                          $
                          214,271
                          
                          
                          $
                          (132,813
                          )Diluted:Loss
      from continuing operations
                          
                          $
                          (52,540
                          )
                          
                          $
                          (235,127
                          )
                          
                          $
                          (11,372
                          )
                          
                          $
                          (275,798
                          )Income
      (loss) from discontinued operations:Income
      from discontinued operations, net of income tax benefit
                          
                          
                          277,249
                          
                          
                          
                          137,104
                          
                          
                          
                          225,643
                          
                          
                          
                          142,985Add
      interest on 8% convertible notes, net of income tax
benefit
                          
                          
                          17,100
                          
                          
                          
                          -
                          
                          
                          
                          34,200
                          
                          
                          
                          -Net
      income (loss) from discontinued operations, adjusted
                          
                          
                          294,349
                          
                          
                          
                          137,104
                          
                          
                          
                          259,843
                          
                          
                          
                          142,985Net
      income (loss), diluted
                          
                          $
                          241,809
                          
                          
                          $
                          (98,023
                          )
                          
                          $
                          248,471
                          
                          
                          $
                          (132,813
                          )Denominator
      for earnings per common share calculation:Basic:Weighted
      average common shares outstanding
                          
                          
                          3,978,199
                          
                          
                          
                          3,978,199
                          
                          
                          
                          3,978,199
                          
                          
                          
                          3,978,199Diluted:Weighted
      average common shares outstanding
                          
                          
                          3,978,199
                          
                          
                          
                          3,978,199
                          
                          
                          
                          3,978,199
                          
                          
                          
                          3,978,199Effect
      of dilutive securities:Convertible
      preferred stock
                          
                          
                          218,000
                          
                          
                          
                          -
                          
                          
                          
                          218,000
                          
                          
                          
                          -8%
      convertible notes
                          
                          
                          815,217
                          
                          
                          
                          -
                          
                          
                          
                          815,217
                          
                          
                          
                          -5,011,416
                          
                          
                          
                          3,978,199
                          
                          
                          
                          5,011,416
                          
                          
                          
                          3,978,199
 
 - 12
-
  Due to
their anti-dilutive effect, the following potential common shares have been
excluded from the computation of diluted loss per share:
 
 For the three months
                            
                            
                            For the six monthsended December 31,
                            
                            
                            ended December 31,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Stock
      options
                            
                            
                            1,614,000
                            
                            
                            
                            2,668,000
                            
                            
                            
                            1,614,000
                            
                            
                            
                            1,558,000Warrants
                            
                            
                            53,320
                            
                            
                            
                            53,320
                            
                            
                            
                            53,320
                            
                            
                            
                            53,3201,667,320
                            
                            
                            
                            2,721,320
                            
                            
                            
                            1,667,320
                            
                            
                            
                            1,611,320
 
 7.
              Supplemental Cash Flow
      Information
 
 Supplemental
      disclosures of cash flow information are as
  follows:
 
 For the six months endedDecember 31,2008
                        
                        
                        2007Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                        
                        $
                        92,306
                        
                        
                        $
                        15,697Cash
      paid for income taxes
                        
                        $
                        -
                        
                        
                        $
                        128,892Supplemental
      schedule of non-cash investing and financing activities:Disposition
      (acquisition) of pharmacies is summarized as follows:Inventory
                        
                        $
                        426,360
                        
                        
                        $
                        (252,115
                        )Property
      and equipment
                        
                        
                        -
                        
                        
                        
                        (19,945
                        )Prescription
      lists
                        
                        
                        500,000
                        
                        
                        
                        (280,055
                        )Cash
      received (paid) for disposition (acquisition)
                        
                        $
                        926,360
                        
                        
                        $
                        (552,115
                        )Reversal
      of discontinued operations accounts payable, accruedexpenses,
      and other liabilities
                        
                        $
                        -
                        
                        
                        $
                        298,628
 
 8.
                Contingencies
  The
Company and the buyer of ADCO are currently in dispute over certain assets and
liabilities that were included in the ADCO sale.  The Company is
unable to determine the final outcome of this dispute, but it may result in an
additional charge to the disposal of discontinued operations.
  Legal
proceedings
  In the
ordinary course of business, the Company may become involved in litigation
incidental to its business; however, the Company is not aware of any pending
legal proceeding that would have a material effect on operating
results.
  - 13
-
  Item
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  This
Quarterly Report on Form 10-Q contains statements which constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and other federal securities laws.  Forward looking
information includes statements concerning pharmacy sales trends, the sale of
discontinued operations and demographic trends; as well as those that include or
are preceded by the words “expects,” “estimates,” “believes,” “plans,”
“anticipates” or similar language.
 
 Forward
looking statements may involve risks and uncertainties, known or unknown to us
that could cause results to differ materially from management’s expectations as
projected in such forward-looking statements. These risks and uncertainties are
discussed in Item 1A in our most recent Annual Report on Form 10-K as filed with
the Securities and Exchange Commission (the “SEC”).
 
 You
should not place undue reliance upon forward looking
statements.  Unless otherwise required by applicable securities laws,
we assume no obligation to update our forward-looking statements to reflect
subsequent events or circumstances.
  Overview
  We
operate a chain of pharmacies and provide pharmacy management services to
various not-for-profit entities.  The pharmacy industry is highly
competitive.  The current economic environment has not impacted our
Company, as our business is generally recession resistant due to the fact that
prescription utilization is generally not included in discretionary
spending.  The long-term outlook for prescription utilization is
strong due in part to the aging population and the continued development of
innovative drugs that improve quality of life and control health care
costs.
  Recent
Developments
  In December 2008, we sold the inventory
and prescription lists of our Topsfield, Massachusetts, store (“Topsfield”) to
CVS Pharmacy LLC (“CVS”).  A gain of $500,000 was recognized on the
sale.
 
 In
October 2008, we entered into a contract with the East Boston Neighborhood
Health Center to assume management of the Health Center’s pharmacy already in
operation.  The pharmacy immediately became our highest volume
location in terms of prescriptions dispensed.  As of December 31,
2008, we had successfully integrated the pharmacy dispensing software platform,
the robotic dispensing unit, the work-flow software, and the point of purchase
software.  While the process was taxing on operational resources, we
believe the changes were necessary in order to maximize the long-term profit
potential of the pharmacy.
  - 14
-
  In
September 2008, we sold certain assets and liabilities of ADCO Surgical Supply,
Inc. (“ADCO”). A loss was recognized from discontinued operations of $17,667 and
loss on disposal of certain assets and liabilities of $48,118 was recognized on
the sale.   In connection with the sale, we recorded a note
receivable of $50,000.  We and the buyer are currently in dispute over
certain assets and liabilities that were included in the ADCO sale, and the note
receivable has not been paid.  As of December 31, 2008, we are unable
to determine the final outcome of this dispute, but it may result in an
additional loss on the disposal of discontinued operations.
  In July
2008, we coordinated the relocation of the pharmacy that we manage for the
Boston Health Care for the Homeless Program (“BHCHP”) from the Barbara McInnis
House to BHCHP’s new, state of the art location within the Jean Yawkey Center
across from Boston Medical Center.  At the new pharmacy, we began
dispensing patient prescriptions for patients visiting the new walk-in clinic in
addition to dispensing prescriptions for the program’s respite
patients.
  In July
2008, we opened a pharmacy in Dorchester, Massachusetts, as a mirror operation
to our Peabody, Massachusetts, location to manage dispensing for a different
geographical area.  Significant “location insensitive” business was
transferred from our other Dorchester pharmacy to gain efficiencies in the
dispensing process.  The new pharmacy increased dispensing capacity
for the rapidly growing assisted living and adherence packaging market
segment.
 
 Results of
Operations
  The
following discussion provides information with respect to our results of
operations, liquidity, and capital resources on a comparative basis for the
three and six months ended December 31, 2008 and 2007.  The following
discussion should be read in conjunction with our consolidated financial
statements and selected notes thereto for the three and six months ended
December 31, 2008 and 2007, included herein, and our audited consolidated
financial statements and notes thereto contained in our Annual Report on Form
10-K for the year ended June 30, 2008, as filed with the SEC.
  Net
Revenues.The following
table sets forth for the periods indicated pharmacy and dispensing fees
revenues:
  For the three months December 31,
                        
                        
                        For the six months ended December 31,Change
                        
                        
                        
                        
                        
                        
                        
                        
                        Change2008
                        
                        
                        2007
                        
                        
                        $
                        
                        
                        %
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        $
                        
                        
                        %Pharmacy
                        
                        $
                        17,446,053
                        
                        
                        $
                        16,369,382
                        
                        
                        $
                        1,076,671
                        
                        
                        
                        6.6
                        %
                        
                        $
                        34,165,135
                        
                        
                        $
                        31,925,502
                        
                        
                        $
                        2,239,633
                        
                        
                        
                        7.0
                        %Dispensing
      fees
                        
                        
                        1,540,716
                        
                        
                        
                        776,828
                        
                        
                        
                        763,888
                        
                        
                        
                        98.3
                        %
                        
                        
                        2,446,142
                        
                        
                        
                        1,497,760
                        
                        
                        
                        948,382
                        
                        
                        
                        63.3
                        %Total
                        
                        $
                        18,986,769
                        
                        
                        $
                        17,146,210
                        
                        
                        $
                        1,840,559
                        
                        
                        
                        10.7
                        %
                        
                        $
                        36,611,277
                        
                        
                        $
                        33,423,262
                        
                        
                        $
                        3,188,015
                        
                        
                        
                        9.5
                        %
  Net revenues increased $1.8 million to
$19.0 million or 10.7% and $3.2 million to $36.6 million or 9.5% for the three
and six months ended December 31, 2008, respectively, as compared to $17.1
million and $33.4 million for the three and six months ended December 31, 2007,
respectively.  The main reason for the increase in revenues was due to
the addition of four new pharmacies in December 2007 and in February, July, and
October 2008.  We operated 24 locations as of December 31, 2008,
compared to 21 locations in the prior year.
  - 15
-
  Net
revenues slightly decreased at stores open more than one year for the three and
six months ended December 31, 2008, due to our decision to transfer accounts
with approximately $1.8 million and $2.7 million in net revenues for the three
and six months ended December 31, 2008, respectively, to two of the newly opened
pharmacies.  The transfer was done to group certain specialized
accounts together in order to achieve efficiencies in the dispensing
process.  If the effect of the business transfer is taken into
account, comparable revenue increased approximately 6% for the three and six
months ended December 31, 2008.
  The total
number of prescriptions dispensed increased 19% for the six months ended
December 31, 2008.  The number of prescriptions dispensed did not
correlate to a commensurate growth in revenue due to an increased number of
generic medications as a percentage of total number of prescriptions dispensed.
Generic medications typically have a lower selling price than brand name
medications. We recognize revenue both from the sale of prescription medications
and other products as well as through dispensing fee revenue derived through the
dispensing of prescriptions with inventory owned by Federally Qualified Health
Centers (“FQHCs”) pursuant to pharmacy management services contracts entered
into between us and various FQHCs.
  The
pharmacy sales (revenues other than dispensing fees) increased $1.1 million to
$17.4 million or 6.6% and $2.2 million to $34.1 million or 7.0% for the three
and six months ended December 31, 2008, respectively, as compared to $16.4
million and $32.0 million for the three and six months ended December 31, 2007,
respectively. The increase was attributable to the opening of the three new
pharmacies. Sales were flat at stores open more than one year due to our
decision to transfer accounts with approximately $1.6 million and $2.4 million
in sales for the three and six months ended December 31, 2008, respectively, to
two of the newly opened pharmacies.  If the effect of the business
transfer is taken into account, comparable sales increased approximately 6% for
the three and six months ended December 31, 2008.
  We
attribute the increase in prescription dispensing to greater drug utilization on
the part of an aging population, an overall increase in market share within
certain communities and an increased utilization of pharmacy services by
patients of FQHCs with whom the pharmacies have contracts to provide services.
The pharmacies manage two pharmacies owned by FQHCs and additionally have
contracts to provide pharmacy services to patients of five other FQHCs. The
pharmacies maintain a segregated inventory owned by the FQHCs for the purpose of
dispensing prescriptions to health center patients.
  Dispensing
fee revenue increased $0.8 million to $1.5 million or 98.3% and $0.9 million to
$2.4 million or 63.3% for the three and six months ended December 31, 2008,
respectively, as compared to $0.8 million and $1.5 million for the three and six
months ended December 31, 2007, respectively.  The increase is
primarily attributable to the our new pharmacy contract with the East Boston
Neighborhood Health Center in Dorchester,  as well as the expanded
number of and increased demand for covered medications effectuated during the
fiscal year by the Massachusetts Health Safety Net Office, an increased number
of prescription benefit management contracts entered into by the FQHCs
contracted with us, and marketing initiatives targeting the patients of the
FQHCs.
  - 16
-
  Gross
Profit Margins.The following
table sets forth for the periods indicated the pharmacy profit margin
rate:
  For the three months December 31,
                                            
                                            
                                            For the six months December 31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            % change
                                            
                                            
                                            2008
                                            
                                            
                                            2007
                                            
                                            
                                            % changeProfit
      margin rate
                                            
                                            
                                            19.8
                                            %
                                            
                                            
                                            22.1
                                            %
                                            
                                            
                                            (2.3
                                            )%
                                            
                                            
                                            21.1
                                            %
                                            
                                            
                                            21.5
                                            %
                                            
                                            
                                            (0.4
                                            )%
  Pharmacy
gross profit margins were 19.8% and 21.1% for the three and six months ended
December 31, 2008, respectively, as compared to 22.1% and 21.5% for the three
and six months ended December 31, 2007, respectively.  Dispensing fees
were not included in the calculation as no cost of sales is estimatable for
dispensing fees.   The decrease in gross profit margin was due to
declining insurance reimbursement rates and the fact that the Topsfield store’s
results, which had a lower than average gross profit margin rate in 2007, have
been removed from continuing operations.
  Selling,
General and Administrative Expenses.The following
table set forth for the periods indicated selling, general and administrative
expenses (“SG&A”):
  For the three months December 31,
                      
                      
                      For the six months ended December 31,Change
                      
                      
                      
                      
                      
                      
                      
                      
                      Change2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      %
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      %SG&A
      expenses
                      
                      $
                      4,933,177
                      
                      
                      $
                      4,600,270
                      
                      
                      $
                      332,907
                      
                      
                      
                      7.2
                      %
                      
                      $
                      9,306,182
                      
                      
                      $
                      8,425,900
                      
                      
                      $
                      880,282
                      
                      
                      
                      10.4
                      %
  SG&A
increased $0.3 million or 7.2% to $4.9 million and $0.9 million or 10.4% to $9.3
million for the three and six months ended December 31, 2008, respectively, as
compared to $4.6 million and $8.4 million for the three months ended December
31, 2007, respectively.  The increase for the three months ended
December 31, 2008, was primarily due to increased payroll costs of $0.9 million
related to four newly opened locations partially offset by a decrease in
administrative expenses of $0.6 million.  The increase for the six
months ended December 31, 2008, was primarily due to increased payroll costs of
$1.0 million related to the four newly opened locations, $0.4 million related to
increased payroll costs at existing pharmacies, partially offset by a decrease
in administrative expenses of $0.6 million.  The decrease in
administrative expenses of approximately $0.6 million for the three and six
months ended December 31, 2008, was primarily due to the elimination of fees
paid to the minority shareholders and investment banker and capital raising
expenses related to the buy-out of the 20% minority interest of D.A.W., Inc.,
our now wholly owned pharmacy subsidiary (“D.A.W.”)
  Other
Income (Expense), net.  The following table sets forth for the
periods indicated the breakdown of other income (expense), net:
 
 For the three months December 31,
                    
                    
                    For the six months ended December 31,Change
                    
                    
                    
                    
                    
                    
                    
                    
                    Change2008
                    
                    
                    2007
                    
                    
                    $
                    
                    
                    %
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    $
                    
                    
                    %Interest
      expense
                    
                    $
                    (44,774
                    )
                    
                    $
                    (8,522
                    )
                    
                    $
                    (36,252
                    )
                    
                    
                    425.4
                    %
                    
                    $
                    (92,169
                    )
                    
                    $
                    (15,927
                    )
                    
                    $
                    (76,242
                    )
                    
                    
                    478.7
                    %Interest
      income
                    
                    
                    1,280
                    
                    
                    
                    4,002
                    
                    
                    
                    (2,722
                    )
                    
                    
                    (68.0
                    )%
                    
                    
                    4,403
                    
                    
                    
                    6,835
                    
                    
                    
                    (2,432
                    )
                    
                    
                    (35.6
                    )%Other
      income
                    
                    
                    4,672
                    
                    
                    
                    15,370
                    
                    
                    
                    (10,698
                    )
                    
                    
                    (69.6
                    )%
                    
                    
                    6,791
                    
                    
                    
                    16,891
                    
                    
                    
                    (10,100
                    )
                    
                    
                    (59.8
                    )%$
                    (38,822
                    )
                    
                    $
                    10,850
                    
                    
                    $
                    (49,672
                    )
                    
                    
                    (457.8
                    )%
                    
                    $
                    (80,975
                    )
                    
                    $
                    7,799
                    
                    
                    $
                    (88,774
                    )
                    
                    
                    (1138.3
                    )%
  - 17
-
  Other income (expense), net, is
comprised of interest expense, interest income, and other
income.  Interest expense increased $36,252 to $44,774 and $76,242 to
$92,169 for the three and six months ended December 31, 2008, respectively, as
compared to $8,522 and $15,927, respectively, for the three and six months ended
December 31, 2007, primarily due to the notes issued in connection with the
February 2008 purchase of the remaining 20% of D.A.W.
  Income
Taxes.  We recorded an
income tax benefit from continuing operations of $58,083 and $8,579 for the
three and six months ended December 31, 2008, respectively, and $97,730 and
$84,196 for the three and six months ended December 31, 2007, respectively,
primarily as due to the losses from continuing operations for each of the
periods presented.  In addition, we recorded income tax expense for
the discontinued operations of $210,760 and $93,151 for the three and six months
ended December 31, 2008, respectively, and $187,556 and $102,947 for the three
and six months ended December 31, 2007, respectively, primarily due to the net
gain on disposal of discontinued operations.
  Discontinued
Operations.  For the three months ended December 31, 2008, we
recognized a gain of $277,249 from discontinued operations, which consisted of a
loss on disposal of discontinued operations of $11,991 net of income tax benefit
of $4,240 and a gain on the disposal of the discontinued operations of $500,000
net of income taxes of $215,000.   For the three months ended
December 31, 2007, we recognized a gain of $137,104 from discontinued
operations, which consisted of a loss on disposal of discontinued operations of
$68,373 net of income tax benefit of $22,849 and a gain on the disposal of the
discontinued operations of $298,628 net of income taxes of
$116,000.  For the six months ended December 31, 2008, we recognized a
gain of $225,643 from discontinued operations, which consisted of a loss on
disposal of discontinued operations of $13,883 net of income tax benefit of
$2,647 and a gain on the disposal of the discontinued operations of $427,082 net
of income taxes of $190,203.   For the six months ended December
31, 2007, we recognized a gain of $142,985 from discontinued operations, which
consisted of a loss on disposal of discontinued operations of $52,696 net of
income tax benefit of $13,053 and a gain on the disposal of the discontinued
operations of $298,628 net of income taxes of $116,000.
  In
connection with the sale of ADCO, we recorded a note receivable of
$50,000.  We and the buyer are currently in dispute over certain
assets and liabilities that were included in the ADCO sale, and the
note receivable has not been paid.  As of December 31, 2008, we are
unable to determine the final outcome of this dispute, but it may result in an
additional loss on the disposal of discontinued operations.
  Liquidity and Capital
Resources
  As of
December 31, 2008, we had $0.5 million of cash as compared to $0.1 million at
June 30, 2008, primarily as a result of the proceeds from the sale of
Topsfield.  Our primary source of liquidity is cash provided by
operations; and our principal uses of cash are operating expenses, acquisitions,
capital expenditures, and repayments of debt.
  Net Cash Provided by Operating
Activities from Continuing Operations.  Net cash provided by
operating activities from continuing operations was $0.1 million for the six
months ended December 31, 2008, and consisted of our net loss adjusted for
non-cash items of $0.4 million (including depreciation of $0.2 million,
amortization and stock-based compensation expense of $0.1 million and deferred
income taxes of $0.1 million) and net cash used from changes in working capital
of $0.2 million.  The net cash used from changes in working capital
was principally the result of an increase in inventories and accounts receivable
partially offset by an increase in accounts payable.    The
increase in inventories was primarily the result of new pharmacy locations and
the increase in accounts receivable and accounts payable was due to the increase
in sales.
  - 18
-
  Net Cash Used in Investing Activities
from Continuing Operations.  Net cash used in investing
activities from continuing operations was $0.2 million for the six months ended
December 31, 2008, and consisted of the purchase of equipment primarily due to
the new pharmacy locations, the purchase of two new delivery trucks to meet the
requirements of an increased delivery radius necessitated by one of our assisted
living facility contracts, and the upgrade of some of our existing information
technology equipment.
  Net Cash Used in Financing Activities
from Continuing Operations.  Net cash used in financing
activities was $0.1 million for the six months ended December 31, 2008, and
consisted of long-term debt repayments.
  We
recognized a net operating loss of $121,801 and net income of $39,872 for the
three and six months ended December 31, 2008.  Although it is our
intention is to generate an operating profit in the future, there can be no
assurance that we will not generate a net operating loss.  We believe
that we have adequate resources to fund our operations for at least the next 12
months.
  Contractual
Obligations
  Asset security
interest.  The pharmacy has an agreement with its major
supplier to purchase pharmaceuticals.  This agreement terminates
January 31, 2012.  Payment for merchandise delivered is secured by a
first primary interest in all assets of D.A.W.
  Line of
Credit.  ADCO has a $300,000 line of credit, which is
collateralized by the building and land owned by ADCO and guaranteed by
us.  The interest rate for the line of credit is the Wall Street
Journal Prime rate; and repayment of the line of credit is in monthly payments
of interest only, with the principal being due at maturity, unless
renewed.  The line of credit will expire on March 1, 2009; and we are
currently in the process of renewing it.  As of December 31, 2008, we
have $300,000 of outstanding borrowings on the line of credit.  The
line of credit is classified in the liabilities to be disposed of from
discontinued operations on our balance sheet.
  We do not
have any interest-bearing investments. The difference between the carrying
amount and fair value of our long-term debt was immaterial as of December 31,
2008.
  Item
4A(T).  Controls and
Procedures
  Evaluation
of Disclosure Controls and Procedures.
  We maintain a system of disclosure
controls and procedures that are designed for the purposes of ensuring that
information required to be disclosed in our SEC reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required
disclosures.
  - 19
-
  As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and acting Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based on that evaluation, our Chief Executive Officer and acting Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.
  Changes
in Internal Control over Financial Reporting.
  There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2008, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  PART
II - Other Information
  Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
  ISSUER
PURCHASES OF EQUITY SHARES
  For the Period Ended
                    (2008)
                  
                  Total Number of
                    Shares
                    Purchased
                  
                  
                  Average
                    Price Paid
                    Per Share
                  
                  
                  Total Number of
                    Shares Purchased
                    as Part of
                    Publicly
                    Announced Plans
                    or Programs
                  
                  
                  Maximum
                    Number (or
                    Approximate
                    Dollar Value) of
                    Shares that May
                    Yet Be Purchased
                    Under the Plans
                    or Programs
                    (shares)July
      1-31
                  
                  
                  0
                  
                  
                  $
                  -
                  
                  
                  
                  0
                  
                  
                  
                  148,000August
      1-31
                  
                  
                  0
                  
                  
                  $
                  -
                  
                  
                  
                  0
                  
                  
                  
                  148,000September
      1-30
                  
                  
                  0
                  
                  
                  $
                  -
                  
                  
                  
                  0
                  
                  
                  
                  148,000
 
 On May
12, 2003, we announced that the Board of Directors of the Company had authorized
the repurchase of up to 150,000 shares of the Company’s outstanding common stock
from time-to-time in open market transactions at prevailing market prices. There
was no expiration date established for this repurchase plan.  As of
the date of this report, the plan has not been terminated.
  - 20
-
  Item
6.  Exhibits
  Exhibit
      10.1
                    Asset
      Purchase and Sale Agreement, dated December 9, 2008, between D.A.W., Inc.,
      and CVS Pharmacy LLC (incorporated by reference from the Company’s Current
      Report on Form 8-K filed on December 15, 2008).Exhibit
      10.2
                    Form
      of Stockholder Guaranty by Nyer Medical Group, Inc., to CVS Pharmacy LLC
      (incorporated by reference from the Company’s Current Report on Form 8-K
      filed on December 15, 2008).Exhibit
      31.1
                    Certification
      Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act
      of 1934 by President, Chief Executive Officer and acting Principal
      Financial Officer (filed herewith).Exhibit
      32.1
                    Certification
      Pursuant to 18 U.S.C. Section 1350 by President, Chief Executive
      Officer  and acting Principal Financial Officer (furnished
      herewith).
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  NYER
      MEDICAL GROUP, INC.
                              RegistrantBy:
                            /s/ Mark
      DumouchelName:
                            Mark
      DumouchelTitle:
                            President
      and Chief
                              Executive
      Officer
                              (Principal
      Executive Officer
                              and
      acting Principal Financial
                              Officer)
 Date:  February
17, 2009
  - 21
-