U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934.

For the quarterly period ended  December 31, 2000

                                       OR

[   ] 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 000-26749

                   NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
             (Exact name of Registrant as Specified in Its Charter)

         New York                         11-2581812

(State or Other Jurisdiction of     (IRS Employer Identification No.)
Incorporation or Organization)


26 Harbor Park Drive, Port Washington, NY         11050
(Address of Principal Executive Offices)        (Zip Code)

Registrant's Telephone Number, Including Area Code (516) 626-0007

Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.

     Indicate  by check  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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes     No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     The  number of shares  outstanding  of the  issuer's  Common  Stock,  as of
February 8, 2001 was 7,121,496 shares.


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                                        INDEX

                                                                            Page

PART I        -   FINANCIAL INFORMATION

ITEM 1        -   CONDENSED FINANCIAL STATEMENTS:                             3

                  CONSOLIDATED BALANCE SHEETS as of June 30, 2000             3
                  and December 31, 2000 (unaudited)

                  CONSOLIDATED STATEMENTS OF INCOME (unaudited)               4
                  for the three months and six months ended
                  December 31, 1999 and 2000

                  CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)           5
                  for the six months ended December 31, 1999 and 2000

                  CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        6

ITEM 2        -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL          16
                  CONDITION AND RESULTS OF OPERATIONS

ITEM 3        -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT             22
                  MARKET RISK

PART II       -   OTHER INFORMATION                                          23

ITEM 1        -   LEGAL PROCEEDINGS                                          23

ITEM 2        -   CHANGES IN SECURITIES AND USE OF PROCEEDS                  24

ITEM 3        -   DEFAULTS UPON SENIOR SECURITIES                            25

ITEM 4        -   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS        25

ITEM 5        -   OTHER INFORMATION                                          25

ITEM 6        -   EXHIBITS AND REPORTS ON FORM 8-K                           26




<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM I - CONDENSED FINANCIAL STATEMENTS

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                                                                    <C>                  <C>
                                                                                       June 30              December 31
ASSETS                                                                                   2000                   2000
                                                                                         ----                   ----
CURRENT:                                                                                                    (Unaudited)

  Cash and cash equivalents (including cash equivalent investments of $11,181,583      $ 15,724,730         $ 10,255,037
     and $5,095,282 and cash restricted as to its use of $1,130,000 and $1,994,508)
  Accounts receivable, less allowance for possible losses of $726,551                    13,409,219           26,090,913
     and $1,100,589
  Rebates receivable                                                                      3,685,576            6,618,538
  Due from affiliates                                                                       903,958              407,812
  Deferred income tax                                                                       409,000              521,753
  Other current assets                                                                      268,651              771,115
                                                                                         ----------           ----------
TOTAL CURRENT ASSETS                                                                     34,401,134           44,665,168

  Property, equipment and software development costs, net                                 6,424,170            7,151,265
  Due from affiliates                                                                     3,486,996            4,139,346
  Goodwill, net of accumulated amortization of $134,831                                         ---            5,908,238
  Other Assets                                                                               51,318               54,219
                                                                                         ----------           ----------
                                                                                       $ 44,363,618          $61,918,236
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:

  Accounts payable and accrued expenses                                                $ 27,430,684          $42,893,361
  Current portion of capital lease obligations                                              456,437              460,907
  Loans payable-current                                                                         ---              381,473
  Due to officer/stockholder                                                                 60,000              294,130
  Due to affiliates                                                                         311,767              149,144
  Income taxes payable                                                                       11,991                  ---
  Other current liabilities                                                                 100,036              353,018
                                                                                         ----------           ----------
TOTAL CURRENT LIABILITIES                                                                28,370,915           44,532,033

  Capital lease obligations, less current portion                                         1,875,444            1,665.989
  Loans payable-long term                                                                       ---               61,018
  Deferred tax liability                                                                    692,000              891,386
                                                                                         ----------           ----------
TOTAL LIABILITIES                                                                        30,938,359           47,150,426

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:

  Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding                ---                  ---
  Common Stock, $.001 par value, 25,000,000 shares authorized,  6,912,496 and                 6,913                7,313
     7,312,496 shares issued 6,721,496 and 7,121,496 outstanding
  Additional paid-in-capital                                                             12,405,010           13,254,530
  Retained earnings                                                                       2,096,203            2,562,484
  Treasury stock at cost, 191,000 shares                                                   (743,767)            (743,767)
  Notes receivable - stockholders                                                          (339,100)            (312,750)
                                                                                         ----------            ----------
TOTAL STOCKHOLDERS' EQUITY                                                               13,425,259           14,767,810
                                                                                         ----------           ----------
                                                                                       $ 44,363,618          $61,918,236
                                                                                         ----------           ----------

           SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

</TABLE>
<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)

<TABLE>
<S>                                                     <C>                <C>                   <C>                   <C>

                                                                 Three months ended                        Six months ended
                                                                     December 31                              December 31
                                                             1999                2000                   1999                2000
                                                             ----                ----                   ----                ----

Revenues                                                 $45,746,710       $65,593,602           $ 85,273,760          $122,601,808
Cost of claims                                            42,564,492        60,936,778             78,741,665           113,347,869
                                                          ----------        ----------             ----------           -----------
Gross Profit                                               3,182,218         4,656,824              6,532,095             9,253,939

Selling, general and administrative expenses*              2,558,916         4,421,899              5,132,406             8,725,324
                                                           ---------         ---------              ---------             ---------
Operating income                                             623,302           234,925              1,399,689               528,615

Other income, net                                            269,081           205,026                488,704               418,666
                                                             -------           -------                -------               -------
Income before income taxes                                   892,383           439,951              1,888,393               947,281

Provision for income taxes                                   360,772           215,000                803,000               481,000
                                                             -------           -------                -------               -------
Net Income                                                 $ 531,611          $ 224,951            $ 1,085,393            $ 466,281
                                                           ---------          ---------            -----------              -------

Earnings per common share:
    Basic                                                     $ 0.08             $ 0.03                 $ 0.16               $ 0.07
    Diluted                                                   $ 0.08             $ 0.03                 $ 0.16               $ 0.07

Weighted average number of common shares outstanding:
    Basic                                                   6,912,496         7,121,496              6,634,235            7,080,192
    Diluted                                                 6,912,496         7,121,496              6,634,235            7,080,192

* Includes amounts charged by affiliates aggregating:       $ 622,262         $ 824,496             $1,298,244          $ 1,783,795
                                                            ---------         ---------             ----------          -----------


           SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

</TABLE>
<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<S>                                                                             <C>                    <C>
                                                                                        Six months ended
                                                                                           December 31
                                                                                      1999               2000
                                                                                      ----               ----
CASH FLOWS FROM OPERATING ACTIVITIES:

OPERATING ACTIVITIES:
   Net income                                                                   $  1,085,393           $ 466,281
   Depreciation and amortization                                                     535,422           1,161,832
   Bad debt expense and allowance for possible losses                                    ---             251,990
   Compensation expense accrued to officer/stockholder                                30,000             234,130
   Deferred income taxes                                                             741,000             153,351
   Interest accrued on stockholders' loans                                            (6,375)            (12,750)
   CHANGES IN ASSETS AND LIABILITIES:
      (Increase) decrease in:
         Accounts receivable                                                        (832,888)         (8,832,396)
         Other current assets                                                       (377,824)           (359,291)
         Rebates receivable                                                         (443,087)           (761,595)
         Due to/from affiliates                                                       64,157            (318,827)
         Other assets                                                                    ---              44,878
      Increase (decrease) in:
         Accounts payable and accrued expenses                                    (1,509,262)          8,687,314
         Income taxes payable                                                       (704,489)            (86,827)
         Other liabilities                                                            31,490               5,262
                                                                                  ----------             -------
Net cash provided by (used in) operating activities                               (1,386,463)            633,352
                                                                                  -----------            -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                           (1,173,816)         (1,450,567)
   Acquisition of PAI, net of cash and cash equivalents                                  ---          (4,487,006)
   Repayment of note by stockholder                                                1,036,125                 ---
   Interest received on notes from stockholders                                          ---              39,100
                                                                                   ---------          ----------
Net cash used in investing activities                                               (137,691)         (5,898,473)
                                                                                   ---------          ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Sale of common stock- net                                                       9,538,037                 ---
   Repayment of debt and capital lease obligations                                    (5,808)           (204,571)
                                                                                   ---------            ---------
Net cash provided by (used in) financing activities                                9,532,229            (204,571)
                                                                                   ---------            ---------

Net increase (decrease) in cash and cash equivalents                               8,008,075          (5,469,693)
Cash and cash equivalents, beginning of period                                     2,815,863          15,724,730
                                                                                  ----------          ----------
Cash and cash equivalents, end of period                                        $ 10,823,938         $10,255,037
                                                                                  ----------          ----------


           SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

</TABLE>
<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.       BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of National
Medical  Health  Card  Systems,  Inc.  (the  "Company")  and  its  wholly  owned
subsidiaries,  Pharmacy Associates,  Inc. ("PAI"),  National Medical Health Card
IPA, Inc. ("IPA") and Specialty  Pharmacy Care, Inc.  ("Specialty").  Unless the
context  otherwise  requires,  references  herein to the "Company"  refer to the
Company and its subsidiaries,  PAI, IPA and Specialty,  on a consolidated basis.
The results of  operations  and balance  sheet of PAI have been  included in the
consolidation  as of July 20, 2000, the effective date that the Company acquired
PAI. All material intercompany balances and transactions have been eliminated in
the consolidation.

The accompanying  unaudited consolidated financial statements have been prepared
by the Company in accordance with generally accepted  accounting  principles for
interim  financial  information and  substantially in the form prescribed by the
Securities and Exchange  Commission in  instructions to Form 10-Q and Article 10
of Regulation S-X.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of the Company's management,  the December
31,  2000  and  1999  unaudited   interim  financial   statements   include  all
adjustments,  consisting of normal recurring  adjustments,  necessary for a fair
presentation  of  results  for these  interim  periods.  In the  opinion  of the
Company's  management,  the disclosures contained in this Form 10-Q are adequate
to make the information  presented not misleading when read in conjunction  with
the Notes to Consolidated  Financial  Statements  included in the Company's Form
10-K,  as amended,  for the year ended June 30, 2000.  The results of operations
for the three and six month period ended  December 31, 2000 are not  necessarily
indicative  of the  results to be  expected  for the full year or for any future
period.

Certain  amounts in the prior  period have been  reclassified  to conform to the
current period presentation.

2.       BUSINESS ACQUISITIONS

Pursuant to the terms of the  Agreement  and Plan of Merger  between the Company
and PAI, dated July 20, 2000 (the "PAI Agreement"),  the Company acquired PAI, a
regional   prescription   benefit  management  company  operating  in  Arkansas,
Louisiana,   and  Mississippi.   Under  the  terms  of  the  merger   agreement,
stockholders  of PAI  received  an  aggregate  of $6 million in cash and 400,000
shares of the  Company's  Common  Stock,  which was  valued at  $849,920  on the
acquisition date. The acquisition was accounted for under the purchase method of
accounting and the results of PAI's operations were included in the consolidated
financial  statements  commencing with the  acquisition  date. The excess of the
acquisition  costs over the fair value of identifiable  net assets acquired were
$6,218,469,   which   consists  of  the  following   components:   (i)  customer
relationships  valued at  $131,000  which will be  amortized  entirely  over the
current  year,  (ii)  non-compete  contracts  valued at  $44,400  which  will be
amortized over five (5) years,  and (iii)  goodwill of $6,043,069  which will be
amortized over twenty (20) years. PAI  stockholders may also receive  additional
consideration  of up to $2 million  payable in a combination  of cash and Common
Stock over a two-year period if certain financial targets of PAI are met.

The Company  entered into an employment  agreement and a Stock Option  Agreement
with the former president of PAI. In addition,  substantially  all of the former
employees of PAI were hired by the Company.

The Company  assumed all the assets and liabilities of PAI, as of July 20, 2000,
including two outstanding  loans as follows:  (i) a note payable to Regions Bank
with a  principal  balance as of  December  31,  2000 of  $84,537.  Such note is
payable in monthly  installments in the amount of $2,432,  including interest at
the rate of 7.75% and  principal  through  July 2004.  Repayment of such note is
currently  secured by a lien on and a security  interest in an  automobile;  and
(ii) a loan representing  prepaid rebates from its rebate  administrator  with a
principal balance as of December 31, 2000 of $357,954,  payable with interest at
the rate of 8.5% in four quarterly payments of $94,261  commencing  December 31,
2000 and ending September 30, 2001.

The summarized unaudited pro forma results of operations set forth below for the
three and six months  ended  December  31, 1999 and December 31, 2000 assume the
PAI acquisition had occurred as of the beginning of each of these periods.

                                                  Three Months Ended December 31
                                                     1999              2000
                                                     ----              ----

Revenues                                         $59,378,708       $65,593,602
Net income                                       $   298,318       $   224,950
Net income per common share:
   Basic                                         $      0.04       $      0.03
   Diluted                                       $      0.04       $      0.03
Pro forma weighted average number of
common shares outstanding:
   Basic                                           7,312,496         7,121,496
   Diluted                                         7,312,496         7,121,496


<PAGE>


                                                  Six Months Ended December 31
                                                     1999              2000
                                                     ----              ----

Revenues                                         $113,872,818      $126,033,207
Net income                                       $    897,126      $    505,749
Net income per common share:
   Basic                                         $       0.13      $       0.07
   Diluted                                       $       0.13      $       0.07
Pro forma weighted average number of
common shares outstanding:
   Basic                                            7,034,235         7,080,192
   Diluted                                          7,034,235         7,080,192

Pro forma adjusted net income per common share, including acquisitions,  may not
be indicative of actual results,  primarily  because pro forma earnings  include
historical  results of operations of the acquired  entity and do not reflect any
cost  savings or  potential  sales  erosion  that may result from the  Company's
integration efforts.

3.         PUBLIC OFFERING

The registration statement for the Company's Public Offering became effective on
July 28,  1999 ("the  Public  Offering").  The  Company  consummated  the Public
Offering  on August 2, 1999 and issued  1,600,000  shares of common  stock at an
offering price of $7.50 per share.  The Company granted the  underwriters of the
Public Offering, for nominal consideration,  warrants to purchase 200,000 shares
of Common Stock at $9.00 per share.  The warrants are exercisable for four years
commencing  on July 29, 2000.  In  addition,  the  underwriters  were granted an
overallotment  option by the  Company to buy 300,000  shares of common  stock at
$7.50 per share  exercisable  by September 11, 1999.  The  underwriters  did not
exercise this option.  Concurrently with the Public Offering,  Mr. Brodsky,  the
Company's  Chairman of the Board of Directors and Chief Executive  Officer ("Mr.
Brodsky"),  sold  400,000  shares of Common Stock from his holdings at $7.50 per
share. The Company received proceeds of $12,883,100 representing payment for the
sale of the  1,600,000  shares,  plus 73% of the  proceeds  from the sale of the
400,000 shares by Mr. Brodsky for repayment of $1,992,900 of  indebtedness  owed
by Mr.  Brodsky  and  affiliates  to the  Company.  Such  proceeds  were  net of
underwriting discounts and commissions,  a non-accountable expense allowance and
a financial advisory fee paid to the underwriters plus certain fees and expenses
paid by the Company.

4.      STOCK OPTIONS

During the six months ended  December  31,  2000,  the total number of incentive
options granted under the 1999 Stock Option Plan (the "Plan"),  net of incentive
options  forfeited during the same period,  was 68,060.  40,000 of these options
are  exercisable  at $4.00 per share over a five-year  period  starting one year
from the date of grant,  and  terminate  after six years.  The  balance of these
options are  exercisable  at $7.50 per share and vest over a  three-year  period
commencing upon the completion of one year of employment  with the Company,  and
terminate  after five  years.  During  this  period  the  Company  also  granted
nonstatutory  options to its outside  Directors under the Plan to purchase up to
an aggregate of 40,000 shares of Common Stock at $5.00 per share.  These options
vest over a three-year  period  commencing  on the date of grant,  and terminate
after five years.  As of December 31, 2000 an  aggregate of 764,529  options had
been granted under the Plan.

5.         2000 RESTRICTED STOCK GRANT PLAN

On  October  16,  2000 the  Board of  Directors  approved  the  adoption  of the
Company's 2000 Restricted  Stock Grant Plan (the "Stock Grant Plan").  The Stock
Grant Plan was subsequently  adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000.  The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares  (e.g.,  the standard  seven year vesting  schedule set forth in the
Stock  Grant  Plan) and /or  restrictions  that the Board  may  impose,  such as
restrictions  relating to length of  service,  corporate  performance,  or other
restrictions.  As of  December  31, 2000 no grants had been made under the Stock
Grant Plan and,  therefore,  no shares had vested  under it.  There are  700,000
shares of Common  Stock  reserved for  issuance in  connection  with grants made
under the Stock Grant Plan.

6.       EARNINGS PER SHARE

Outstanding  options and warrants  issued by the Company are  excluded  from the
calculation  of diluted  earnings  per share for the three and six months  ended
December 31, 1999 and 2000 as their effect is antidilutive.

7.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

                                           June 30              December 31
                                           2000                       2000
                                           ----                       ----
     Claims payable                        $22,571,928          $35,370,515
     Rebates payable to sponsors             3,565,258            4,944,815
     Other payables                          1,293,498            2,578,031
                                         -------------        -------------
                                           $27,430,684          $42,893,361

8.       RELATED PARTY TRANSACTIONS

Certain costs paid to affiliates were capitalized as software development costs.
For the six months ended December 31, 2000, the amount charged by affiliates and
capitalized was approximately $336,000.

The Company  purchased  computer  equipment  and  furniture and fixtures from an
affiliate  during the six  months  ended  December  31,  2000 for  approximately
$354,000.  The  price of some of these  assets  included  a 20%  purchasing  and
handling fee.

For the periods  presented,  certain general,  administrative and other expenses
reflected in the financial  statements include  allocations of certain corporate
expenses from affiliates which take into consideration  personnel,  estimates of
the time spent to provide services or other appropriate bases. These allocations
include  services  and  expenses  for general  management,  information  systems
maintenance,  financial  consulting,  employee benefits  administration,  legal,
communications and other miscellaneous services.

Management  believes the foregoing  allocations were made on a reasonable basis.
Although these  allocations do not  necessarily  represent the costs which would
have been or may be incurred by the Company on a stand-alone  basis,  management
believes that any variance in costs would not be material.

General and  administrative  expenses  related to  transactions  with affiliates
included in the statement of income are:

                                                  Three months ended December 31
                                                        1999        2000
                                                        ----        ----

Software maintenance and related services             $    230,252  $   224,413
Management and consulting fees                             215,834      288,227
Administrative and bookkeeping services and supplies        83,176      160,731
Rent and utilities                                          93,000      151,125
                                                      ------------- -----------
                                                      $    622,262  $   824,496

                                                  Six months ended December 31
                                                      1999        2000
                                                      ----        ----

Software maintenance and related services             $    457,000  $   560,305
Management and consulting fees                             524,644      594,849
Administrative and bookkeeping services and supplies       130,600      367,641
Rent and utilities                                         186,000      261,000
                                                     -------------  -----------
                                                      $ 1,298,244   $ 1,783,795

The  Company  has  accrued  approximately   $190,000  of  interest  income  from
affiliates,  arising from two loans, for the six months ended December 31, 2000.
This  compares to  approximately  $30,000 for the six months ended  December 31,
1999. As of December 31, 2000, the Company received cash of $23,750 against this
accrual.  The two loans are as follows:  (i) As of December 31,  2000,  Sandata,
Inc., a corporation of which Mr. Brodsky is the Chairman of the Board, Treasurer
and a principal stockholder ("Sandata"), owed the Company $507,812 pursuant to a
promissory  note dated May 31, 2000, made payable by Sandata to the order of the
Company in the original  principal  amount of $500,000 plus interest at the rate
of 9-1/2%;  interest on such note is payable quarterly,  and such note which was
originally  due on June 1, 2001,  is now due on March 31, 2002.  (ii) On June 1,
1998,  the Company  assigned  certain  indebtedness  aggregating  $1,636,785  in
principal  and accrued  interest,  if any,  from certain  persons and  entities,
including  Mr.  Brodsky,  to P.W.  Capital,  LLC  ("P.W.  Capital"),  a  company
affiliated  with Mr.  Brodsky.  On June 1, 1998 P.W.  Capital  executed a demand
promissory note made payable to the order of the Company in the principal amount
of $4,254,785  with interest at the rate of 8.5% per annum,  payable  quarterly,
such amount  reflecting the assigned debt and amounts then owed by P.W.  Capital
to the Company. On June 1, 1998, Mr. Brodsky executed an unconditional  guaranty
in favor of the  Company  for the full and prompt  payment to the Company of all
amounts payable under the P.W. Capital  promissory note dated June 1, 1998. Such
note was  secured by  1,022,758  shares of Common  Stock of the  Company  and is
without recourse to the maker.  Such note was restructured by a new non-recourse
promissory note dated July 31, 2000,  made payable by P.W.  Capital to the order
of the  Company  in the  amount of  $3,890,940.  Such note is  payable in annual
installments  of $400,000  consisting  of principal  and interest at the rate of
8-1/2% per annum on each of the first and  second  anniversary  dates,  with the
total  remaining  balance of principal  and interest due and payable on July 31,
2003.  The note is  collateralized  by  1,000,000  shares of Common Stock of the
Company.

The Company occupies approximately 14,600 square feet of space at 26 Harbor Park
Drive,  Port  Washington,  New York under an amended  lease at a monthly cost of
$38,999 (including  utilities).  The lessor is BFS Realty, LLC ("BFS"), which is
affiliated with Mr. Brodsky.  The lease expires as of March 30, 2004. Rent under
the lease increases by 5% annually. The BFS lease was assigned by Sandata to BFS
in November 1996. Mr. Brodsky is the Operating  Manager and holder of a majority
of the membership  interests of BFS. The Company  believes that the terms of the
lease are as fair to it as those which could be  obtained  from an  unaffiliated
third party,  although no independent fee quotes have been obtained.  During the
fiscal years ended June 30 1999 and 2000,  the Company  paid another  affiliated
party  approximately  $15,833 and  $10,200,  respectively,  in  connection  with
improvements  to the  building  in which  the  Company's  offices  are  located.
Furthermore,  in October,  2000 an oral agreement was reached among BFS, Sandata
and the  Company  as to a  reallocation  of the common  space at 26 Harbor  Park
Drive,  which resulted in an increase of $6,400 per month in the rent payable by
the Company.  This  increase was  retroactive  to June 1, 2000,  resulting in an
aggregate  increase,  over the term of the  lease,  of  $294,000.  Sandata  also
occupies space at 26 Harbor Park Drive. Except for certain common areas, Sandata
and the Company do not share space in such facility.


<PAGE>


9.       MAJOR CUSTOMERS AND PHARMACIES

For the three months ended December 31, 1999,  approximately  49% of revenues of
the  Company  were from three  plan  sponsors,  two of which were  administering
multiple plans. For the three months ended December 31, 2000,  approximately 18%
of  the  consolidated  revenues  of the  Company  were  from  one  plan  sponsor
administering  multiple  plans.  For the six months  ended  December  31,  1999,
approximately  51% of the revenues were from three plan  sponsors,  two of which
were administering  multiple plans, while 18% of the revenues for the six months
ended December 31, 2000 were from one plan sponsor administering multiple plans.
Amounts due from this sponsor at December 31, 2000 approximated $3,943,000.

During the six months ended December 31, 2000, the Company  settled certain fees
due from a major sponsor  related to a capitation  arrangement for calendar year
1999,  which reduced  revenue by $733,000.  The calendar year 2000 contract with
this sponsor is no longer a capitation arrangement.

For the three months ended December 31, 1999 and 2000, approximately 42% and 32%
of the cost of claims were from two pharmacy chains,  respectively.  For the six
months ended December 31, 1999 and 2000,  approximately  42% and 33% of the cost
of claims were from these same two pharmacy chains. Amounts payable to these two
pharmacy chains at December 31, 2000 were approximately $11,241,000.

10.      LITIGATION

On February 9, 1999, the Company was informed by counsel that an action had been
commenced  against the  Company on  December  8, 1998 by the West  Contra  Costa
Unified School District (the "School  District") and an individual  plaintiff in
the State of California.  The case was subsequently removed to the U.S. District
Court for the Northern  District of  California.  The complaint  alleges,  among
other  things,  that the parties  entered into a contract  beginning in November
1996, for services to be provided by the Company and, subsequently,  the Company
unilaterally terminated the contract on December 16, 1996. The complaint further
alleges that this  termination was in violation of the terms of the contract and
one or more statutory  provisions;  that the termination  resulted in the School
District incurring  approximately $150,000 in additional costs due to its having
to  enter  into a  fee-for-service  arrangement  with  the  Company  in order to
continue providing  prescription  benefits to its plan members; and that, due to
the wrongful  termination  of the  contract,  the School  District was forced to
secure a  replacement  for the benefits and the services  that were to have been
provided  under the contract  with the  Company.  In  connection  with this last
circumstance,  plaintiffs allege that the School District incurred approximately
$867,000 in  additional  expenses to obtain  coverage  from  December 1996 until
October 1997.  The complaint also seeks treble  damages.  If treble damages were
allowable  in this case and a judgment  were to be entered  against the Company,
the  Company  would be liable for  damages in excess of  $1,500,000.  The School
District is also seeking  attorneys' fees; costs,  interest to date and punitive
damages.  The  Company is  currently  in the  process of  assessing  plaintiffs'
alleged  damages  based upon  documents  produced in the  discovery  phase.  The
Company has decided to postpone the deposition and the dispositive motion it has
been contemplating.  On November 8, 2000, the court set a trial date of June 18,
2001. The Company denies the allegations  and intends to vigorously  defend this
action.  In the opinion of management,  the outcome of this  litigation will not
have a  material  adverse  effect on the  Company's  financial  position  or its
results of operations.

On October 23,  2000,  the Company was served with a complaint  filed by Allcare
Health Management Systems,  Inc. ("Allcare") in the United States District Court
for the Northern District of Texas, alleging that the Company and numerous other
defendants  infringe  certain  patent  rights  allegedly  owned by Allcare.  The
complaint seeks unspecified  damages and injunctive  relief.  The Company denies
such allegations and intends to vigorously defend the action.

Allcare has settled with numerous  defendants in a previous related  litigation.
The Company is presently  licensing its product (the  "License")  from a company
that was a defendant in the previous  related  litigation and which settled with
Allcare.  As far as the  Company's  use of any  product of the  defendant  which
settled is concerned, Allcare does not allege that the Company is infringing its
patent.  The Company believes that its liability with respect to activities that
are based  exclusively  on the  License is  minimal.  The  Company's  management
believes  that during a portion of the relevant time period,  the  activities of
the  Company  that are  under  consideration  were  based  exclusively  upon the
License. However, Allcare alleges infringement both with respect to systems used
by the  Company  which are not  under the  License,  and for  activities  of the
Company prior to its obtaining the License.

Notwithstanding  the foregoing,  because of the uncertainties of litigation,  no
assurances  can be given as to the  outcome of the  Allcare  litigation.  In the
event that the Company were not to prevail in this litigation, the Company could
be required  to pay  significant  damages to Allcare and could be enjoined  from
further use of its  technology.  A negative  outcome in the  Allcare  litigation
could  have a  material  adverse  effect on the  Company's  business,  operating
results  and  financial  condition.  If it is held  that  the  Company's  system
infringes  Allcare's patent rights, the Company would attempt to obtain software
to replace the  infringing  system or would attempt to negotiate with Allcare to
utilize its system,  although no assurances  can be given that the Company would
be successful  in either of these  attempts.  At the present  time,  the Company
cannot assess the cost of designing and  implementing a new system,  obtaining a
replacement system, or obtaining rights from Allcare.

11.      RECENTLY ISSUED ACCOUNTING STANDARDS

In December 1999, the  Securities and Exchange  Commission  ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial  Statements." In June
2000, the SEC delayed the required  implementation date to the fourth quarter of
fiscal years  beginning after December 15, 1999. The Company does not expect the
implementation of SAB 101 to have a material effect on its results of operations
and financial position.

12.      SUPPLEMENTAL CASH FLOW INFORMATION

During the six months ended December 31, 1999 and December 31, 2000, the Company
paid $2,062 and $122,570 in interest and $228,000 and $414,363 in income  taxes,
respectively.  In a non-cash  transaction,  the Company issued 400,000 shares of
its Common Stock valued at $849,920 as part of the acquisition of PAI.

13.      SUBSEQUENT EVENTS

The Company and a certain  prescription  benefit  management company (the "PBM")
have signed a letter of intent outlining the terms pursuant to which the Company
intends  to  acquire  substantially  all  of  the  assets,  and  certain  of the
liabilities,  of the PBM.  The  acquisition,  is subject  to  certain  customary
closing  conditions,  including the delivery of audited financial  statements of
the PBM to the Company.

Under the terms of the  agreement  contemplated  by the  letter of  intent,  the
purchase price will consist of (i) $5,500,000 in cash, (ii)  satisfaction by the
Company of the PBM's bank  indebtedness of approximately  $1,300,000,  and (iii)
forgiveness  of  $600,000  of  accounts  receivable  owed to the PBM by  parties
related to the PBM by common  ownership.  The  definitive  agreement will likely
provide that the cash portion of the purchase  price may be increased if certain
pre-determined  criteria or  conditions  are met. In  addition,  the Company has
loaned  $1,500,000  to the  PBM,  which  will be  applied  against  the  initial
consideration  upon closing.  The loan accrues  interest at 12% per annum and is
guaranteed by certain of the PBM's equity  owners,  including the majority owner
of the PBM, and by another entity,  which is also majority-owned by the owner of
the PBM. The letter of intent  provides  that the agreement may be terminated if
the acquisition is not consummated by March 15, 2001.

On January  20,  2001,  the  Company  submitted  to the  Florida  Department  of
Insurance a Proof of Claim in the amount of $1,231,244.12, for services rendered
to SunStar Healthcare, Inc. ("SunStar"). SunStar has been placed in receivership
under the  Florida  Department  of  Insurance.  For further  details  concerning
SunStar's receivership and the relationship between SunStar and the Company, see
the  Section  entitled   "SunStar   Healthcare,   Inc.",  in  Item  13  (Certain
Relationships  and Related  Transactions) of the Company's Annual Report on Form
10-K,  as amended,  for the fiscal year ended June 30,  2000,  which  section is
hereby incorporated by reference.

On January 11, 2001, Mary T. Casale,  a former employee of the Company,  filed a
Charge of  Discrimination  against the Company with the New York District Office
of the  U.S.  Equal  Employment  Opportunity  Commission  ("EEOC").  Ms.  Casale
alleges, among other things, that she was constructively  discharged as a result
of  discriminatory  age and  gender  practices,  and that she was  subjected  to
repeated  discriminatory  comments regarding her age and gender. By letter dated
January 24, 2001, the EEOC has prepared a fact-finding  conference,  after which
the Company may submit a position  statement.  The Company  believes that it has
not violated any employment discrimination laws, and that if it is found to have
violated any such laws, a significant  portion (if not all) of its liability for
any such violation will be covered by its employment-related practices liability
insurance.


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1999

Revenues  increased $19.8 million,  or approximately 43%, from $45.8 million for
the three months ended  December 31, 1999, to $65.6 million for the three months
ended December 31, 2000. Of the increase,  $17.0 million,  or 86% was due to the
inclusion of revenues from PAI in the quarter.  $1.0 million of the increase was
due to revenues related to new sponsors or new services offered. The majority of
the balance of the year-over-year  increase,  or $1.8 million, was due primarily
to  increased  revenues  from  other  existing  sponsors  as a result of several
factors including higher charges relating to increased cost of  pharmaceuticals,
new drugs,  plan  participant  growth,  and an increase in the average number of
claims per plan participant. One factor that diminished the increase in revenues
was a net  reduction  in  revenues  of $683,000  during the three  months  ended
December 31, 2000.  This reduction  arose when the Company  settled certain fees
due from a major sponsor  related to a capitation  arrangement for calendar year
1999.  The  calendar  year  2000  contract  with  this  sponsor  is no  longer a
capitation arrangement.

Cost of claims increased $18.4 million, or approximately 43%, from $42.5 million
for the three months ended  December  31, 1999,  to $60.9  million for the three
months ended December 31, 2000.  PAI accounted for $15.5 million,  or 84% of the
increase.  As a percentage of revenues,  cost of claims decreased from 93.0 % to
92.9% for the three  months  ended  December  31, 1999 and  December  31,  2000,
respectively.  PAI  experienced  a  major  improvement  in its  cost  of  claims
resulting  from its adoption of some of the  Company's  pricing  policies.  As a
result of adopting these pricing policies,  PAI's costs as a percent of revenues
decreased to 90.8% for the three  months ended  December 31, 2000 from 96.1% for
the three months ended December 31, 1999.

Gross profit increased from $3.2 million for the three months ended December 31,
1999 to $4.7  million for the three  months  ended  December  31,  2000;  a $1.5
million  or 46%  increase.  PAI  accounted  for $1.6  million,  or 106%,  of the
increase.  Gross profit as a percentage of revenue  increased  from 7.0% to 7.1%
for  the  three  months   ended   December  31,  1999  and  December  31,  2000,
respectively.

Selling,  general, and administrative expenses, which include amounts charged by
affiliates,  increased $1.9 million or  approximately  73% from $2.5 million for
the three  months  ended  December 31, 1999 to $4.4 million for the three months
ended December 31, 2000.  $0.8 million or  approximately  42% was related to the
inclusion of PAI in the consolidated numbers. The balance of the growth in these
expenses was principally related to three areas:


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

(i) an approximate  $493,000  increase in  expenditures  related to increases in
compensation  and  benefits,   primarily  associated  with  new  employees,  and
increased  sales  and  marketing  expenditures;  (ii)  an  approximate  $356,000
increase in depreciation and amortization expenses related to increased hardware
procurement,  intangible  amortization  relating  to the  PAI  acquisition,  and
software  development;  and  (iii)  an  approximate  $155,000  increase  in data
processing charges related to increased information  technology services, as the
Company determined it should increase its reserves based on an assessment of its
receivables aging.

General   and   administrative   expenses   charged  by   affiliates   increased
approximately  $202,000 or 32% year-over-year  from $622,000 to $824,000 for the
three months ended  December 31, 1999 and December 31, 2000,  respectively.  The
majority of the increase related to increased  information  technology services,
and  additional  administrative  support  services  and  supplies to support the
continued expansion of the business.

Other income,  net,  declined by  approximately  $64,000,  or 24%, for the three
months ended  December  31, 2000 as compared to the three months ended  December
31, 1999. The reason for the decline was a $65,000  increase in interest expense
because the Company  entered into a capital lease agreement with Hewlett Packard
for computer hardware and related software that went into effect March, 2000.

Income before income taxes declined $452,000, from $892,000 to $440,000, or 51%,
for the three  months  ended  December  31, 2000 as compared to the three months
ended  December  31, 1999.  The primary  reason for the decline was the $683,000
revenue reduction  described above which had a direct negative impact on pre tax
income. EBITDA (Earnings before interest,  taxes, depreciation and amortization)
for these same periods showed a smaller decline of $32,000, or 4%, from $905,000
for the three  months  ended  December 31, 1999 to $873,000 for the three months
ended  December 31, 2000.  This was due to the inclusion of $111,000 of goodwill
amortization  related to the PAI  acquisition  in the period ended  December 31,
2000,  $29,000  of  depreciation  of  PAI's  assets,  as  well  as  $216,000  of
incremental depreciation of new assets procured during the last year.

The effective tax rate  increased  from 40% for the three months ended  December
31, 1999 to 49% for the three  months  ended  December  31,  2000.  The increase
stemmed primarily from the non-deductibility,  for tax purposes, of the goodwill
amortization related to the acquisition of PAI.

SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1999

Revenues  increased $37.3 million,  or approximately 44%, from $85.3 million for
the six months ended  December 31,  1999,  to $122.6  million for the six months
ended December 31, 2000. Of the increase,  $29.9 million,  or 80% was due to the
inclusion of revenues from PAI subsequent to July 20, 2000.  $2.1 million of the
increase was due to revenues  related to new  sponsors or new services  offered.
The majority of the balance of the year-over-year increase, or $5.3 million, was
due primarily to increased  revenues from other existing sponsors as a result of
several  factors   including  higher  charges  relating  to  increased  cost  of
pharmaceuticals,  new drugs,  plan  participant  growth,  and an increase in the
average  number of claims per plan  participant.  Both periods  were  negatively
impacted  by a net  reduction  in revenues  that arose when the Company  settled
certain fees due from a major sponsor  related to a capitation  arrangement  for
calendar  years 1997 - 1999.  The net reduction in revenues was $821,000 for the
six months  ended  December  31,  1999,  and  $733,000  for the six months ended
December  31,  2000.  The calendar  year 2000  contract  with this sponsor is no
longer a capitation arrangement.

Cost of claims increased $34.6 million, or approximately 44%, from $78.7 million
for the six months ended December 31, 1999, to $113.3 million for the six months
ended  December  31,  2000.  PAI  accounted  for  $27.5  million,  or 79% of the
increase.  As a percentage of revenues,  cost of claims  increased from 92.3% to
92.5%  for the six  months  ended  December  31,  1999 and  December  31,  2000,
respectively.  PAI's cost of claims  were  92.0% of  revenue  for the six months
ended  December 31, 2000.  The  percentage for the six months ended December 31,
1999 was favorably  impacted by a $736,000  reduction in rebates payable,  which
reduces cost of claims, which arose when the Company reevaluated its liabilities
to a plan sponsor.

Gross profit  increased  from $6.5 million for the six months ended December 31,
1999 to $9.2 million for the six months ended  December 31, 2000; a $2.7 million
or 42% increase. PAI accounted for $2.4 million, or 89%, of the increase.  Gross
profit as a percentage of revenue  declined from 7.7% to 7.5% for the six months
ended  December 31, 1999 and December 31, 2000,  respectively.  This decline was
due  primarily  to  the  $733,000  revenue  reduction,  and  thus  gross  profit
reduction, during the six months ended December 31, 2000.

Selling,  general, and administrative expenses, which include amounts charged by
affiliates,  increased $3.6 million or  approximately  70% from $5.1 million for
the six months ended  December 31, 1999 to $8.7 million for the six months ended
December  31,  2000.  $1.6  million  or  approximately  44% was  related  to the
inclusion of PAI in the consolidated numbers. The balance of the growth in these
expenses was principally  related to four areas:  (i) an approximate  $1,091,000
increase in  expenditures  related to increases in  compensation  and  benefits,
primarily  associated  with new  employees,  and  increased  sales and marketing
expenditures;   (ii)  an  approximate  $670,000  increase  in  depreciation  and
amortization  expenses  related to increased  hardware  procurement,  intangible
amortization relating to the PAI acquisition, and software development; (iii) an
approximate  $211,000  increase in data processing  charges related to increased
information  technology  services;  and (iv) a $115,000 increase in the bad debt
expense accrual as the Company  determined it should increase its reserves based
on an assessment of its receivables ageing.

General   and   administrative   expenses   charged  by   affiliates   increased
approximately  $486,000 or 37% year-over-year  from $1,298,000 to $1,784,000 for
the six months ended December 31, 1999 and December 31, 2000, respectively.  The
majority of the increase related to increased  information  technology services,
and  additional  administrative  support  services  and  supplies to support the
continued expansion of the business.

Other income, net, declined by approximately $70,000, or 14%, for the six months
ended  December 31, 2000 as compared to the six months ended  December 31, 1999.
The main  factor in the decline  was a $120,000  increase  in  interest  expense
because the Company  entered into a capital lease agreement with Hewlett Packard
for computer  hardware and related software that went into effect in March 2000.
The increase in interest  expense was partially  offset by a $50,000 increase in
interest income related to the inclusion of PAI.

Income before income taxes declined  $941,000,  or 50%, for the six months ended
December  31, 2000 as compared to the six months ended  December  31, 1999.  The
primary  reason for the decline was the  $733,000  revenue  reduction  described
above which had a direct  negative  impact on pre tax  income.  EBITDA for these
same periods showed a smaller  decline of $201,000,  or 11%, from $1,935,000 for
the six months ended  December 31, 1999 to  $1,734,000  for the six months ended
December  31,  2000.  This was due to the  inclusion  of  $197,000  of  goodwill
amortization  related to the PAI  acquisition  in the period ended  December 31,
2000,  $56,000  of  depreciation  of  PAI's  assets,  as  well  as  $417,000  of
incremental depreciation of new assets procured during the last year.

The effective tax rate  increased  from 42.5% for the six months ended  December
31, 1999 to 50.8% for the six months  ended  December  31,  2000.  The  increase
stemmed primarily from the non-deductibility,  for tax purposes, of the goodwill
amortization related to the PAI acquisition.

LIQUIDITY AND CAPITAL RESOURCES

The  Company's  primary  cash  requirements  are for  capital  expenditures  and
operating  expenses,  including cost of  pharmaceuticals,  software and hardware
upgrades and the funding of accounts receivable.  The Company also requires cash
for potential acquisitions of other prescription benefit management companies or
of companies  providing related  services.  As of December 31, 2000, the Company
had working capital of $133,000 as compared to $6.0 million as of June 30, 2000.
The primary  reason for this change in working  capital was the $6.0  million of
cash used as the initial consideration for the PAI acquisition.

Net cash  provided by operating  activities  was $0.6 million for the six months
ended December 31, 2000, as compared to net cash used in operating activities of
$1.4  million for the six months ended  December  31,  1999.  For the six months
ended December 31, 2000, the increase of $8.8 million in accounts receivable was
primarily  offset  by a  corresponding  increase  of $8.7  million  in  accounts
payable.  This differs  from the six months ended  December 31, 1999 where there
was an increase of $0.8  million in accounts  receivable  and a decrease of $1.5
million in accounts  payable,  as proceeds from the Public  Offering,  described
herein, were applied to existing payables. This accounts for the majority of the
difference, between the periods, in cash flow from operating activities.

Historically,  the timing of the  Company's  accounts  receivable  and  accounts
payable has generally been a net source of cash from operating activities.  This
is the result of the terms of trade in place with plan sponsors on the one hand,
and the Company's pharmacy network on the other hand. These terms generally lead
to the  Company's  payments to  participating  pharmacies  being slower than its
corresponding  collections  from plan sponsors.  The Company  believes that this
situation is not unusual in the  prescription  benefit  management  industry and
expects to operate on similar terms for the foreseeable future.  However,  there
can be no assurance that such terms of trade will continue in the future and, if
they were to change  materially,  the Company could require  additional  working
capital  financing.  There  can be no  assurance  that such  financing  could be
obtained  at rates or on terms  acceptable  to the  Company,  if at all. If such
terms of trade were to change  materially,  and/or if the Company were unable to
obtain additional working capital  financing,  there could be a material adverse
effect on the Company's business, financial condition, or results of operations.

Net cash used in investing  activities was $5.9 million for the six months ended
December 31, 2000.  The net cash outlay for PAI was $4.5  million,  representing
the initial payment of $6.0 million plus $0.2 million of related expenses,  less
PAI's cash balance at July 20, 2000 of $1.7 million. In addition, there was $1.5
million of capital asset additions during the period. Net cash used in financing
activities was $205,000 for the six months ended  December 31, 2000,  reflecting
repayments  against  capital leases.  This compares to $9.5 million  provided by
financing activities for the six months ended December 31, 1999,  reflecting the
cash received from the Public Offering described herein.

During  fiscal  year  2000,  the  Company   entered  into  three  capital  lease
transactions  for hardware and  software.  The purchase  price of these  capital
assets  was  $2,537,730.  One  hardware  lease is for a term of 57  months  with
monthly  payments of $40,322.  Another hardware lease is for a term of 60 months
with monthly  payments of $3,245.  The software lease is for a term of 33 months
with  monthly  payments  of  $13,662.  The  Company  assumed  all the assets and
liabilities  of PAI, as of July 20, 2000,  including  two  outstanding  loans as
follows:  (i) a note  payable to  Regions  Bank with a  principal  balance as of
December 31, 2000 of $84,536.  Such note is payable in monthly  installments  in
the  amount of $2,432,  including  interest  at the rate of 7.75% and  principal
through July 2004.  Repayment of such note is currently secured by a lien on and
a security  interest  in an  automobile;  and (ii) a loan  representing  prepaid
rebates from its rebate  administrator  with a principal  balance as of December
31,  2000  of  $357,954,  payable  with  interest  at the  rate  of 8.5% in four
quarterly payments of $94,261 commencing  December 31, 2000 and ending September
30, 2001.

PAI  stockholders  are  eligible  to  receive  up to  $1,000,000  in  additional
consideration  payable  in  combination  of cash and  common  stock  if  certain
financial  targets of PAI are met for the fiscal year ended June 30, 2001. Based
on performance through December 31, 2000, it is likely that most, if not all, of
these funds will be earned and will be paid following the fiscal year.

In February  1998, the Company  entered into an agreement  with an  unaffiliated
third party for  computer  software  products  and  professional  services.  The
agreement  required the Company to pay an initial  license fee. In addition,  if
certain  milestones are met based on the number of processed  claims, as defined
in the agreement, the initial license fee increases in specified increments.  To
date,  two such  milestones  have been met,  resulting  in a 75% increase in the
license fee. The  agreement  also  provides for the annual  payment of a fee for
maintenance  and updating  services equal to 18% of the initial  license fee, as
defined.  It  is  anticipated  that,  based  on  internal  growth  and  the  PAI
acquisition,  at least one additional milestone will be met during calendar year
2001. If the next milestone is reached,  the cash outlay by the Company would be
$100,000.

The Company  anticipates that current cash positions,  after the PAI acquisition
and the  repayment of certain  affiliate  and  shareholder  debt,  together with
anticipated  cash  flow from  operations,  will be  sufficient  to  satisfy  the
Company's  contemplated cash requirements for at least 24 months.  This is based
upon current levels of capital  expenditures and anticipated  operating  results
for the next 24 months.  However,  it is one of the  Company's  stated  goals to
acquire other  prescription  benefit management  companies,  as evidenced by the
letter of intent to acquire another PBM (see Footnote 13, Subsequent  Events, to
the  financial  statements  herein).  This will require  cash.  Depending on the
Company's  evaluation of future  acquisitions,  additional cash may be required.
Therefore,  the  Company  has  received  a verbal  commitment  for a  $4,000,000
revolving  credit  line for  acquisitions  from its bank.  The  Company  is also
currently  negotiating a larger amount, based on anticipated future earnings, to
meet  anticipated  future needs. In the event that the Company's plans change or
its  assumptions  prove to be  inaccurate,  or that the  bank  financing  is not
consummated,  or the proceeds of the bank financing  prove to be insufficient to
fund  operations  and  acquisitions,  the  Company  could  be  required  to seek
additional financing sooner than anticipated.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 1999, the  Securities and Exchange  Commission  ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial  Statements." In June
2000, the SEC delayed the required  implementation date to the fourth quarter of
fiscal years  beginning after December 15, 1999. The Company does not expect the
implementation of SAB 101 to have a material effect on its results of operations
and financial position.

OTHER MATTERS

NASDAQ Compliance

By letter dated December 7, 2000, NASDAQ notified the Company that the Company's
Common  Stock had failed to maintain a minimum  market  value of public float of
$5,000,000 over the preceding 30 consecutive trading days, as required by NASDAQ
rules (the "MVPF Rule"). The market value of public float ("MVPF") is the dollar
amount  determined  by  multiplying  the  closing  bid  price by the  number  of
outstanding  shares of the Company's  Common Stock excluding  shares held by the
Company's  directors,  officers  and  beneficial  owners  of 10% or  more of the
Company's shares.  The Company has until March 6, 2001 to regain compliance with
the MVPF  Rule.  If at any time  prior  to March 6,  2001,  the MVPF is at least
$5,000,000  for a minimum of 10  consecutive  trading days,  NASDAQ's staff will
determine if the Company  complies with the MVPF Rule. If the requirement is not
met by such date,  NASDAQ is required  to notify the Company  that it must begin
the process of delisting the Company's  Common Stock,  at which time the Company
will  determine  whether  to  request a hearing  on the  matter or pursue  other
options.

Inflation

Management does not believe that inflation has had a material  adverse impact on
the Company's net income.

FORWARD-LOOKING STATEMENTS

This  report  contains  or may  contain  forward-looking  statements  within the
meaning of the Securities Exchange Act of 1934, as amended, including statements
of the Company's and management's expectations,  intentions,  plans and beliefs,
including those contained in or implied by "Management's Discussion and Analysis
of Financial  Condition and Results of  Operations"  and the Condensed  Notes to
Consolidated Financial Statements.  These forward-looking statements, as defined
in Section 21E of the Securities  Exchange Act of 1934, are dependent on certain
events, risks and uncertainties that may be outside the Company's control. These
forward-looking  statements  may include  statements of  management's  plans and
objectives for the Company's future operations and statements of future economic
performance;  the Company's capital budget and future capital requirements,  and
the Company's meeting its future capital needs; and the assumptions described in
this report  underlying  such  forward-looking  statements.  Actual  results and
developments  could differ materially from those expressed in or implied by such
statements  due to a number of factors,  including,  without  limitation,  those
described in the context of such forward-looking statements, and the factors set
forth in the  Company's  Form 10-K for the fiscal year ended June 30,  2000,  as
amended. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly  qualified in their
entirety by this section.

ITEM 3     -      Quantitative and Qualitative Disclosures
                  about Market Risk

Not applicable.


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 1    -       LEGAL PROCEEDINGS

On February 9, 1999, the Company was informed by counsel that an action had been
commenced  against the  Company on  December  8, 1998 by the West  Contra  Costa
Unified School District (the "School  District") and an individual  plaintiff in
the State of California.  The case was subsequently removed to the United States
District Court for the Northern District of California.  The complaint  alleges,
among  other  things,  that the parties  entered  into a contract  beginning  in
November 1996, for services to be provided by the Company and, subsequently, the
Company unilaterally terminated the contract on December 16, 1996. The complaint
further  alleges  that this  termination  was in  violation  of the terms of the
contract and one or more statutory provisions;  that the termination resulted in
the School District incurring  approximately $150,000 in additional costs due to
its having to enter into a fee for service arrangement with the Company in order
to continue providing  prescription  benefits to its plan members; and that, due
to the wrongful  termination of the contract,  the School District was forced to
secure a  replacement  for the benefits and the services  that were to have been
provided  under the contract  with the  Company.  In  connection  with this last
circumstance,  plaintiffs allege that the School District incurred approximately
$867,000 in  additional  expenses to obtain  coverage  from  December 1996 until
October 1997.  The complaint also seeks treble  damages.  If treble damages were
allowable  in this case and a judgment  were to be entered  against the Company,
the  Company  would be liable for  damages in excess of  $1,500,000.  The School
District is also seeking  attorneys' fees, costs,  interest to date and punitive
damages.  The  Company is  currently  in the  process of  assessing  plaintiffs'
alleged  damages  based upon  documents  produced in the  discovery  phase.  The
Company has decided to postpone the deposition and the dispositive motion it has
been contemplating.  On November 8, 2000, the court set a trial date of June 18,
2001. The Company denies the allegations  and intends to vigorously  defend this
action.  In the opinion of management,  the outcome of this  litigation will not
have a  material  adverse  effect on the  Company's  financial  position  or its
results of operations.

On October 23,  2000,  the Company was served with a complaint  filed by Allcare
Health Management Systems,  Inc. ("Allcare") in the United States District Court
for the Northern District of Texas, alleging that the Company and numerous other
defendants  infringe  certain  patent  rights  allegedly  owned by Allcare.  The
complaint seeks unspecified  damages and injunctive  relief.  The Company denies
such allegations and intends to vigorously defend the action.

Allcare has settled with numerous  defendants in a previous related  litigation.
The Company is presently  licensing its product (the  "License")  from a company
that was a defendant in the previous  related  litigation and which settled with
Allcare.  As far as the  Company's  use of any  product of the  defendant  which
settled is concerned, Allcare does not allege that the Company is infringing its
patent.  The Company believes that its liability with respect to activities that
are based exclusively on under the License is minimal.  The Company's management
believes  that during a portion of the relevant time period,  the  activities of
the  Company  that are  under  consideration  were  based  exclusively  upon the
License. However, Allcare alleges infringement both with respect to systems used
by the  Company  which are not  under the  License,  and for  activities  of the
Company prior to its obtaining the License.

Notwithstanding  the foregoing,  because of the uncertainties of litigation,  no
assurances  can be given as to the  outcome of the  Allcare  litigation.  In the
event that the Company were not to prevail in this litigation, the Company could
be required  to pay  significant  damages to Allcare and could be enjoined  from
further use of its  technology.  A negative  outcome in the  Allcare  litigation
could  have a  material  adverse  effect on the  Company's  business,  operating
results  and  financial  condition.  If it is held  that  the  Company's  system
infringes  Allcare's patent rights, the Company would attempt to obtain software
to replace the  infringing  system or would attempt to negotiate with Allcare to
utilize its system,  although no assurances  can be given that the Company would
be successful  in either of these  attempts.  At the present  time,  the Company
cannot assess the cost of designing and  implementing a new system,  obtaining a
replacement system, or obtaining rights from Allcare.

ITEM 2    -       CHANGES IN SECURITIES AND USE OF PROCEEDS

During the six months ended  December  31,  2000,  the total number of incentive
options granted under the 1999 Stock Option Plan (the "Plan"),  net of incentive
options  forfeited during the same period,  was 68,060.  40,000 of these options
are  exercisable  at $4.00 per share over a five-year  period  starting one year
from the date of grant,  and  terminate  after six years.  The  balance of these
options are  exercisable  at $7.50 per share and vest over a  three-year  period
commencing upon the completion of one year of employment  with the Company,  and
terminate  after five  years.  During  this  period  the  Company  also  granted
nonstatutory  options to its outside  Directors under the Plan to purchase up to
an aggregate of 40,000 shares of Common Stock at $5.00 per share.  These options
vest over a three-year  period  commencing  on the date of grant,  and terminate
after five years.  As of December 31, 2000 an  aggregate of 764,529  options had
been granted under the Plan.

Pursuant to the terms of the PAI Agreement, the Company issued 400,000 shares of
unregistered Common Stock of the Company to certain PAI stockholders.  The stock
issued to the PAI  stockholders was valued at $849,920.  Information  concerning
the PAI Agreement,  including the type and amount of  consideration  received by
the  Company,  is  provided  in Note 2 of the  Condensed  Notes to  Consolidated
Financial  Statements in Part I hereof,  which Note 2 is hereby  incorporated by
reference.  The issuance of such shares was exempt from  registration  under the
Securities Act by virtue of Section 4(2) thereof.

On  October  16,  2000 the  Board of  Directors  approved  the  adoption  of the
Company's 2000 Restricted  Stock Grant Plan (the "Stock Grant Plan").  The Stock
Grant Plan was subsequently  adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000.  The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares  (e.g.,  the standard  seven year vesting  schedule set forth in the
Stock  Grant  Plan) and /or  restrictions  that the Board  may  impose,  such as
restrictions  relating to length of  service,  corporate  performance,  or other
restrictions.  As of  December  31, 2000 no grants had been made under the Stock
Grant Plan and,  therefore,  no shares had vested  under it.  There are  700,000
shares of Common  Stock  reserved for  issuance in  connection  with grants made
under the Stock Grant Plan.

ITEM 3    -       Defaults Upon Senior Securities

None.

ITEM 4    -       Submission of Matters to a Vote of Security Holders

A.   Six (6)  directors  were  elected at the Annual  Meeting to serve until the
     next Annual Meeting of Shareholders and until their  respective  successors
     are duly  elected and  qualified,  or until their  earlier  resignation  or
     removal.  The names of these  directors  and  votes  cast in favor of their
     election and votes withheld are as follows:

       Name                         Votes For        Votes Withheld

       Bert E. Brodsky              4,705,642              0
       Gerald Shapiro               4,705,642              0
       Gerald Angowitz              4,705,642              0
       Kenneth J. Daley             4,705,642              0
       Paul J. Konigsberg           4,705,642              0
       Ronald L. Fish               4,705,642              0

B.   The adoption of the 2000  Restricted  Stock Grant Plan,  reserving  700,000
     shares for issuance under such plan, was approved as set forth below:

                                    Votes For        Votes Against

                                    4,705,642              0

ITEM 5    -       Other Information

None.


<PAGE>


ITEM 6    -       Exhibits and Reports on Form 8-K
                  --------------------------------

(a) Exhibits

EXHIBIT

NUMBER   DESCRIPTION OF EXHIBIT
<TABLE>
<S>                                                                             <C>
3.1               Restated Certificate of Incorporation of Health Card(1)
3.2               Certificate of Amendment, filed May 25, 1999, to Certificate of Incorporation of Health Card(1)
3.3               Restated Certificate of Incorporation of Health Card, as amended(2)
3.4               Amended and Restated By-Laws of Health Card(1)
4.1               Form of Specimen Common Stock Certificate(1)
4.2               Form of Warrant Agreement, including form of Representatives' Warrants(1)
10.1              Mail Service  Provider  Agreement,  dated July 1, 1996,  between Health Card and Thrift Drug, Inc. d/b/a Express
                  Pharmacy Services(1)
10.2              Amendment to Mail Service Provider  Agreement,  dated January 1, 1997, between Health Card and Thrift Drug, Inc.
                  d/b/a Express Pharmacy Services(1)
10.3              Software License  Agreement and Professional  Service  Agreement,  dated February 18, 1998,  between Health Card
                  and Prospective Health, Inc.(1)
10.4              1999 Stock Option Plan(1)
10.5              Employee Covenant Agreement, dated June 15, 1998, between Health Card and Mary Casale(1)
10.6              Letter, dated February 1, 2000, from Mary Casale to Bert E. Brodsky(4)
10.7              Stock Option Agreement, dated February 1, 2000, between Health Card and Mary Casale(4)
10.8              Letter, dated November 30, 1998, from Health Card to Marjorie O'Malley(1)
10.9              Employee Covenant Agreement, dated December 7, 1998, between Health Card and Marjorie O'Malley(1)
10.10             Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and Marjorie  O'Malley(1)
10.11             Letter, dated February 1, 2000, from Marjorie O'Malley to Bert E. Brodsky(4)
10.12             Stock Option Agreement, dated February 1, 2000, between Health Card and Marjorie O'Malley(4)
10.13             Letter, dated November 3, 1998, from Health Card to John Ciufo(1)
10.14             Confidentiality  and  Non-Disclosure  Agreement,  dated November 19, 1998,  between Health Card and John
                  Ciufo(1)

10.15             Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and John Ciufo(1)
10.16             Stock Option Agreement, dated August 3, 1999, between Health Card and John Ciufo(4)
10.17             Letter, dated February 1, 2000, from John Ciufo to Bert E. Brodsky(4)
10.18             Stock Option Agreement, dated February 1, 2000, between Health Card and John Ciufo(4)
10.19             Employee Covenant Agreement, dated June 16, 1998, between Health Card and Ken Hammond(1)
10.20             Stock Option Agreement, dated August 3, 1999, between Health Card and Ken Hammond(4)
10.21             Employee Covenant Agreement, dated June 1, 1998, between Health Card and Linda Portney(1)
10.22             Employment Agreement, dated March 27, 2000, between Health Card and David Gershen(4)
10.23             Stock Option Agreement, dated May 1, 2000, between Health Card and David Gershen(4)
10.24             Employment Agreement, dated May 3, 2000, between Health Card and James Bigl(4)
10.25             Stock Option Agreement, dated June 12, 2000, between Health Card and James Bigl(4)
10.26             Stock Option Agreement, dated August 3, 1999, between Health Card and Kenneth J. Daley(4)
10.27             Stock Option Agreement, dated August 3, 1999, between Health Card and Gerald Angowitz(4)
10.28             Stock Option Agreement, dated August 3, 1999, between Health Card and Richard J. Strauss, M.D.(4)
10.29             Lease, dated January 1, 1996, between Sandata, Inc. and Health Card(1)
10.30             Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty, LLC(1)
10.31             First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between BFS Realty, LLC and Health Card(1)
10.32             Second  Amendment  to BFS Realty,  LLC Lease,  dated April 1, 1999,  between BFS Realty,  LLC and Health
                  Card(1)

10.33 Lease,  dated August 10, 1998,  between 61 Manor Haven Boulevard,  LLC and
Health Card(1) 10.34  Promissory  Note, dated July 1, 1997, made payable by Bert
Brodsky to the order of Health Card in the

                  original principal amount of $1,000,000(1)
10.35             Letter, dated June 3, 1999, from Bert Brodsky to Health Card(1)
10.36             Promissory  Note,  dated  July 1,  1997,  made  payable  by Gerald  Shapiro  to the order of Health  Card in the
                  original principal amount of $300,000(1)
10.37             Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.38             Promissory  Note,  dated June 1, 1998,  made  payable by P.W.  Capital,  LLC to the order of Health  Card in the
                  original principal amount of $4,254,785(1)
10.39             Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health Card(1)
10.40             Demand  Promissory Note, dated January 2, 1999, made payable by P.W.  Capital,  LLC to the order of Health Card,
                  in the original principal amount of $90,100(1)
10.41             Promissory  Note,  dated July 31, 2000,  made payable by P.W.  Capital,  LLC to the order of Health Card, in the
                  amount of $3,890,940(4)
10.42             Consulting Agreement, dated April 14, 1994, between P.W. Medical Management, Inc. and Health Card(1)
10.43             Assignment, dated July 1, 1996, between P.W. Medical Management, Inc. and P.W. Capital Corp.(1)
10.44             Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card(1)
10.45             Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.46             Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health Card(1)
10.47             Letter agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable Trust and Health Card(1)
10.48             Employment Agreement, dated July 1, 1999, between Health Card and Bert E. Brodsky(1)
10.49             Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.50             Form of Lock-up Agreement(1)
10.51             Acquisition  and Merger  Agreement,  dated as of June 27, 2000,  between  Health Card and  Pharmacy  Associates,
                  Inc.(3)

10.52             Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.53             Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.54             Amendment  to  Lease,  dated  November  19,  1998,  between  Pharmacy   Associates,   Inc.  and  Executive  Park
                  Partnership(4)

10.55             Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and Executive Park Partnership(4)
10.56             Settlement Agreement regarding capitation arrangement between the Company
                  and Vytra

-------------------
(1)      Denotes  document  filed as an  exhibit  to  Health  Card's  Registration  Statement  on Form S-1  (Registration  Number:
         333-72209) and incorporated herein by reference.
(2) Denotes  documentation  filed as an Exhibit to Health  Card's Report on Form
10-K for the fiscal year ended June 30, 1999.  (3) Denotes  document filed as an
exhibit  to  Health  Card's  Form  8-K for an  event  dated  July  20,  2000 and
incorporated herein

         by reference.
(4)      Denotes  documentation  filed as an Exhibit to Health  Card's  Report on Form 10-K,  as amended,  for the fiscal year ended
         June 30, 2000.

(b)      Reports on Form 8-K

None

Exhibit 27 - Financial Data Schedule (Electronic Filing Only)

</TABLE>

<PAGE>


                                     Page 29

                                   SIGNATURES

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

                   NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

                                  (Registrant)

Date:    February 12, 2001                  By:      /s/ Bert E. Brodsky
     ---------------------                      ------------------------
                                                 Bert E. Brodsky
                                                 Chairman of the Board
                                                 and Chief Executive Officer