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  March 31, 2005

                                       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)
                                 --------------

         Delaware                                           11-2581812
(State or Other Jurisdiction                   (IRS Employer Identification No.)
of 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


                                     Not Applicable
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

     Indicate by check whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)Yes No x


     APPLICABLE ONLY TO CORPORATE ISSUERS:

     The number of shares outstanding of the issuer's Common Stock, as of May
10, 2005 was 4,752,139 shares.


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


                                  INDEX                                                                         Page

                 FORWARD-LOOKING STATEMENTS                                                                       3

PART I        -   FINANCIAL INFORMATION                                                                           4

ITEM 1        -   CONDENSED FINANCIAL STATEMENTS:                                                                 4

                  CONSOLIDATED BALANCE SHEET as of                                                                4
                  March 31, 2005 (unaudited) and June 30, 2004

                  CONSOLIDATED STATEMENT OF INCOME (unaudited)                                                    5
                  for the three months and nine months ended March 31, 2005 and 2004

                  CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)                                                6
                  for the nine months ended March 31, 2005 and 2004

                  CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            7

ITEM 2        -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                                              21
                  CONDITION AND RESULTS OF OPERATIONS

ITEM 3        -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT                                                 37
                  MARKET RISK

ITEM 4    -       CONTROLS AND PROCEDURES                                                                        37

PART II       -   OTHER INFORMATION                                                                              38

ITEM 1        -   LEGAL PROCEEDINGS                                                                              38

ITEM 2        -   UNREGISTERED SALES OF EQUITY SECURITIES AND USE                                                38
                  OF PROCEEDS

ITEM 3        -   DEFAULTS UPON SENIOR SECURITIES                                                                38

ITEM 4        -   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            38

ITEM 5        -   OTHER INFORMATION                                                                              38

ITEM 6        -   EXHIBITS                                                                                       39

</TABLE>

<PAGE>


Forward Looking Statements

     When  used  herein,  the  words  "may,"  "could,"  "estimate,"   "believe,"
"anticipate,"  "think,"  "intend,"  "expect"  and similar  expressions  identify
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995.  Such  statements  are not  guarantees of future
performance  and involve  known and unknown risks and  uncertainties,  and other
factors, which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
such  statements,  which speak only as of the date hereof.  For a discussion  of
such risks and uncertainties,  including risks relating to pricing,  competition
in the  bidding  and  proposal  process,  our  ability  to  consummate  contract
negotiations with prospective clients,  dependence on key members of management,
government  regulation,  acquisitions and affiliations,  the market for pharmacy
benefit  management  ("PBM") services,  and other factors,  readers are urged to
carefully  review and  consider  various  disclosures  made by National  Medical
Health Card Systems,  Inc.  ("Health  Card" or the  "Company")  which attempt to
advise  interested  parties of the factors which affect Health Card's  business,
including,   without   limitation,   the  disclosures  made  under  the  caption
"Description of Business" in Item 1 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of Health Card's Annual
Report on Form 10-K,  for the fiscal  year ended June 30,  2004,  filed with the
U.S. Securities and Exchange Commission on September 28, 2004.


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1 - CONDENSED FINANCIAL STATEMENTS

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                ($ in thousands)


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


                                                                                        March 31,              June 30,
                                                                                          2005                  2004
                                                                                        ----------             --------
                                                                                       (Unaudited)
Assets
Current:

  Cash and cash equivalents (including cash equivalent investments of $187
            and $1,191, respectively)                                                        $ 4,498               $ 3,388

  Restricted cash                                                                              3,847                 1,695
  Accounts receivable, less allowance for doubtful accounts of $2,186 and $2,312,            100,184                73,162
respectively

  Rebates receivable                                                                          42,923
                                                                                                                    34,764
  Inventory                                                                                    6,320                 3,252
  Due from affiliates                                                                             17                    18
  Deferred tax assets                                                                          3,260                 2,711
  Other current assets                                                                         3,370
                                                                                                                     2,093
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                                   164,419               121,083

  Property, equipment and software development costs, net                                     12,014                10,597
  Intangible assets, net of accumulated amortization of $2,992 and $2,106,                     4,232                 3,788
respectively
  Goodwill                                                                                    99,997                86,964
  Other assets                                                                                   757                 3,717
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      Total Assets                                                                        $  281,419            $  226,149
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Liabilities, Redeemable Preferred Equity, and Common Stockholders' Equity (Deficit)
Current Liabilities:

  Accounts payable and accrued expenses                                                   $  187,534            $  147,572
  Revolving credit facility and loans payable-current                                          1,875                    53
  Current portion of capital lease obligations                                                    27                   327
  Income taxes payable                                                                         1,948                   837
  Other current liabilities                                                                    1,458                     -
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                               192,842               148,789

  Capital lease obligations, less current portion                                                 47                    13
  Long term loans payable and other liabilities                                                1,000                 3,877
  Deferred tax liability                                                                       5,363                 4,704
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                       199,252               157,383
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Redeemable Preferred Equity:

Redeemable convertible preferred stock $.10 par value; 15,000,000 shares
authorized, 6,956,522 issued and outstanding                                                  75,745                75,389

Common Stockholders' Equity (Deficit):

  Common stock, $.001 par value, 35,000,000 shares authorized, 9,355,249 and
  8,969,694 shares issued, 4,715,349 and 4,329,794 outstanding, respectively                       9                     9
  Additional paid-in-capital                                                                 112,760               104,890
  Accumulated deficit                                                                        (54,468)              (59,643)
  Treasury stock at cost, 4,639,900 shares                                                   (51,879)              (51,879)
---------------------------------------------------------------------------------------------------------------------------
     Total common stockholders' equity (deficit)                                               6,422               (6,623)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total Liabilities, Redeemable Preferred Equity, and Common
       Stockholders' Equity (Deficit)                                                     $  281,419            $  226,149
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      See accompanying condensed notes to consolidated financial statements
</TABLE>


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF INCOME
                (Amounts in thousands, except per share amounts)
                                   (Unaudited)


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


                                                                        Three months ended March      Nine months ended
                                                                                 March  31,                  March  31,
                                                                           2005           2004           2005          2004

Revenue (includes co-payments collected of $4,322, $901, $10,772
and $1,061, respectively; and excludes co-payments retained by
  the pharmacies of $74,932, $52,651, $203,623 and $152,491,         $     199,342  $     159,725  $     584,734  $    474,450
  respectively)

Cost of claims (excludes co-payments retained by the pharmacies of
  $74,932, $52,651, $203,623 and $152,491, respectively)                   177,150        142,909        520,940       428,441

-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Gross Profit                                                                22,192         16,816         63,794        46,009

Selling, general and administrative expenses                                16,629         14,182         48,699        36,551
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------

Operating income                                                             5,563          2,634         15,095         9,458

Other income (expense):
Interest expense                                                              (167)          (114)          (534)         (519)
Interest income                                                                123            111            161           173
Other income, net                                                               16             10          1,777            90
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
                                                                              (28)              7          1,404         (256)
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------

Income before provision for income taxes                                     5,535          2,641         16,499         9,202
Provision for income taxes                                                   2,270          1,077          6,765         3,773
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Net income                                                                   3,265          1,564          9,734         5,429
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Beneficial conversion feature                                                    -         80,000              -        80,000
Preferred stock cash dividend                                                1,380            199          4,204           199
Accretion of transaction expenses                                              117             17            356            17
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Net income (loss) available to common stockholders                   $       1,768  $    (78,652)  $       5,174  $   (74,787)
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Earnings (loss) per common share:
  Basic                                                              $        0.39  $     (11.17)  $        1.16  $     (9.99)
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
  Diluted *                                                          $        0.27  $     (11.17)  $        0.81  $     (9.99)
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
Weighted average number of common shares outstanding:
  Basic                                                                      4,584          7,044          4,468         7,485
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
  Diluted *                                                                 12,123          7,044         12,090         7,485
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------
-------------------------------------------------------------------- -- ----------- -- ----------- -- ----------- -- ----------

</TABLE>


      See accompanying condensed notes to consolidated financial statements

     * = For the three months and nine months  ended March 31, 2005,  the number
of weighted  average  diluted shares was calculated  using the "as if converted"
method for the redeemable preferred stock.

<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<S>                                                               <C>    <C>    <C>    <C>    <C>    <C>

                                                                                                  Nine months ended
                                                                                                      March 31,
                                                                                              2005                       2004
                                                                                            -------                    -------
Cash flows from operating activities:
           Net income                                                                     $   9,734                   $  5,429
             Adjustments to reconcile net income to net cash
              provided by operating activities:

                Depreciation and amortization                                                 4,682                      4,135
                Amortization of deferred gain                                                   (92)                      (333)
                Net gain on disposal of capital assets                                            -                        316
                Provision for doubtful accounts                                                 756                        847
                Compensation expense accrued to officer/stockholder                               -                         37
                Deferred income taxes                                                           901                       (400)
             Changes in assets and liabilities, net of effect from acquisitions:
                Restricted cash                                                                 582                        745
                Accounts receivable                                                         (24,585)                   (13,633)
                Rebates receivable                                                           (2,058)                    (4,762)
                Inventory                                                                    (3,068)                    (1,410)
                Other current assets                                                         (1,954)                      (727)
                Due to/from affiliates                                                            1                        235
                Other assets                                                                  3,327                        (81)
                Accounts payable and accrued expenses                                        10,321                     26,172
                Income taxes payable and other current liabilities                            6,828                      2,502
                Other long term liabilities                                                    (925)                     1,343
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                                      4,450                    20,415
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
             Capital expenditures                                                            (4,295)                    (5,550)
             Repayment of loan from affiliate                                                     -                      2,660
             Repayment of loan from officer                                                       -                        107
             Acquisition of PCN, net of cash acquired                                         3,153                          -
             Acquisition of Integrail                                                             -                       (13)
             Acquisition of Inteq                                                             (139)                          -
             Acquisition of PPP, net of cash acquired                                         (358)                    (3,658)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                       (1,639)                    (6,454)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
             Proceeds from exercise of stock options                                         3,251                      2,632
             Proceeds from issuance of preferred stock, net of offering costs                                          75,262
             Purchase of treasury stock in tender offer including related costs                                       (51,130)
             Proceeds from revolving credit facility                                       695,758                    624,095
             Repayment of revolving credit facility                                       (695,796)                  (639,723)
             Payment of preferred stock dividends                                           (4,204)                      (199)
             Deferred financing costs                                                         (367)                       143
             Repayment of debt and capital lease obligations                                  (343)                      (379)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities                                         (1,701)                     10,701
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                                    1,110                      24,662
Cash and cash equivalents at beginning of period                                             3,388                       5,222
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                $  4,498                  $   29,884
------------------------------------------------------------------------------------------------------------------------------

</TABLE>
      See accompanying condensed notes to consolidated financial statements


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (All $ in thousands, except share and per share amounts)
                                   (Unaudited)

28


1. BASIS OF PRESENTATION

     The unaudited  consolidated  financial  statements  include the accounts of
National Medical Health Card Systems,  Inc. (the "Company" or "Health Card") and
its wholly owned subsidiaries,  Pharmacy Associates,  Inc. ("PAI"),  Interchange
PMP, Inc. ("PMP"), Centrus Corporation ("Centrus"), National Medical Health Card
IPA, Inc. ("IPA"), Specialty Pharmacy Care, Inc. ("Specialty"),  Integrail, Inc.
("Integrail"),  NMHCRX Mail Order, Inc. ("Mail Order"),  NMHCRX Contracts,  Inc.
("Contracts"), Portland Professional Pharmacy and Portland Professional Pharmacy
Associates  (collectively,  "PPP" or "Ascend"),  Inteq Corp.  and Inteq TX Corp.
(collectively,   "Inteq"),   PCN  DE  Corp.  and  Pharmaceutical   Care  Network
(collectively,  "PCN") and PBM  Technology  Inc. ("PBM Tech") (See Note 4). Also
included  on a  consolidated  basis  are  the  accounts  of  NMHC  Funding,  LLC
("Funding"),   a  limited  liability  company  of  which  the  Company  and  its
subsidiaries  are the  owners of all of the  membership  interests.  Unless  the
context otherwise requires,  references herein to the "Company" or "Health Card"
refer to the Company and its subsidiaries, on a consolidated basis. All material
inter-company balances and transactions have been eliminated in consolidation.

     The unaudited  consolidated  financial statements have been prepared by the
Company in  accordance  with  accounting  principles  generally  accepted in the
United States for interim  financial  information and  substantially in the form
prescribed  by the U.S.  Securities  and  Exchange  Commission  (the  "SEC")  in
instructions to Form 10-Q and in Article 10 of Regulation S-X. Accordingly,  the
interim  financial  information  does not  include  all of the  information  and
footnotes  required  by  such  accounting   principles  for  complete  financial
statements.  In the opinion of the Company's management,  the March 31, 2005 and
2004 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 for the year ended June
30, 2004.  The results of  operations  for the nine month period ended March 31,
2005 are not necessarily  indicative of the operating results to be expected for
the full year.

For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-K for the year ended
June 30, 2004 (the "Annual Report") filed with the SEC.

2. STOCK-BASED COMPENSATION

     Pro  forma   information   regarding   net  income   applicable  to  common
stockholders is required by SFAS 123, "Accounting for Stock-Based Compensation,"
which also  requires  that the  information  be determined as if the Company has
accounted for its stock  options under the fair value method of that  statement.
For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the  options'  vesting  period.  The fair value for
these options was estimated using the  Black-Scholes  option-pricing  model with
the  following  weighted-average  assumptions  used for all  grants  in the nine
months  ended  March 31,  2005 and 2004:  no  dividend  yield,  weighted-average
expected life of the option of between three and seven years, risk-free interest
rate of between 3.40% and 4.46% and between 2.81% and 2.83% respectively,  and a
volatility  of between 72.2% and 75%, and 83.2%,  respectively,  for all grants.
The  weighted-average  value of options granted is $14.71 and $8.75 for the nine
months ended March 31, 2005 and 2004, respectively.

     The  Company  follows  the  provisions  of SFAS No.  148,  "Accounting  for
Stock-Based  Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123,  "Accounting  for  Stock-Based  Compensation,"  to provide  alternative
methods of  transition  to SFAS No.  123's fair value method of  accounting  for
stock-based  employee  compensation.  SFAS No. 148 also  amends  the  disclosure
provisions of SFAS No. 123 to require  disclosure in the summary of  significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee  compensation on reported net income. While SFAS No. 148
does not amend SFAS No. 123 to require  companies to account for employee  stock
options using the fair value method,  the disclosure  provisions of SFAS No. 148
are  applicable  to  all  companies  with  stock-based  employee   compensation,
regardless  of whether they account for that  compensation  using the fair value
method of SFAS No. 123 or the intrinsic  value method of APB No. 25. The Company
adopted SFAS No. 148 effective December 31, 2002.

     The following table illustrates the effect on net income if the Company had
applied the fair value  recognition  provisions  of SFAS No. 123 to  stock-based
compensation:

<TABLE>

<S>                                                       <c>           <c>            <C>                 <C>
                                                                         Three Months Ended March 31,
                                                              ----------------------------------------------------
                                                              -------------------------- -------------------------
                                                                        2005                       2004
     Reported net income (loss) available to
       common stockholders                                       $       1,768            $     (78,652)
     Stock compensation expense included in net
       income available to common                                            -                      200
       stockholders
     Pro forma compensation expense                                     (1,092)                    (652)
     Pro forma net income (loss) available to
       common stockholders                                        $        676               $  (79,104)
     Pro forma earnings (loss) per share:
       Basic                                                      $       0.15               $   (11.23)
       Diluted                                                    $       0.13               $   (11.23)



                                                                          Nine Months Ended March 31,
                                                              ----------------------------------------------------
                                                              -------------------------- -------------------------
                                                                        2005                       2004
     Reported net income (loss) available to
       common stockholders                                         $      5,174            $    (74,787)
     Stock compensation expense included in net
       income available to common                                             -                     200
       stockholders
     Pro forma compensation expense                                      (3,492)                 (1,636)
     Pro forma net income (loss) available to
       common stockholders                                         $      1,682             $   (76,223)
     Pro forma earnings (loss) per share:
       Basic                                                       $       0.38             $    (10.18)
       Diluted                                                     $       0.33             $    (10.18)

</table>

     On December 16,  2004,  the  Financial  Accounting  Standards  Board (FASB)
issued FASB Statement No. 123 (revised 2004),  Share-Based  Payment,  which is a
revision of FASB  Statement No. 123,  Accounting for  Stock-Based  Compensation.
Statement 123(R)  supersedes APB Opinion No. 25,  Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the  approach  in  Statement  123(R) is similar  to the  approach  described  in
Statement 123.  However,  Statement 123(R) requires all share-based  payments to
employees,  including grants of employee stock options,  to be recognized in the
income  statement based on their fair values.  Pro forma disclosure is no longer
an alternative.

     Statement 123(R) must be adopted by the Company no later than July 1, 2005.
Early adoption will be permitted in periods in which  financial  statements have
not yet been issued.  The Company expects to adopt  Statement  123(R) on July 1,
2005.

     Statement 123(R) permits public  companies to adopt its requirements  using
one of two methods:

     A "modified  prospective"  method in which  compensation cost is recognized
beginning  with the effective  date (a) based on the  requirements  of Statement
123(R) for all  share-based  payments  granted after the effective  date and (b)
based on the  requirements  of Statement 123 for all awards granted to employees
prior to the  effective  date of  Statement  123(R) that remain  unvested on the
effective date.

     A "modified  retrospective"  method which includes the  requirements of the
modified  prospective  method  described  above,  but also  permits  entities to
restate  based on the amounts  previously  recognized  under  Statement  123 for
purposes of pro forma disclosures  either (a) all prior periods presented or (b)
prior interim periods of the year of adoption.

     The Company is currently  evaluating  these two methods to determine  which
method will be adopted and its effect on the financial statements.

     As  permitted  by  Statement  123,  the  Company  currently   accounts  for
share-based payments to employees using Opinion 25's intrinsic value method and,
as such,  generally  recognizes no compensation cost for employee stock options.
Accordingly,  the adoption of Statement  123(R)'s  fair value method will have a
significant impact on our result of operations,  although it will have no impact
on our overall  financial  position.  The impact of adoption of Statement 123(R)
cannot  be  determined  at  this  time  because  it will  depend  on  levels  of
share-based  payments granted in the future.  However,  had we adopted Statement
123(R) in prior periods, the impact of that standard would have approximated the
impact of Statement  123 as described in the  disclosure of pro forma net income
and earnings per share in this Note to our  consolidated  financial  statements.
Statement  123(R) also  requires  the  benefits of tax  deductions  in excess of
recognized  compensation  cost to be reported as a financing  cash flow,  rather
than as an  operating  cash flow as  required  under  current  literature.  This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption.  The Company cannot estimate what those amounts
will be in the  future,  because  they  depend  on,  among  other  things,  when
employees  exercise  stock options and the fair value of the Company's  stock on
the date of exercise.

3. NEW MOUNTAIN TRANSACTION

     The Company  entered into an amended and restated  preferred stock purchase
agreement,  dated as of November 26, 2003, with New Mountain Partners, L.P. (the
"purchase agreement").  Pursuant to the purchase agreement,  the Company agreed,
subject  to various  conditions,  to issue to New  Mountain  Partners a total of
6,956,522  shares of series A 7%  convertible  preferred  stock  (the  "series A
preferred  stock")  at a  purchase  price of $11.50  per  share,  for  aggregate
proceeds of approximately  $80,000. On March 19, 2004, the Company completed the
sale  of the  series  A  preferred  stock  to New  Mountain  Partners  and  used
approximately  $49,000 of the  proceeds  of the sale of the  series A  preferred
stock to purchase, pursuant to a tender offer, 4,448,900 shares of the Company's
issued and  outstanding  common stock (the  "common  stock") at $11.00 per share
(collectively, the "New Mountain Transaction").  Prior to the closing of the New
Mountain  Transaction,  Bert E.  Brodsky,  the former  chairman  of the board of
directors,  and certain stockholders related to him, held (assuming the exercise
of 330,000  options and warrants held by Mr.  Brodsky,  which  occurred in April
2004), in the aggregate, approximately 59% of the common stock and had agreed to
tender 4,448,900 shares, or approximately 54% of the common stock, held by them,
into the tender offer. No other stockholders tendered shares in the offer.

     Following the completion of the tender offer,  and assuming the exercise of
330,000 options and warrants held by Mr. Brodsky,  which occurred in April 2004,
New Mountain  Partners  owned  securities at March 19, 2004 that were  initially
convertible into  approximately  64% of the common stock and prior to conversion
of the series A preferred  stock were entitled to cast that number of votes that
is equal to approximately 60% of the Company's aggregate voting power. Following
the closing of the New Mountain Transaction,  New Mountain Partners was entitled
to and did  nominate  and elect 60% of the  members  of the  Company's  board of
directors.

     The Company used the  remaining  proceeds from the issuance and sale of the
series A preferred stock of approximately $24,000, excluding expenses related to
the closing of the New Mountain Transaction, for the Inteq Acquisition described
in Note 4 - Business Acquisitions and for working capital purposes.

     The preferred  stock  provides for an initial annual cash dividend equal to
7% of the investment amount, which decreases to 3.5% after the fifth anniversary
of issuance.  The preferred stock is convertible into the Company's common stock
at a price of $11.50 per share of common stock, or an aggregate of approximately
7,000,000 shares of the Company's common stock.

     The  series A  preferred  stock may be  redeemed  at the  Company's  option
subsequent  to the  fourth  anniversary  of its  issuance,  subject  to  certain
conditions.  After  the  tenth  anniversary  of the  issuance  of the  series  A
preferred  stock,  each holder of shares of series A preferred stock may require
the  Company  to  redeem  all or a part of that  holder's  shares  of  series  A
preferred stock.

     Upon the closing of the New Mountain  Transaction,  the Company  recorded a
non-recurring,  non-cash  charge  to net  income  available  to  holders  of the
Company's common stock for a beneficial conversion feature related to the series
A preferred  stock,  which is  convertible  into the  Company's  common stock at
$11.50 per share. Such non-cash charge reflects the difference  between the fair
market value of the Company's common stock on the date of the closing of the New
Mountain  Transaction  and the  effective  conversion  price  of  $11.29  (after
deducting  the  closing  payment  of $1,450  payable to New  Mountain  Partners)
multiplied by 6,956,522, the number of shares of the Company's common stock into
which the series A preferred stock held by New Mountain Partners is convertible.
The maximum amount of the beneficial  conversion feature was limited to $80,000,
which is the purchase price of the series A preferred stock.

4. BUSINESS ACQUISITIONS

     On March 7, 2005,  the Company  acquired  all of the  outstanding  stock of
Pharmaceutical  Care  Network,  a California  corporation,  from the  California
Pharmacists Association (the "PCN Acquisition"). The aggregate purchase price of
the PCN Acquisition was $13,000 in cash. In addition,  the Company has agreed to
pay the California  Pharmacists  Association  ("CphA") earn-outs,  as additional
purchase price, up to $30,000 over a period of three years if certain  financial
and performance targets are achieved.  The funds for the payment of the purchase
price in connection with the PCN Acquisition  were obtained out of the Company's
working  capital and revolving  credit facility (See Note 5). The PCN operations
complement the Company's business while  strengthening the Company's presence in
the California marketplace as well as in the Medicaid managed care market.

     In addition to the $13,000  purchase price for the PCN  Acquisition,  there
were $558 of  acquisition  related  expenses  incurred  by the  Company.  Of the
$13,000,  $10,500  was paid to CPhA and  certain  of PCN's  current  and  former
employees  who  participated  in its Long Term  Incentive  Plan,  and $2,500 was
deposited into escrow to secure CPhA's obligations under the purchase agreement.
At the time of the acquisition,  PCN had  approximately  $30,942 of assets which
included  $16,711  of cash,  $2,734  of  restricted  cash,  $3,204  of  accounts
receivable,  $6,090 of rebates receivable, $1,139 of other assets, and $1,064 of
property and equipment. They also had approximately $27,040 of liabilities which
included  $26,848  of  claims  and  accounts  payable,   $97  of  other  current
liabilities  and $95 of other  long-term  liabilities.  As a  result  of the PCN
Acquisition,  $2,747 of  severance  and exit costs have been accrued as of March
31, 2005 and recorded as additional goodwill.  The acquisition was accounted for
under the purchase method of accounting and the results of PCN's operations were
included in the consolidated  financial statements  commencing as of the closing
date of the PCN Acquisition.  The excess of the acquisition  costs over the fair
value of identifiable net assets acquired was $12,402. An independent  valuation
of intangible  assets relating to the PCN  Acquisition is not yet complete.  The
preliminary estimate of the components of this excess are customer relationships
valued at $1,200,  which is being  amortized over ten (10) years and goodwill of
$11,202, which will not be amortized for book purposes per SFAS 142. As of March
31,  2005,  the  financial  and  performance  targets  have  not yet  been  met.
Therefore, no additional earn-outs have been accrued.

     On April 1, 2004, the Company entered into an Asset Purchase Agreement with
Inteq PBM,  LP, a Texas  limited  partnership  (the  "Purchaser"),  The INTEQ-RX
Group,  LLP and certain other owners named therein  (together  with The INTEQ-RX
Group,  LLP,  the "The Inteq  Group"),  pursuant to which the Company  agreed to
acquire certain assets of the The Inteq Group relating to their pharmacy benefit
management business (the "Inteq  Acquisition").  The aggregate purchase price of
the Inteq  Acquisition was $31,500 in cash. In addition,  the Company has agreed
to pay The Inteq Group, as additional purchase price, up to $4,200 over a period
of one year if the acquired PBM business achieves certain financial  performance
targets during the one-year  period  following the closing.  Funds for the Inteq
Acquisition  were supplied from proceeds from the New Mountain  Transaction (See
Note 3 - New  Mountain  Transaction)  and from the  Company's  revolving  credit
facility (See Note 5). In connection with the Inteq Acquisition, several members
of Inteq's  management have remained with the Company as consultants  during the
transition period.  The Inteq business  complements the Company's business while
strengthening the Company's presence in the Texas marketplace.

     The purchase  price for the acquired  assets of The Inteq Group was $31,500
of which  $29,640 was paid in cash at closing and $1,860 was paid in the form of
a promissory note. In addition,  there were $572 of acquisition related expenses
incurred by the Company.  Of the  $29,640,  $24,900 was paid to The Inteq Group,
and $4,740 was  deposited  into escrow to secure The Inteq  Group's  obligations
under the purchase  agreement.  In addition,  another $3,000,  out of the $4,200
potential  to be paid to The Inteq  Group,  was  placed in escrow to secure  the
Company's  obligations  to pay The  Inteq  Group  additional  purchase  price if
certain  targets are achieved during the first year, and such escrowed amount is
included in other assets in the consolidated  balance sheet. The promissory note
plus accrued  interest at four percent (4%) per annum is due and payable in full
on  October  1,  2005.  At the time of the  acquisition,  The  Inteq  Group  had
approximately  $14,200  of  assets  which  included  $4,134  of cash,  $7,938 of
accounts receivable,  $2,041 of rebates receivable, $47 of other assets, and $40
of property and equipment.  They also had  approximately  $11,151 of liabilities
which included  $11,138 of claims and accounts  payable and $13 of miscellaneous
payables.  The  acquisition  was  accounted  for  under the  purchase  method of
accounting  and  the  results  of  Inteq'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 was  $29,023,  which  consists of the  following  components:  customer
relationships valued at $1,800, which is being amortized over ten (10) years and
goodwill of $27,223, which will not be amortized for book purposes per SFAS 142.
In addition,  the $3,000  placed in escrow will be released  quarterly if earned
and will be  recorded as  additional  goodwill.  To date,  $1,024 out of a total
potential of $4,200, of additional  consideration has been earned, of which $957
was released from escrow on October 5, 2004,  with an additional $67 released in
January 2005. For tax purposes, the Company will amortize the goodwill and other
intangibles over fifteen years.

     On July 31, 2003, the Company entered into a Stock Purchase  Agreement with
Portland   Professional   Pharmacy  ("PPRX"),   Portland  Professional  Pharmacy
Associates  ("PRXA",  and  together  with  PPRX,  "PPP"  or  "Ascend")  and  the
individual  shareholders (the "PPP  Shareholders") to purchase all of the shares
of PPP for  $3,150  (the "PPP  Acquisition").  PPP  provides  specialty-pharmacy
services in a broad range of areas,  including  women's health,  pediatric care,
men's health and transplant.  Funds for the PPP Acquisition were supplied by the
Company's  revolving  credit facility that was put in place in January 2002 (see
Note 5). The  Company has  positioned  PPP as a  preferred  provider  with PPP's
target  markets while focusing on the extension of their  specialty  services to
the Company's PBM division.

     The  purchase  price  for the  stock  of PPP  was  $3,150.  At the  time of
acquisition, PPP had approximately $1,664 of assets which included $177 of cash,
$889  of  accounts  receivable,  $539  of  inventory  and  $59 of  property  and
equipment.  PPP also had approximately $1,423 of liabilities which included $609
of bank debt, which was paid off at closing, and $814 of miscellaneous payables.
The  acquisition  was accounted for under the purchase  method of accounting and
the results of PPP'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 was $2,986,  which
consists of the following components: (i) customer relationships valued at $295,
which is being  amortized over seven (7) years;  (ii) employment and non-compete
agreements  valued at $100 each,  which are being amortized over four (4) years;
(iii) the  Portland  Professional  Pharmacy  trade name  valued at $100 which is
being amortized over four (4) years; and (iv) goodwill of $2,391, which will not
be amortized for book  purposes per SFAS 142. For tax purposes,  the Company has
made an  election  which  will  allow it to  amortize  the  goodwill  and  other
intangibles  over fifteen years.  In addition,  the Company agreed to pay to the
PPP  Shareholders  up to $7,000  over a  three-year  period if the PPP  business
achieved certain financial targets. To date, $1,333 has been earned and accrued,
of which $358 has been paid in cash and $358 has been settled by the issuance of
12,650  shares of common  stock,  and the  remaining  $617  will be  settled  in
September 2005.

     Each of PRXA and PPRX  continues to operate under their  respective  names,
and also does business under the name NMHC Ascend.

     As of  November  1, 2002,  the  Company  and its wholly  owned  subsidiary,
Integrail  Acquisition  Corp.,  entered into an Asset  Purchase  Agreement  with
Health  Solutions,  Ltd.  ("HSL"),  a New York  corporation,  and certain of its
security holders (together with HSL, the "Sellers").  Pursuant to the Agreement,
Health Card acquired  substantially all of the assets of the Integrail  division
of HSL's operations, for a purchase price of $1,400. Integrail provides software
and analytical tools in the area of informatics which allows for the blending of
medical and pharmacy data to predict future outcomes.

     Half of the $1,400  purchase price was paid at the closing  directly to the
Sellers,  and half was deposited into escrow (the "Escrowed Amount") as security
for the performance of certain  indemnification  obligations of the Sellers. The
Company  acquired  approximately  $500 of HSL's  assets which  included  $158 of
property and equipment,  $225 of software,  $76 of prepaid expenses,  and $41 of
accounts  receivable.  The Company also agreed to assume  approximately  $500 of
liabilities  related to  Integrail  which  included  $166 of debt under  capital
leases, $75 of miscellaneous  payables,  and $259 due to HSL for prior equipment
and services  provided to Integrail by HSL. The  acquisition  was  accounted for
under  the  purchase  method  of  accounting  and  the  results  of  Integrail'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 was $1,719,  which  consists of the
following components: (i) software and company know how valued at $797, which is
being amortized over three (3) years;  and (ii) goodwill of $922, which will not
be amortized for book purposes per SFAS 142. For tax purposes,  the goodwill and
other  intangibles  will  be  amortized  over  fifteen  years.  Funds  for  this
transaction  were supplied by the Company's  revolving credit facility (see Note
5). With the  achievement  of certain  operational  milestones  for the first 12
months  specified in the Agreement,  the entire  Escrowed Amount was released to
the Sellers in November 2003.

     The Company  entered into an Asset Purchase  Agreement (the "Asset Purchase
Agreement"),  dated as of January 29, 2002, with HSL, HSL  Acquisition  Corp., a
Delaware  corporation and a wholly-owned  subsidiary of the Company ("Sub"), and
the security holders of HSL named therein,  pursuant to which the Company agreed
to acquire  certain  assets of HSL relating to the pharmacy  benefit  management
business  (PBM)  conducted  by  HSL  under  the  name  "Centrus"  (the  "Centrus
Acquisition").  The  aggregate  purchase  price of the Centrus  Acquisition  was
$40,000 in cash. The Company acquired approximately $1,400 of HSL's assets which
included $900 of property and  equipment and $500 of software.  The Company also
agreed  to assume  approximately  $1,400 of HSL's  liabilities  relating  to the
Centrus  business  which  included  $1,100 of rebates due to  sponsors,  $100 of
capital leases, and $200 of miscellaneous  payables. The Centrus Acquisition was
accounted  for under  the  purchase  method of  accounting  and the  results  of
Centrus'  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 was $40,672,  which consists
of the following components:  (i) customer relationships valued at $2,415, which
is being amortized over five (5) years;  (ii) an employment  agreement valued at
$83, which was amortized over two (2) years: (iii) non-compete  contracts valued
at $76,  which is being  amortized  over four (4) years;  and (iv)  goodwill  of
$38,098  which will not be  amortized  for book  purposes  per SFAS 142. For tax
purposes,  the goodwill  and other  intangibles  will be amortized  over fifteen
years.  In addition,  the Company has agreed to pay HSL as  additional  purchase
price up to $4,000  over a period of three  (3)  years if the  acquired  Centrus
business  achieves  certain  financial  performance  targets during the two-year
period following the Closing.  The financial  performance  targets were achieved
during the first two years and $4,000 has been earned.  Of this  amount,  $1,000
was paid in May 2003, $2,000 was paid in May 2004, and another $1,000 is payable
in May 2005.

     The  summarized  unaudited pro forma results of operations  set forth below
for the three and nine months  ended  March 31,  2005 and 2004  assumes the PCN,
Inteq and PPP Acquisitions had occurred as of the beginning of these periods.





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


                                                            Three Months Ended                Three Months Ended
                                                              March 31, 2005                    March 31, 2004
                                                            ------------------                ------------------
Revenue                                                    $       212,965                     $     201,430
 Net income                                                $         2,486                     $       1,475
 Net income (loss) available to common
   Stockholders                                            $           989                     $     (78,741)
 Earnings (loss) per common share:
   Basic                                                   $          0.22                     $      (11.18)
   Diluted                                                 $          0.21                     $      (11.18)
 Pro forma weighted-average number of common shares outstanding:
   Basic                                                             4,584                             7,044
   Diluted                                                          12,123                             7,044



<PAGE>


                                                            Nine Months Ended                 Nine Months Ended
                                                              March 31, 2005                    March 31, 2004
 Revenue                                               $            628,672                $          599,819
 Net income                                               $           8,664                $            5,906
 Net income (loss) available to common
   Stockholders                                        $              4,104                $         (74,310)
 Earnings (loss) per common share:
   Basic                                               $               0.92                $           (9.93)
   Diluted                                             $               0.72                $           (9.93)
 Pro forma weighted-average number of common shares outstanding:
   Basic                                                              4,468                             7,485
   Diluted                                                           12,090                             7,485

</TABLE>

     This pro forma financial  information is presented for information purposes
only.  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. In addition, while PCN has traditionally recorded
all revenue on a gross basis, we have adjusted the historical amounts to reflect
certain contracts on a revenue basis consistent with NMHC's policies.

     The change in the  carrying  amount of goodwill  for the nine months  ended
March 31, 2005 is as follows:


Balance as of June 30, 2004                                       $ 86,964
PCN acquisition                                                     11,202
Inteq acquisition                                                      139
Inteq additional consideration earned                                1,024
PPP additional consideration earned                                    668
                                                                 ---------
Balance as of March 31, 2005                                      $ 99,997


Approximately $80,922 of the Company's March 31, 2005 goodwill is deductible for
income tax purposes on a straight-line basis over 15 years.

Acquired intangible assets subject to amortization consisted of the following:

<Table>
<S>                                                        <C>    <C>    <C>    <C>    <C>    <C>

                                       March 31, 2005                              June 30, 2004
                           =======================================    ========================================

Asset Class                 Gross Carrying         Accumulated         Gross Carrying          Accumulated
                                Amount            Amortization              Amount            Amortization
Customer
  relationships               $   6,146          $      2,232             $    4,816         $       1,564
Non-compete agreements
                                    220                   143                    220                   105
Employment agreements
                                    186                   127                    186                   109
Trade name                          100                    29                    100                    10
Company know how
                                    572                   461                    572                   318
                           -------------        ---------------       ---------------      ---------------
                           -------------        ---------------       ---------------      ---------------
                               $  7,224          $       2,992            $    5,894           $     2,106
                           =============        ===============       ===============      ===============

</TABLE>

5. DEBT

     On January 29, 2002,  the Company and certain of its  subsidiaries  entered
into  a  $40,000  secured  revolving  credit  facility  (the  "revolving  credit
facility") with HFG Healthco-4 LLC, a specialty finance company. The term of the
revolving  credit facility expired on January 28, 2005 and there is no remaining
obligation outstanding.

     On January 28, 2005,  the Company and certain of its  subsidiaries  entered
into a new five-year $65,000 cash flow based, line of credit with a syndicate of
commercial  banks led by JPMorgan  Chase  Bank,  N.A.  ("JPMorgan").  Subject to
certain conditions  including the consent of the existing lenders,  the new line
of credit may be increased by an aggregate of $35,000.

     Depending on the timing and dollar amount of each loan request, the Company
will either borrow at a spread above LIBOR, the overnight  Federal Funds rate or
JPMorgan's  prime rate.  The initial  spread will be 1.75% for LIBOR and Federal
Funds  loans and 0.75% for prime rate  loans.  After  receipt  of the  Company's
financial  statements  for the period  ended June 30,  2005,  the  spreads  will
increase or decrease  based on an interest  rate grid that is tied to a ratio of
debt to annual EBITDA.

     The new line of credit is secured by the Company's consolidated assets. The
new facility  requires the Company to be in compliance  with financial and other
covenants.  The three defined  financial  covenants  include:  consolidated  net
worth;  consolidated  fixed charge ratio; and consolidated debt to EBITDA ratio.
The Company was in compliance with all covenants at March 31, 2005.

6. STOCK OPTIONS

     During the nine months ended March 31, 2005,  the Company  granted  443,245
stock  options and 141,381  stock  options were  cancelled  for a net of 301,864
stock options  under the 1999 Stock Option Plan,  as amended (the  "Plan").  The
options granted during this period are exercisable at prices ranging from $19.80
to $29.06 and terminate  five to ten years from the grant date. The total number
of shares of common  stock of the Company  reserved by the Company for  issuance
under the Plan is 4,850,000  plus an  indeterminable  number of shares of common
stock of the Company issuable  pursuant to the  anti-dilution  provisions of the
Plan or upon the exercise of "reload options." There are no options  outstanding
that  contain  the  "reload"  provision.  There are  1,519,310  shares  issuable
pursuant to options granted under the Plan as of March 31, 2005.

7. EARNINGS PER SHARE

     A reconciliation  of shares used in calculating  basic and diluted earnings
per share follows:
<TABLE>
<S>                                                                        <C>    <C>    <C>    <C>    <C>    <C>


                                                                                 Three Months Ended March 31,
                                                                             -----------------------------------
                                                                                      2005                 2004
                                                                                ------------         -----------
   Basic                                                                           4,583,773          7,043,809
   Effect of assumed exercise of employee stock options                              583,197                  -
   Effect of assumed exercise of warrants                                                  -                  -
   Effect of assumed conversion of redeemable convertible preferred stock
                                                                                   6,956,522
                                                                                                              -
   Diluted weighted average number of shares outstanding                          12,123,492          7,043,809

                                                                                 Nine Months Ended March 31,
                                                                             -------------------------------------
                                                                                       2005                 2004
                                                                             ------------------      -------------
   Basic                                                                             4,468,227          7,484,757
   Effect of assumed exercise of employee stock options                                664,938                  -
   Effect of assumed exercise of warrants                                                    -                  -
   Effect of assumed conversion of redeemable convertible preferred stock            6,956,522                  -
                                                                                    ----------          ----------
  Diluted weighted average number of shares outstanding                            12,089,687          7,484,757
</TABLE>


     Basic net income per common  share is computed  by dividing  the net income
available to common stockholders by the weighted-average number of common shares
outstanding  during the period.  For the three and nine  months  ended March 31,
2005, diluted net income per share is computed by dividing the net income by the
weighted-average   number  of  common  and  dilutive  common  equivalent  shares
(consisting of employee stock options,  warrants and redeemable  preferred stock
as if converted)  outstanding  during the period.  For the three and nine months
ended March 31, 2004, the diluted net loss per share is computed by dividing the
net loss  available to common  stockholders  by the  weighted-average  number of
common  shares and excludes  dilutive  potential  common shares  outstanding  of
approximately  2,316,582  and  1,340,654,   respectively,  as  their  effect  is
anti-dilutive.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

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

                                                                             March 31,           June 30,
                                                                                2005               2004
                                                                           -----------          --------
Claims payable                                                                 110,576       $  102,259
Rebates payable to sponsors                                                     55,287           33,451
Trade and other payables and accrued expenses                                   21,671           11,862
                                                                           -----------          --------
                                                                           $   187,534       $  147,572
</TABLE>


9. RELATED PARTY TRANSACTIONS

     The Company  receives certain  general,  administrative  and other services
from an  affiliate.  The  financial  statements  include  allocations  of  these
corporate  expenses from affiliates,  which  management  believes were made on a
reasonable basis.  General and  administrative  expenses related to transactions
with  affiliates  included  in the  statement  of income were $316 for the three
months  ended March 31, 2005 and $190 for the three months ended March 31, 2004.
Included in the statement of income for the nine months ended March 31, 2005 and
2004 were  general and  administrative  expenses  related to  transactions  with
affiliates of $914 and $668, respectively.

     The Company  occupied  approximately  26,500  square  feet of office  space
located at 26 Harbor Park Drive, Port Washington, New York 11050 until April 30,
2004 (the  "Leased  Premises").  The  Company  subleases a portion of the Leased
Premises  (the  "Lease")  from BFS Realty,  LLC, an affiliate  of the  Company's
former  chairman and director  (the  "Affiliate").  As of November 1, 2001,  the
Company and the Affiliate amended the Lease. The Lease provided that,  effective
August 1, 2001,  the rent payable by the Company  would be an  aggregate  annual
rent of  $308.  The  Company  makes  monthly  real  estate  tax,  utilities  and
maintenance-expense payments to the Affiliate. The annual rent would increase by
5% per year during the term of the Lease.

     Additional space was built in the Leased Premises which allowed the Company
to  reconfigure  its  existing  space and to move all of its  employees  in Port
Washington  into  contiguous  space.  The Company and the Affiliate  amended the
Lease for the space on October 23,  2003 and April 26,  2004.  Effective  on the
occupancy  date  of the new  space,  as of May 1,  2004,  the  Affiliate  leased
additional square footage in the Leased Premises to the Company. The total space
leased by the Company is currently  37,108 square feet. The Lease provides that,
effective  May 1, 2004,  the rent  payable by the Company  shall be an aggregate
annual rent of $580 over a ten year term,  plus expenses  related to real estate
taxes,  utilities and maintenance.  Annual rent increases will be based upon the
Consumer  Price  Index plus 2.5%  subject to a maximum  annual cap of 3.5%.  The
Lease expires ten years from the occupancy date of May 1, 2004. In addition, the
Company  has early  termination  rights  which it may  exercise by delivery of a
notice to the  Affiliate  60 days  prior to the end of the April 30,  2009 lease
year. In consideration of such early termination  rights,  the Company would pay
to the Affiliate the rent that would  otherwise be payable by the Company to the
Affiliate  for the  succeeding  30 months  and  subject  to  adjustments  if the
Affiliate is able to lease the Leased  Premises to another  party during said 30
month period.  Leasehold  improvements made to this space during the nine months
ended March 31, 2005 were approximately $419.

10. MAJOR CUSTOMERS AND PHARMACIES

     For the three and nine months ended March 31, 2005,  approximately  18% and
19%, respectively,  of the consolidated revenue of the Company was from one plan
sponsor, MVP Health Plan, Inc.,  administering multiple plans. For the three and
nine months ended March 31, 2004,  approximately 42% and 41%,  respectively,  of
the consolidated revenue of the Company was from two plan sponsors administering
multiple plans.  Amounts due from the sponsor as of March 31, 2005  approximated
$9.6 million.

     For the three and nine months ended March 31, 2005 approximately 11% of the
cost of claims was from one  pharmacy  chain.  Amounts  payable to the  pharmacy
chain at March 31, 2005 were  approximately  $5.6 million.  For the three months
ended  March 31,  2004,  approximately  23% of the cost of  claims  was from two
pharmacy chains. For the nine months ended March 31, 2004,  approximately 17% of
the cost of claims was from one pharmacy chain.

11. SUPPLEMENTAL CASH FLOW INFORMATION

     During the nine months ended March 31, 2005 and March 31, 2004, the Company
paid  $492  and $519 in  interest,  and  $1,543  and  $1,566  in  income  taxes,
respectively.

12. LITIGATION

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plan Inc.  ("MHP") in the United  States  District  Court for the Eastern
District of Michigan.  The amended complaint alleges,  among other things,  that
the  parties  entered  into a contract  dated July 1999 (the  "Agreement"),  and
further alleges that the Company has overcharged MHP for the  administration  of
prescription benefit services in contravention to the terms of the Agreement and
breached its fiduciary duties by making a profit.  MHP is seeking $3,000 dollars
in damages.  The Company filed an answer and  counterclaim  on June 12, 2002. In
the counterclaim, the Company claimed damages in excess of $2,800 based on MHP's
failure  to pay  under a  contract.  On July 5,  2002,  MHP  agreed  to make two
payments in the amount of $1,340 and $1,360 to  partially  settle the  Company's
claims against MHP. MHP added a fiduciary duty claim,  with respect to which the
Company's  motion  to  dismiss  was  denied.   The  Company  continues  to  have
counterclaims  totaling  over  $200  against  MHP for MHP's  failure  to pay the
amounts it had agreed to pay the  Company  for goods and  services.  The Company
argued its  motion  for  partial  summary  judgment  in  February  2004,  and is
currently  awaiting the court's decision on such motion.  The Company intends to
continue to  vigorously  defend the action.  The Company is unable to provide an
estimate of any particular  loss, if any,  which may be associated  with the MHP
claims.


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES



<PAGE>



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

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

                                              OPERATING INCOME
                                              ($ in thousands)
                                          Three months ended March 31,
                                                                    Increase/
                                               2005                 (Decrease)                2004
                                        --------------------    -------------------    --------------------
                                        --------------------
   Revenue                                         $199,342                  24.8%                $159,725
   Cost of Claims                                   177,150                  24.0%                 142,909
                                        --------------------                           --------------------
                                        --------------------                           --------------------
   Gross profit                                      22,192                  32.0%                  16,816
   Selling, general, and
     administrative expense                          16,629                  17.3%                  14,182
                                        --------------------                           --------------------
                                        --------------------                           --------------------
   Operating Income                                  $5,563                 111.2%                  $2,634

                                              OPERATING INCOME
                                              ($ in thousands)
                                         Nine months ended March 31,
                                                                    Increase/
                                               2005                 (Decrease)                2004
                                        --------------------    -------------------    --------------------
                                        --------------------
   Revenue                                         $584,734                  23.2%                $474,450
   Cost of Claims                                   520,940                  21.6%                 428,441
                                        --------------------                           --------------------
                                        --------------------                           --------------------
   Gross profit                                      63,794                  38.7%                  46,009
   Selling, general, and
     administrative expense                          48,699                  33.2%                  36,551
                                        --------------------                           --------------------
                                        --------------------                           --------------------
   Operating Income                                 $15,095                  59.6%                  $9,458

</table>

Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

     Revenue  increased  $39.6  million,  or  approximately  24.8%,  from $159.7
million for the three  months ended March 31,  2004,  to $199.3  million for the
three months ended March 31, 2005.  Revenue recognized for contracts recorded on
a gross  revenue  basis was $158.9  million for the three months ended March 31,
2004 and $197.6  million  for the three  months  ended March 31,  2005.  Revenue
recognized  for  contracts  recorded on a net revenue basis was $0.8 million for
the three  months  ended  March 31, 2004 and $1.7  million for the three  months
ended March 31,  2005.  The  specific  terms of the  contracts  that Health Card
enters into with its sponsors will determine  whether Health Card recognizes the
gross  revenue  related to the cost of the  prescriptions  filled (see  Critical
Accounting  Policies and Estimates - Revenue  Recognition).  For those contracts
that Health Card  recognizes  net  revenue,  there is no impact on gross  profit
since   neither  the   prescription   revenue  nor  the  related  costs  of  the
prescriptions   is  recorded.   Health  Card  includes  in  revenue  only  those
co-payments  collected in its mail order facility in Miramar,  Florida.  For the
three  months  ended March 31,  2005,  there was  approximately  $4.3 million of
co-payments  included in revenue  versus $0.9 million for the three months ended
March 31, 2004.  Co-payments  retained by pharmacies on prescriptions filled for
Health  Card's  members and not  included in Health  Card's  revenue  were $74.9
million and $52.7  million,  for the three months ended March 31, 2005 and 2004,
respectively.

     Of the $39.6  million  increase in revenue in the three  months ended March
31, 2005, $12.3 million was  attributable to the inclusion of revenue  generated
by Inteq which was included in the revenue for the quarter ended March 31, 2005,
but not in the quarter ended March 31, 2004 and $5.5 million was attributable to
the  inclusion of revenue  generated by PCN that was not included in the quarter
ended  March 31,  2004.  Co-payments  received  from the Mail  Order  operations
accounted for $3.4 million of the increase.  Another approximately $31.2 million
of the  increase  was due to revenue  related to new  sponsors  or new  services
offered during the quarter ended March 31, 2005 excluding  contracts recorded on
a net revenue basis. An additional  increase of  approximately  $8.9 million was
attributable to other existing  sponsors related to, among other things,  higher
costs for  pharmaceuticals,  availability of new drugs, plan participant  growth
and an increase in the average number of claims per plan participant, as well as
changes in other  miscellaneous  revenue  items.  These revenue  increases  were
offset by revenue  decreases  related to the  termination  of existing  customer
contracts leading to a reduction in revenue of approximately $21.7 million.

     Cost of claims increased $34.2 million, or approximately 24.0%, from $142.9
million for the three  months  ended  March 31,  2004 to $177.2  million for the
three months ended March 31, 2005.  Inteq  accounted  for $10.6  million of this
increase,  and PCN  accounted  for another  $4.8  million.  Increases in cost of
claims  totaling  approximately  $39.5  million  related to the  activity of new
sponsors as well as the growth in existing sponsors were partially offset by the
loss of sponsors  which  reduced cost of claims by  approximately  $20.7 million
(including  a $1.1  million  adjustment  for  previous  pharmacy  claims).  As a
percentage  of  revenue,  cost of claims  decreased  from 89.5% to 88.9% for the
three  months  ended  March  31,  2004 and  March 31,  2005,  respectively.  The
contracts the Company  recognized  on a net revenue basis  decreased the overall
Company costs as a percentage of revenue due to the cost not being recognized on
the contracts recorded on the net revenue basis. In addition,  the receipt of an
additional $3.4 million in co-payments for the Mail Order operations resulted in
a lower  cost of claims as a percent of  revenue,  since no  additional  cost of
claims are incurred related to these fees.

     Gross profit  increased from $16.8 million for the three months ended March
31, 2004 to $22.2  million for the three  months  ended March 31,  2005;  a $5.4
million, or 32.0%, increase. In addition to increases in gross profit related to
the increases in revenue, Inteq added $1.7 million to gross profit and PCN added
$0.7 million. The gross profit also increased by approximately $2.6 million from
the expanding mail order and specialty  operations.  Net rebates retained by the
Company added another  approximately $0.4 million to gross profit. Gross profit,
as a percentage of revenue,  increased  from 10.5% to 11.1% for the three months
ended March 31, 2004 and March 31, 2005, respectively. The contracts the Company
recognizes  on a net revenue  basis have the effect of improving  the  Company's
gross margin as a percentage  of revenue due to the fact that  recorded  revenue
and cost is lower since only the administrative  fees related to these contracts
are recorded.  Competitive  pressures which have led to a decline in some prices
that the  Company  charges  to its  sponsors  have had the  effect of  partially
offsetting the increases in gross margin described above.

     Selling,  general,  and administrative  expenses increased $2.4 million, or
approximately  17.3%,  from $14.2  million for the three  months ended March 31,
2004 to $16.6  million for the three months  ended March 31,  2005.  Included in
selling,  general and  administrative  expenses for the three months ended March
31, 2004 were approximately  $1,881,500 of non-recurring expenses related to the
New  Mountain  Transaction  including:  1)  transaction  bonuses and a severance
payment  totaling  $1,542,500,   and  2)  a  non-cash   compensation  charge  of
approximately  $339,000  related to the  acceleration  of stock  options for two
directors  who  resigned  upon  the  closing  of the New  Mountain  Transaction.
Excluding  these  non-recurring  items,  the  increase in  selling,  general and
administrative  expenses was $4.3  million.  Approximately  $1.9 million of this
increase  in selling,  general,  and  administrative  expenses is related to the
acquisition of Inteq and PCN. The major  components of the $1.9 million increase
in  expenses   related  to  the   acquisitions:   1)  salaries  and  benefits  -
approximately  $0.9  million,  2)  postage  and  supplies -  approximately  $0.1
million,  3) telephone and travel - approximately $0.1 million, 4) equipment and
office rental - approximately  $0.2 million,  5) depreciation and amortization -
approximately  $0.2 million,  6) license and support  agreements - approximately
$0.1 million,  and 7) broker commissions - approximately  $0.3 million.  Another
$0.5  million  relates  to costs  incurred  as a result of  compliance  with the
Sarbanes-Oxley Act. In addition, salaries and benefits increased by $1.1 million
over the prior year primarily due to increased headcount.

     General  and  administrative   expenses  charged  by  affiliates  increased
approximately  $126,000, or 66%,  year-over-year from approximately  $190,000 to
approximately  $316,000  for the three months ended March 31, 2004 and March 31,
2005,  respectively.  The increase is the result of higher rent costs due to the
expanded space in the Company's Port Washington, NY offices.

     Selling,  general,  and  administrative  expenses  as a percent  of revenue
decreased  from 8.9% for the three  months  ended March 31, 2004 to 8.3% for the
three months ended March 31, 2005.

     For the three  months ended March 31, 2004,  the Company  recognized  other
income, net, of approximately $7,000. For the three months ended March 31, 2005,
the Company  recognized  other  expense,  net, of  approximately  $28,000.  This
increase in other expense was  primarily  due to a $53,000  increase in interest
expense,  offset by an increase in interest income, both of which were driven by
higher interest rates.

     Income before the provision for income taxes increased  approximately  $2.9
million,  or 110%, from approximately $2.6 million,  for the quarter ended March
31, 2004,  to  approximately  $5.5 million for the quarter ended March 31, 2005.
The primary  factor  leading to this  increase in income before income taxes was
the rise in gross  profit,  offset  by the  increase  in  selling,  general  and
administrative expenses related to the new acquisitions.

     The effective tax rate was  approximately  41% for both periods  presented.
The tax rate of 41% represents the Company's  current estimated tax rate for the
full fiscal year.

     Net income for the  quarter  ended March 31,  2005 was  approximately  $3.3
million as compared to  approximately  $1.6 million for the quarter  ended March
31, 2004,  which is a 109% increase for such period.  The increase in net income
is attributable to the same factors causing the increase in income before income
taxes.

     In addition,  there were three charges  against income (loss)  available to
common shareholders  related to the New Mountain Transaction (See Note 3 of Part
1,  Item  1).  The  first of these  charges  relates  to  preferred  stock  cash
dividends,  which  amounted to  approximately  $1.4 million for the three months
ended March 31, 2005 and $0.2 million for the three months ended March 31, 2004.
The preferred  stock  provides for an initial cash  dividend  equal to 7% of the
investment  amount  (currently $80 million),  which  decreases to 3.5% after the
fifth anniversary of issuance.  The dividends of approximately  $1.4 million and
$0.2 million  represent  the amount  accrued and paid for the three months ended
March 31, 2005 and March 31, 2004,  respectively.  The second  charge is for the
accretion of  transaction  expenses  which were  approximately  $117,000 for the
three months ended March 31, 2005,  and $17,000 for the three months ended March
31, 2004. Certain  transaction costs related to the New Mountain preferred stock
investment of approximately $4.7 million were deducted from net proceeds and the
carrying value of the preferred stock.  These  transaction costs are accreted to
the preferred stock carrying value over the ten-year life of the preferred stock
investment.  The  third  charge is for the  beneficial  conversion  feature  and
affects  the quarter  ended March 31,  2004.  This $80  million,  non-recurring,
non-cash charge  represents the difference  between the fair market value of the
Company's  common  stock  on  the  date  of the  closing  of  the  New  Mountain
Transaction and the effective  conversion price of $11.29,  and which is limited
to the $80 million purchase price for the preferred stock.

     After  deducting  these three  charges from net income  there  remained net
income available to common  stockholders of  approximately  $1.8 million for the
three months ended March 31, 2005, as compared to a net loss available to common
stockholders of approximately $78.7 million for the three months ended March 31,
2004.

While net income and net income available to common stockholders excluding
non-recurring New Mountain Transaction items are not measures of financial
performance under U.S. generally accepted accounting principles, they are
provided as information for investors for analysis purposes in evaluating the
effect of the New Mountain Transaction on net income and net income available to
common stockholders. Net income and net income available to common stockholders
excluding non-recurring New Mountain Transaction items are not meant to be
considered a substitute or replacement for net income or net income (loss)
available to common stockholders as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from net income to net income
available to common stockholders excluding non-recurring New Mountain
Transaction items, is as follows (all amounts are in thousands, except per share
amounts):

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


                                                                                  Three Months Ended
                                                           -----------------------------------------------------------------
                                                           ------------------------------ ---- -----------------------------
                                                                  March 31, 2005                      March 31, 2004
                                                           ------------------------------      -----------------------------

Net income, as reported                                                        $   3,265                          $   1,564

Add back:
Transaction bonuses and severance payment,
  net of income tax benefit                                                            -                                910

Compensation charge related to the
  acceleration of directors options, net of                                            -                                200
  income tax benefit                                        ------------------------------      -----------------------------
Net income excluding non-recurring
  New Mountain Transaction items ( C )                                        $    3,265                         $    2,674

Less:
Preferred dividends                                                                1,380                                199
Accretion of transaction expenses                                                    117                                 17
                                                           ------------------------------      -----------------------------
Net income available to common
  shareholders excluding non-recurring New                                    $    1,768                         $    2,458
  Mountain Transaction items ( A )

Earnings per share excluding non-recurring New Mountain Transaction items:
  Basic ( ( A ) / ( B ) )                                                     $     0.39                          $    0.35
  Diluted ( ( C ) / ( D ) )                                                   $     0.27                          $    0.29

Weighted average number of shares outstanding:
   Basic ( B )                                                                     4,584                              7,044
   Diluted ( D )                                                                  12,123   *                          8,366

</table>

     * For the three months ended March 31, 2005, the number of weighted average
diluted  shares  was  calculated  using  the "as if  converted"  method  for the
redeemable preferred stock.

Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004

     Revenue  increased  $110.3 million,  or  approximately  23.2%,  from $474.5
million for the nine months ended March 31, 2004, to $584.7 million for the nine
months ended March 31, 2005.  Revenue  recognized  for  contracts  recorded on a
gross revenue basis was $472.6  million for the nine months ended March 31, 2004
and $580.5 million for the nine months ended March 31, 2005.  Revenue recognized
for  contracts  recorded  on a net revenue  basis was $1.9  million for the nine
months ended March 31, 2004 and $4.2 million for the nine months ended March 31,
2005.  The specific terms of the contracts that Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related
to the cost of the  prescriptions  filled.  For those contracts that Health Card
recognizes  net revenue,  there is no impact on gross  profit since  neither the
prescription  revenue nor the related  costs of the  prescriptions  is recorded.
Health Card  includes in revenue  only those  co-payments  collected in its mail
order  facility in Miramar,  Florida.  For the nine months ended March 31, 2005,
there was approximately $10.8 million of co-payments  included in revenue versus
$1.1 million for the nine months ended March 31, 2004.  Co-payments  retained by
pharmacies on prescriptions filled for Health Card's members and not included in
Health  Card's  revenue  were $203.6  million and $150.2  million,  for the nine
months ended March 31, 2005 and 2004, respectively.

     Of the $110.3  million  increase in revenue in the nine months  ended March
31, 2005, $44.8 million was  attributable to the inclusion of revenue  generated
by Inteq and another $5.5 million  generated by PCN,  which were included in the
revenue for the nine months  ended  March 31,  2005,  but not in the nine months
ended March 31, 2004. In addition, $1.8 million of the increase was attributable
to the PPP Acquisition, which took place on July 31, 2003 and therefore was only
included  in the revenue  for eight of the nine  months  ended  March 31,  2004.
Co-payments  received from the Mail Order operations  accounted for $9.7 million
of the increase.  Another approximately $60.0 million of the increase was due to
revenue  related to new sponsors or new services  offered during the nine months
ended March 31, 2005 excluding  contracts  recorded on a net revenue  basis.  An
additional  increase of  approximately  $49.9 million was  attributable to other
existing   sponsors   related  to,   among  other   things,   higher  costs  for
pharmaceuticals,  availability  of new  drugs,  plan  participant  growth and an
increase  in the  average  number of  claims  per plan  participant,  as well as
changes in other  miscellaneous  revenue  items.  These revenue  increases  were
offset by revenue  decreases  related to the  termination  of existing  customer
contracts leading to a reduction in revenue of approximately $61.4 million.

     Cost of claims increased $92.5 million, or approximately 21.6%, from $428.4
million for the nine months ended March 31, 2004 to $520.9  million for the nine
months ended March 31, 2005.  Inteq  accounted for $39.3 million,  PCN accounted
for $4.8 million and PPP  accounted  for another  $1.4 million of the  increase.
Increases in cost of claims totaling approximately $105.0 million related to the
activity  of new  sponsors  as well as the  growth  in  existing  sponsors  were
partially  offset  by the loss of  sponsors  which  reduced  cost of  claims  by
approximately  $58.0 million  (including a $1.1 million  adjustment for previous
pharmacy  claims).  As a percentage of revenue,  cost of claims  decreased  from
90.3% to 89.1% for the nine  months  ended  March 31,  2004 and March 31,  2005,
respectively.  The  contracts  the Company  recognized  on a net  revenue  basis
decreased  the overall  Company costs as a percentage of revenue due to the cost
not being  recognized on the  contracts  recorded on the net revenue  basis.  In
addition,  the receipt of an additional $9.7 million in co-payments for the Mail
Order  operations  resulted  in a lower cost of claims as a percent of  revenue,
since no additional cost of claims are incurred related to these fees.

     Gross profit  increased  from $46.0 million for the nine months ended March
31, 2004 to $63.8  million for the nine months ended March 31, 2005,  which is a
$17.8 million,  or 38.7%,  increase for such period. In addition to increases in
gross profit  related to the  increases in revenue,  Inteq added $5.6 million to
gross  profit and PCN added $0.7  million.  The gross  profit also  increased by
approximately   $8.1  million  from  the  expanding  mail  order  and  specialty
operations. Net rebates retained by the Company added another approximately $3.4
million to gross  profit.  Gross profit,  as a percentage of revenue,  increased
from 9.7% to 10.9% for the nine months  ended March 31, 2004 and March 31, 2005,
respectively.  The contracts the Company  recognizes on a net revenue basis have
the effect of improving  the  Company's  gross margin as a percentage of revenue
due to the  fact  that  recorded  revenue  and  cost is  lower  since  only  the
administrative  fees  related  to  these  contracts  are  recorded.  Competitive
pressures which have led to a decline in some prices that the Company charges to
its sponsors have had the effect of partially  offsetting the increases in gross
margin described above.

     Selling,  general, and administrative  expenses increased $12.1 million, or
approximately 33.2%, from $36.6 million for the nine months ended March 31, 2004
to $48.7 million for the nine months ended March 31, 2005.  Included in selling,
general and  administrative  expenses  for the nine months  ended March 31, 2004
were  approximately  $1,881,500  of  non-recurring  expenses  related to the New
Mountain Transaction  including:  1) transaction bonuses and a severance payment
totaling  $1,542,500,  and 2) a non-cash  compensation  charge of  approximately
$339,000  related to the  acceleration  of stock  options for two  directors who
resigned  upon the  closing of the New  Mountain  Transaction.  Excluding  these
non-recurring  items,  the  increase  in  selling,  general  and  administrative
expenses  was $14.0  million.  Approximately  $8.4  million of this  increase in
selling, general, and administrative expenses is related to the new acquisitions
and expanding mail order  operations.  The major  components of the $8.4 million
increase in expenses  related to new services  were:  1) salaries and benefits -
approximately  $3.4  million,  2)  postage  and  supplies -  approximately  $0.8
million,  3) telephone and travel - approximately $0.3 million, 4) equipment and
office rental - approximately  $1.1 million,  5) depreciation and amortization -
approximately  $0.9 million,  6) license and support  agreements - approximately
$0.4 million,  and 7) broker commissions - approximately  $1.5 million.  Another
$0.6  million  relates  to costs  incurred  as a result of  compliance  with the
Sarbanes-Oxley Act. In addition, salaries and benefits increased by $2.1 million
over the prior year primarily due to increased headcount.

     General  and  administrative   expenses  charged  by  affiliates  increased
approximately  $246,000, or 37%,  year-over-year from approximately  $668,000 to
approximately  $914,000  for the nine months  ended March 31, 2004 and March 31,
2005,  respectively.  The increase is the result of higher rent costs due to the
expanded space in the Company's Port Washington, NY offices.

     Selling,  general,  and  administrative  expenses  as a percent  of revenue
increased  from 7.7% for the nine  months  ended  March 31, 2004 to 8.3% for the
nine months ended March 31, 2005.

     For the nine months  ended March 31,  2004,  the Company  recognized  other
expense, net, of approximately $0.3 million. For the nine months ended March 31,
2005, the Company  recognized other income,  net, of approximately $1.4 million.
The primary component of the approximately $1.7 million increase in other income
was the realization of a non-recurring $1.7 million gain from an insurance claim
which  represented the excess of the insurance  proceeds over the carrying value
of the assets covered by the claim.

     Income before the provision for income taxes increased  approximately  $7.3
million,  or 79%, from  approximately  $9.2  million,  for the nine months ended
March 31, 2004, to  approximately  $16.5 million for the nine months ended March
31, 2005. The primary  factors  leading to this increase in income before income
taxes were the rises in gross profit and other income, offset by the increase in
selling, general and administrative expenses related to the new activities.

     The effective tax rate was  approximately  41% for both periods  presented.
The tax rate of 41% represents the Company's  current estimated tax rate for the
full fiscal year.

     Net income for the nine months ended March 31, 2004 was approximately  $5.4
million as  compared to  approximately  $9.7  million for the nine months  ended
March 31, 2005; a 79% increase.  The increase in net income is  attributable  to
the same factors causing the increase in income before income taxes.

     In addition,  there were three charges  against income (loss)  available to
common shareholders  related to the New Mountain Transaction (See Note 3 of Part
1,  Item  1).  The  first of these  charges  relates  to  preferred  stock  cash
dividends,  which  amounted to  approximately  $4.2  million for the nine months
ended March 31, 2005 and $0.2  million for the nine months ended March 31, 2004.
The preferred  stock  provides for an initial cash  dividend  equal to 7% of the
investment  amount  (currently $80 million),  which  decreases to 3.5% after the
fifth anniversary of issuance.  The dividends of approximately  $4.2 million and
$0.2  million  represent  the amount  accrued and paid for the nine months ended
March 31, 2005 and March 31, 2004,  respectively.  The second  charge is for the
accretion of transaction expenses which were approximately $356,000 for the nine
months  ended March 31,  2005 and  $17,000  for the nine months  ended March 31,
2004.  Certain  transaction  costs related to the New Mountain  preferred  stock
investment of approximately $4.7 million were deducted from net proceeds and the
carrying value of the preferred stock.  These  transaction costs are accreted to
the preferred stock carrying value over the ten-year life of the preferred stock
investment.

     After  deducting  these three  charges from net income  there  remained net
income (loss) available to common stockholders of approximately $5.2 million for
the nine months ended March 31, 2005, as compared to a net loss of approximately
$74.8 million for the nine months ended March 31, 2004.

While net income and net income available to common stockholders excluding
non-recurring New Mountain Transaction items are not measures of financial
performance under U.S. generally accepted accounting principles, they are
provided as information for investors for analysis purposes in evaluating the
effect of the New Mountain Transaction on net income and net income available to
common stockholders. Net income and net income available to common stockholders
excluding non-recurring New Mountain Transaction items are not meant to be
considered a substitute or replacement for net income or net income (loss)
available to common stockholders as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from net income to net income
available to common stockholders excluding non-recurring New Mountain
Transaction items, is as follows (all amounts are in thousands, except per share
amounts):
<TABLE>
<S>                                                               <C>    <C>    <C>    <C>    <C>    <C>

                                                                                  Nine Months Ended
                                                           -----------------------------------------------------------------
                                                           ------------------------------ ---- -----------------------------
                                                                  March 31, 2005                      March 31, 2004
                                                           ------------------------------      -----------------------------
                                                           ------------------------------

Net income, as reported                                                        $   9,734                          $   5,429

Add back:
Transaction bonuses and severance payment,
  net of income tax benefit                                                            -                                910
Compensation charge related to the
  acceleration of directors options, net of                                            -                                200
  income tax benefit

                                                           ------------------------------      -----------------------------
Net income excluding non-recurring
  New Mountain Transaction items ( C )                                        $    9,734                         $    6,539

Less:
Preferred dividends                                                                4,204                                199
Accretion of transaction expenses                                                    356                                 17

                                                           ------------------------------      -----------------------------
Net income available to common
  shareholders excluding non-recurring New                                    $    5,174                         $    6,323
  Mountain Transaction items ( A )

Earnings per share excluding non-recurring New Mountain Transaction items:
  Basic ( ( A ) / ( B ) )                                                     $     1.16                          $    0.84
  Diluted ( ( C ) / ( D ) )                                                   $     0.81                          $    0.74

Weighted average number of shares outstanding:
   Basic ( B )                                                                     4,468                              7,485
   Diluted ( D )                                                                  12,090   *                          8,578

</table>

     * For the nine months ended March 31, 2005, the number of weighted  average
diluted  shares  was  calculated  using  the "as if  converted"  method  for the
redeemable preferred stock.

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.  Effective  July 2003,  the
Company  requires  cash to carry  inventory  in its  mail  order  and  specialty
pharmacy facilities.  Also, the Company requires cash to execute its strategy of
pursuing  acquisitions of other PBM companies or of companies  providing related
services.  As of March 31, 2005,  the Company had a working  capital  deficit of
$28.4  million as compared to a working  capital  deficit of $27.7 million as of
June 30, 2004. The primary  reason for the reduction in working  capital was the
PCN  Acquisition,  offset by the profit generated by the Company during the nine
months ended March 31, 2005. The Company has now acquired seven  companies since
July 2000 utilizing  primarily  cash.  This has had the effect of increasing the
Company's  working capital deficits until sufficient  profitability is earned to
offset these deficits.

     Net cash  provided by  operating  activities  was $4.5 million for the nine
months ended March 31, 2005, compared to $20.4 million for the nine months ended
March 31, 2004. Cash flows from operating activities were impacted negatively in
the fiscal 2005 period, and cash provided by investing activities was positively
impacted, as a result of the timing of the closing of the PCN Acquisition, which
occurred on March 7, 2005.

     A component of cash  provided by operating  activities is the net change in
assets and  liabilities  from the beginning to the end of the reporting  period.
The  effect  of  changes  in  assets  and  liabilities  acquired  in a  business
combination  are included in the  statement of cash flows as of the  acquisition
date through the end of the reporting period.

     In calculating the Company's cash flows for the nine months ended March 31,
2005, the Company  included the acquired  balances of PCN as of March 7, 2005 in
measuring cash provided by operating  activities.  The PCN  Acquisition  closing
date  occurred at a time during  PCN's  billing and paying  cycle when  accounts
receivable had decreased  significantly  following collection of a large portion
of its February 28, 2005 receivables. This resulted in a large cash balance, the
majority  of which was  earmarked  for  payment  within the next few days to the
various dispensing  pharmacies.  Since PCN accounts receivable was significantly
higher  at March  31,  2005  compared  to March 7, 2005  (relative  to  accounts
payable),  the timing of the PCN Acquisition  negatively  impacted the Company's
consolidated  cash from operations by  approximately  $12.6 million for the nine
months ended March 31, 2005.  The Company's  cash flows from  operations for the
nine months ended March 31, 2005,  without giving effect to the PCN Acquisition,
would have been $17.1 million.

     The large PCN cash  balance  at the  closing  date was  reported  as a $3.2
million source of cash, or cash provided by investing activities,  calculated by
subtracting the $13.5 million acquisition price and related costs from the $16.7
million of cash acquired.

     While cash flow from  operating  and  investing  activities  excluding  the
impact of the PCN  acquisition are not measures of financial  performance  under
U.S. generally accepted accounting principles,  they are provided as information
for  investors  for  analysis  purposes  in  evaluating  the  effect  of the PCN
acquisition on cash flow from operating and investing activities. Cash flow from
operating and investing  activities  excluding the impact of the PCN acquisition
is not meant to be  considered a substitute  or  replacement  for cash flow from
operating and investing activities as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from cash flow from operating
and investing  activities to cash flow from  operating and investing  activities
excluding the impact of the PCN acquisition, is as follows:

<table>
<S>                                                               <C>    <C>    <C>    <C>    <C>    <C>

                                                                              For the nine months ended
                                                                        March 31, 2005        March 31, 2004
                                                                          (unaudited)         (unaudited)
                                                                        --------------       ---------------

Net cash provided by operating activities, as reported                    $     4,450        $   20,415

Impact of PCN on cash flow from operations
for the period March 7 - March 31, 2005                                        12,656                 -

Net cash provided by operating activities, excluding the impact
of the PCN acquisition                                                   $      17,106      $    20,415
Net cash used in investing activities, as reported                       $     (1,639)      $    (6,454)

Impact of PCN acquisition at March 7, 2005 on cash flow
from investing activities                                                      (3,104)                -

Net cash used in investing activities, excluding the impact
of the PCN acquisition                                                    $    (4,743)     $     (6,454)
Cash and cash equivalents at end of period, as reported                   $     4,498      $     29,884

Impact of PCN acquisition at March 7, 2005 and PCN's
operations for the period March 7 - March 31, 2005                              9,552                 -

Cash and cash equivalents at end of period, excluding
the impact of the PCN acquisition                                        $     14,050     $      29,884

</TABLE>

     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 pharmacy 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. Furthermore, 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 $1.6 million for the nine months
ended March 31,  2005,  as compared  to $6.5  million for the nine months  ended
March 31,  2004.  This  decrease of $4.9  million in net cash used in  investing
activities was the result of a decrease in capital  expenditures of $1.3 million
along with a reduction in the cash paid for the PPP Acquisition of $3.3 million,
offset by the receipt of $2.7  million in the nine  months  ended March 31, 2004
relating to officer and affiliate loans less $3.2 million generated from the PCN
Acquisition.  The cash  payments of $358,000  during the nine months ended March
31,  2005 for the PPP  Acquisition  are for  additional  payments  due under the
earn-out  provision  (See Note 4 of Part 1, Item 1).  The  Company  has  accrued
$617,000  through  March 31, 2005 as  additional  purchase  price related to the
earn-out provision, which will be paid in September 2005.

     During the nine months ended March 31, 2005,  the Company used $1.7 million
from financing activities compared to receiving $10.7 million in the nine months
ended March 31,  2004.  This  decrease  of $12.4  million is the result of $75.3
million from the issuance of the Company's series A preferred stock net of $51.1
million for the purchase of the Company's shares in the tender offer (See Note 3
of Part 1, Item 1) in the nine months ended March 31, 2004. Further, in the nine
months ended March 31, 2004, cash was reduced by a $15.6 net repayment under the
revolving  credit facility  compared to no net activity in the nine months ended
March 31, 2005.  Finally,  an additional  $4.0 million was paid for dividends on
the  convertible  preferred stock during the nine months ended March 31, 2005 as
compared to the nine months  ended March 31, 2004 along with an increase in cash
paid for financing  costs of $0.5 million,  offset by an additional $0.7 million
in proceeds from the exercise of stock options compared to the prior year.

     On January 28, 2005,  the Company  entered into a five-year  $65.0  million
cash flow  based,  line of credit with a syndicate  of  commercial  banks led by
JPMorgan Chase Bank, N.A. ("JPMorgan").  Subject to certain conditions,  the new
line of credit may be increased by an  aggregate of $35.0  million.  The line of
credit facility contains various covenants that, among other things, require the
Company to maintain certain financial ratios,  which are consolidated net worth,
consolidated  fixed charge ratio and  consolidated  debt to EBITDA ratio.  As of
March 31,  2005 there was no  principal  balance  outstanding  under the line of
credit facility, and the Company was in compliance with its financial covenants.

Two of these financial covenants are based upon the EBITDA (earnings before
interest, taxes, depreciation and amortization) generated by the Company over
specified periods of time. These covenants, consolidated fixed charge ratio and
consolidated debt to EBITDA ratio, are evaluated by the lender as a measure of
the Company's liquidity and its ability to meet all of its obligations under the
credit facility. EBITDA is presented as cash flow from operations plus or minus
the net changes in assets and liabilities and the changes in certain non-cash
reconciling items from net cash from operations to net income over the reported
periods. While EBITDA is not a measure of financial performance or liquidity
under generally accepted accounting principles, it is provided as information
for investors for analytical purposes in light of the financial covenants
referred to above. EBITDA is not meant to be considered a substitute or
replacement for net income as prepared in accordance with accounting principles
generally accepted in the United States. EBITDA, which increased by
approximately $7.9 million or 58%, from $13.7 million for the nine months ended
March 31, 2004 to $21.6 million for the nine months ended March 31, 2005, is
calculated as follows (see Consolidated Statement of Cash Flows comprising Item
1 hereof for more details):

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

                                                    Nine Months Ended March 31,
                                                   2005                      2004
                                            ---------------------- ---------------------
                                            ---------------------- ---------------------
Cash flow from operations                         $   4,450               $   20,415
Provision for income taxes                            6,765                    3,773
Interest expense, net                                   373                      346
Net change in assets and
  liabilities                                        11,531                  (10,384)
Non-cash items to reconcile
  net cash from operations to                        (1,565)                    (467)
  net income
                                            ---------------------- ---------------------
                                            ---------------------- ---------------------

EBITDA                                           $   21,554               $   13,683
                                            ====================== =====================
</TABLE>


     The  Company  has entered  into  various  capital  lease  transactions  for
hardware and  software.  The Company has also  assumed  various  capital  leases
through its acquisitions. In addition, three capital leases have been assumed as
a result of the PCN Acquisition.

     The Company has entered into various real estate operating leases with both
related and unrelated  parties.  The Company has entered into various  operating
leases and a sale-leaseback  with unrelated third parties for office  equipment.
These leases have different payment terms and expiration dates. The Company also
entered  into  a   sale-leaseback   operating  lease  of  certain  fixed  assets
(principally  computer  hardware  and  externally  developed  software)  with an
affiliate of the  Company's  former  chairman and  director.  See Note 11 to the
Consolidated  Financial  Statements  comprising Item 8 of Form 10-K for the year
ended June 30, 2004 for a further description of these various leases.

     The total future payments under these  contractual  obligations as of March
31, 2005, are as follows:

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

Contractual Obligations                              Payments Due by Period
($ in thousands)
                                                                                                            More than
                                          Total           Less than         1-3 Years          3-5           5 Years
                                                           1 Year                             Years
                                        -----------     --------------      ----------      ----------      ----------
                                        -----------     --------------      ----------      ----------      ----------
Long Term Debt                          $        -      $           -      $        -      $        -      $        -
Capital Lease Obligations                       74                 27              47               -               -
Operating Leases                            22,763              6,647           8,437           4,390           3,289
Sale-leasebacks                                245                140             105               -               -
                                        -----------     --------------      ----------      ----------      ----------
                                        -----------     --------------      ----------      ----------      ----------
   Total Contractual Cash
        Obligations                     $   23,082      $       6,814      $    8,589      $    4,390      $    3,289
                                        ===========     ==============      ==========      ==========      ==========
</TABLE>


     The  shareholders  of the Inteq Group are  eligible  to receive  additional
compensation of up to $4.2 million,  if certain  financial  targets are met over
the first year. Of this potential  amount,  $3.0 million was deposited in escrow
at the time of closing.  As of March 31, 2005,  $1.0 million has been earned and
released from escrow.

     The shareholders of PPP are eligible to receive additional consideration of
up to $7.0 million,  if certain  financial  targets are met over the first three
years.  Such amounts earned are payable within 45 days after the first,  second,
and third anniversary of the date of acquisition.  In the sole discretion of the
Company,  up to 50% of any amounts earned can be paid in the Company's  stock in
lieu of cash. For the year ended July 31, 2004, $716,010 has been earned and was
paid on  September  15,  2004.  Of this  amount,  $358,005  was paid in cash and
$358,005 was satisfied by the issuance of 12,650 shares of common stock. For the
period of August 1, 2004 through March 31, 2005, an additional $617,000 has been
earned  and  accrued  as  additional  purchase  price  that will be  settled  in
September 2005.

     The   shareholders   of  Centrus  were   eligible  to  receive   additional
consideration  of up to $4.0  million,  payable  over  three  years,  if certain
financial  targets  were met over the  first two years  after  acquisition.  The
financial  performance  targets were achieved and $4 million has been earned. Of
this  amount,  $1.0  million was paid in May 2003,  $2.0 million was paid in May
2004, and another $1.0 million will be paid in May 2005.

     The Company  entered into an amended and restated  preferred stock purchase
agreement,  dated as of November 26, 2003, with New Mountain Partners, L.P. (the
"purchase agreement").  Pursuant to the purchase agreement,  the Company agreed,
subject  to various  conditions,  to issue to New  Mountain  Partners a total of
6,956,522  shares of series A preferred  stock at a purchase price of $11.50 per
share, for aggregate  proceeds of approximately $80 million.  On March 19, 2004,
the Company  completed the sale of the series A preferred  stock to New Mountain
Partners and used  approximately  $49 million of the proceeds of the sale of the
series A preferred  stock to  purchase,  pursuant to a tender  offer,  4,448,900
shares of the Company's  outstanding  common stock at $11.00 per share. Prior to
the  closing  of the New  Mountain  Transaction,  Bert E.  Brodsky,  the  former
chairman and member of the board of directors,  and certain stockholders related
to him, held (assuming the exercise of 330,000  options and warrants held by Mr.
Brodsky,  which occurred in April 2004), in the aggregate,  approximately 59% of
the  Company's  outstanding  common  stock and had  agreed  to tender  4,448,900
shares, or approximately 54% of the Company's  outstanding common stock, held by
them, into the tender offer. No other shareholders tendered shares in the offer.

     Following the completion of the tender offer,  and assuming the exercise of
330,000 options and warrants held by Mr. Brodsky,  which occurred in April 2004,
New Mountain  Partners  owned  securities at March 19, 2004 that were  initially
convertible  into  approximately  64% of the  Company's  issued and  outstanding
common  stock and prior to  conversion  of the  series A  preferred  stock  were
entitled to cast that number of votes that is equal to approximately  60% of the
Company's  aggregate  voting  power.  Following  the closing of the New Mountain
Transaction,  New Mountain  Partners were entitled to and did nominate and elect
60% of the members of the Company's board of directors.

     The Company used the  remaining  proceeds from the issuance and sale of the
series A  preferred  stock of  approximately  $24  million,  excluding  expenses
related  to  the  closing  of  the  New  Mountain  Transaction,  for  the  Inteq
Acquisition (See Note 4 of Part 1, Item 1) and working capital purposes.

     The preferred  stock  provides for an initial annual cash dividend equal to
7% of the investment amount, which decreases to 3.5% after the fifth anniversary
of issuance.  The preferred stock is convertible into common stock at a price of
$11.50 per share of common  stock,  or an aggregate of  approximately  7 million
shares of the Company's common stock.

     The  series A  preferred  stock may be  redeemed  at the  Company's  option
subsequent  to the  fourth  anniversary  of its  issuance,  subject  to  certain
conditions.  After  the  tenth  anniversary  of the  issuance  of the  series  A
preferred  stock,  each holder of shares of series A preferred stock may require
the  Company  to  redeem  all or a part of that  holder's  shares  of  series  A
preferred stock.

     The Company  anticipates  that current cash positions and available  credit
facilities,  after its seven  acquisitions  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  pharmacy
benefit management companies and companies providing related services. Depending
on the  Company's  evaluation  of future  acquisitions,  additional  cash may be
required to complete these acquisitions.  In addition,  the Company will require
cash to  acquire  inventory  for  its  mail  order  and  specialty  distribution
operations.  In the event that the  Company's  plans  change or its  assumptions
prove to be inaccurate,  or the proceeds from the new revolving  credit facility
and the New Mountain Transaction prove to be insufficient to fund operations and
acquisitions,  the Company could be required to seek additional financing sooner
than  anticipated.  There  can be no  assurance  that  such  financing  could be
obtained at rates or on terms acceptable to the Company, if at all.


Other Matters

Inflation

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

Critical Accounting Policies and Estimates

General

     Health  Card's  discussion  and  analysis of its  financial  condition  and
results  of  operations  are based upon  Health  Card's  unaudited  consolidated
financial  statements,  which have been prepared in accordance  with  accounting
principles  generally  accepted in the United States.  The  preparation of these
financial  statements  requires Health Card to make estimates and judgments that
affect the reported amounts of assets, liabilities,  revenue and expenses; these
estimates and judgments also affect related disclosures of contingent assets and
liabilities.  On an on-going  basis,  Health Card  evaluates  its  estimates and
judgments,  including those related to revenue recognition, bad debt, intangible
assets, income taxes, and financing operations.  Health Card bases its estimates
on  experience  and  on  various  other  assumptions  that  are  believed  to be
reasonable  under the  circumstances,  the  results  of which form the basis for
making  judgments about the carrying  values of assets and liabilities  that are
not readily  apparent from other  sources.  Actual results may differ from these
estimates under different assumptions or conditions.

     The Company believes that of its significant  accounting policies (See Note
1 to the Consolidated  Financial  Statements  comprising Item 8 of Form 10-K for
the year ended June 30,  2004),  the  following  may involve a higher  degree of
judgment and complexity than others:

Revenue Recognition

          (a) Since January 1, 2000,  all services  provided by the Company have
     been on a fee for services  basis.  Under the fee for service  arrangement,
     the Company is paid by its sponsors for the Company's  contractually agreed
     upon rates based upon actual claims  adjudicated,  plus a fixed transaction
     fee.

          Revenue under the fee for service  arrangement is recognized  when the
     claims   are   adjudicated.   Included   as  revenue   are  the   Company's
     administrative  fees and charges relating to  pharmaceuticals  dispensed by
     the Company's  network of  pharmacies.  Revenue is reduced by the amount of
     rebates paid to the Company's sponsors.

          (b) The specific  terms of the contracts  that Health Card enters into
     with its sponsors will determine  whether Health Card  recognizes the gross
     revenue related to the cost of the prescriptions  filled. There are several
     factors from EITF 99-19 that led the Company to  recognize  the majority of
     its  revenue  on a  gross  basis.  These  include:  the  Company  acts as a
     principal and not an agent and is the primary  obligor in the  relationship
     among the pharmacies,  the sponsors and the Company, the Company has credit
     risk,  the Company has certain  latitude  in  establishing  price,  and the
     Company has discretion in supplier selection.  In certain cases,  primarily
     because  the  amount  the  Company  earns is  fixed,  the  Company  has not
     recognized the gross revenue or cost related to prescriptions  filled for a
     specific  sponsor.  This has no impact on the Company's  gross profit since
     neither the prescription  revenue nor the related cost of the prescriptions
     is recorded.

          (c) Health Card includes in revenue only those  co-payments  collected
     from  individual  members by its mail order  facility in Miramar,  Florida.
     Co-payments  retained by pharmacies  on the remainder of the  prescriptions
     filled for Health Card's members are not included in Health Card's reported
     revenue. Health Card discloses these amounts parenthetically on the face of
     its Consolidated Statement of Income.

          (d)Rebates  are  recognized  when the  Company is  entitled to them in
     accordance  with the terms of its  arrangements  with  drug  manufacturers,
     third party rebate administrators,  andsponsors, and when the amount of the
     rebates is  determinable.  The Company records the gross rebate  receivable
     and the appropriate  payable to the sponsors based on estimates,  which are
     subject  to final  settlement.  The  estimates  are based  upon the  claims
     submittedand  the  Company's  rebate   experience,   and  are  adjusted  as
     additional information becomes available.

Bad Debt

     Health Card maintains allowances for doubtful accounts for estimated losses
resulting from the liability of its sponsors to make required  payments.  If the
financial condition of Health Card's sponsors were to deteriorate,  resulting in
an impairment of their ability to make  payments,  additional  allowances may be
required.

Goodwill and Intangible Asset Impairment

     In  assessing  the  recoverability  of the  Company's  goodwill  and  other
intangibles,  the Company must make assumptions  regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related  assumptions  change in the future, the Company
may be required to record  impairment  charges for these  assets not  previously
recorded.  On July 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible  Assets," and will be required
to analyze its goodwill for impairment issues on a periodic basis thereafter. To
date, the Company has not recorded any impairment losses related to goodwill and
other intangible assets.

Deferred Taxes

     Health  Card  periodically  considers  whether  or not it  should  record a
valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized.  While Health Card has considered future taxable
income  and  ongoing  tax  planning  strategies  in  assessing  the need for the
valuation allowance, in the event Health Card were to determine that it would be
able to  realize  its  deferred  tax  assets in the  future in excess of its net
recorded  amount,  an adjustment to the deferred tax asset would increase income
in the  period  such  determination  was  made.  Likewise,  should  Health  Card
determine  that it would not be able to realize all or part of its net  deferred
tax asset in the  future,  an  adjustment  to the  deferred  tax asset  would be
charged to income in the period such determination was made.

Capitalized Software

     The costs of  software  developed  for  internal  use  incurred  during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application  development  stage are  capitalized.  Costs incurred during the
post-implementation/operation   stage  are  expensed  as  incurred.  Capitalized
software  development  costs are amortized on a  straight-line  basis over their
estimated useful lives,  commencing on the date the software is placed into use,
primarily three years.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4 - CONTROLS AND PROCEDURES

     Disclosure controls and procedures are the controls and procedures designed
to ensure  that  information  that the  Company is  required  to disclose in its
reports under the Securities  Exchange Act of 1934, as amended  ("Exchange Act")
is  recorded,  processed,  summarized  and  reported  within  the  time  periods
required. They include, without limitation,  controls and procedures designed to
ensure that  information is accumulated and  communicated to management in order
to allow timely decisions regarding required disclosure.

     Under the supervision and with the participation of management, chiefly the
Company's  principal  executive  officer and the Company's  principal  financial
officer,  Health Card evaluated the effectiveness of the design and operation of
its  disclosure  controls  and  procedures  (as defined in Rules  13a-15(e)  and
15d-15(e)  under  the  Exchange  Act),  as of  March  31,  2005.  Based  on that
evaluation,   the  Company's  principal  executive  officer  and  the  Company's
principal  financial  officer have  concluded that these controls and procedures
are  effective  in alerting  them to material  information,  on a timely  basis,
required  to be included  in the  Company's  periodic  Securities  and  Exchange
Commission  filings.  There  have  been no  changes  in the  Company's  internal
controls over financial  reporting (as defined in Rules  13a-15(f) and 15d-15(f)
under the  Exchange  Act) that  occurred  in this  period  that have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.

<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

     The legal proceeding described below should be read in conjunction with the
legal proceeding disclosure in the following earlier reports: Part I, Item 3 and
Note 11 to the consolidated  financial statements of Health Card's Annual Report
on Form 10-K for the year ended June 30, 2004.

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plan Inc.  ("MHP") in the United  States  District  Court for the Eastern
District of Michigan.  The amended complaint alleges,  among other things,  that
the  parties  entered  into a contract  dated July 1999 (the  "Agreement"),  and
further alleges that the Company has overcharged MHP for the  administration  of
prescription benefit services in contravention to the terms of the Agreement and
breached  its  fiduciary  duties by making a profit.  MHP is  seeking $3 million
dollars in damages.  The Company  filed an answer and  counterclaim  on June 12,
2002. In the counterclaim, the Company claimed damages in excess of $2.8 million
based on MHP's failure to pay under a contract.  On July 5, 2002,  MHP agreed to
make two payments in the amount of $1.34  million and $1.36 million to partially
settle the Company's claims against MHP. MHP added a fiduciary duty claim,  with
respect  to which the  Company's  motion to  dismiss  was  denied.  The  Company
continues to have  counterclaims  totaling over  $200,000  against MHP for MHP's
failure  to pay the  amounts  it had  agreed  to pay the  Company  for goods and
services. The Company argued its motion for partial summary judgment in February
2004, and is currently awaiting the court's decision on such motion. The Company
intends to continue to  vigorously  defend the action.  The Company is unable to
provide an estimate of any particular loss, if any, which may be associated with
the MHP claims.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS

Exhibits

<table>
<S>                                                       <C>    <C>    <C>    <C>    <C>    <C>

Exhibit
Number   Description of Exhibit

2.1      Stock Purchase Agreement dated July 31, 2003, among Health Card and Portland
         Professional Pharmacy, Portland Professional Pharmacy Associates and the individuals
         listed on Schedule I thereto (3)
2.2      Amended and Restated Stock Purchase Agreement dated November 26, 2003 by and
         between Health Card and New Mountain Partners, L.P. (8)
2.3      Asset Purchase Agreement among Health Card, Inteq PBM, LP, Inteq-RX Group,
         LLP, and the individuals named therein dated April 1, 2004 (6)
2.4      Stock Purchase Agreement dated March 7, 2005 among Health Card, PCN Acquisition Corp.,
         Pharmaceutical Care Network and California Pharmacists Association (13)
3.1      Certificate of Incorporation of Health Card (2)
3.2      Certificate of Amendment to the Certificate of Incorporation of Health Card (7)
3.3      Amended and Restated By-Laws of Health Card (7)
3.4      Amended and Restated Audit Committee Charter (7)
4.1      Form of Warrant Agreement, including form of Representatives' Warrants (1)
4.2      Certificate of Designation, Preferences and Rights of Series A 7% Convertible Preferred Stock of Health Card (7)
10.1     Credit Agreement dated January 28, 2005 among Health Card, the Lenders party thereto and JPMorgan Chase, as Administrative
         Agent (12)
10.2     Stock Option Agreement between Health Card and James Bigl dated July 22, 2003 (3)
10.3     Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003 (3)
10.4     Stock Option Agreement between Health Card and David Gershen dated August 1, 2003 (3)
10.5     Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003 (3)
10.6     Stock Option Agreement between Health Card and Patrick McLaughlin dated August 1, 2003 (3)
10.7     Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between National Medical Health Card Systems, Inc.
         and James J. Bigl  (5)
10.8     Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development Corporation and NMHCRx Mail
         Order, Inc. (3)
10.9     AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc. d/b/a NMHCmail and
         AmerisourceBergen Drug Corporation (3)
10.10    Release, dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc. (5)
10.11    Amendment to Lease Agreement, dated as of October 23, 2003, by and among BFS Realty, LLC and National Medical Health Card
         Systems, Inc. (5)
10.12    Amendment to Lease Agreement (30 Sea Cliff), dated as of October 30, 2003 between Living in Style, LLC and National Medical
         Health Card Systems, Inc. (5)
10.13    Amendment to Lease Agreement (32 Sea Cliff), dated as of October 30, 2003 between Living in Style, LLC and National Medical
         Health Card Systems, Inc. (5)
10.14    Second Amendment to Employment Agreement, dated October 30, 2003 by and between National Medical Health Card Systems, Inc.
         and Bert E. Brodsky (5)
10.15    Amended and Restated Employment Agreement dated June 14, 2004 between National Medical Health Card Systems, Inc. and James
         J. Bigl (9)
10.16    Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Non-Employee Directors dated May 4,
         2004 for a grant of 15,000 shares of common stock (9)
10.17    Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Non-Employee Directors dated May 4,
         2004 for a grant of 20,000 shares of common stock (9)
10.18    Employment Agreement dated August 30, 2004 between National Medical Health Card Systems, Inc. and James Smith (11)
10.19    Employment Agreement dated October 4, 2004 between National Medical Health Card Systems, Inc. and Bill Masters (11)
10.20    Stock Option Agreement dated August 31, 2004 between National Medical Health Card Systems, Inc. and James Smith (11)
10.21    Stock Option Agreement dated October 4, 2004 between National Medical Health Card Systems, Inc. and Bill Masters (11)
10.22    Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Senior Management dated December 20,
         2004
10.23    Form of Stock Option Agreement between National Medical Health Card Systems, Inc. and Non-Employee Directors dated December
         21, 2004
14.      Amended and Restated Code of Ethics (10)
31.1     Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
31.2     Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
32.1     Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
32.2     Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act

</TABLE>

     (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 document filed as an Exhibit to Health Card's  Definitive Proxy
Statement on Schedule 14-A filed on December 21, 2001 and incorporated herein by
reference.

     (3) Denotes  document  filed as an Exhibit to Health  Card's Report on Form
10-K for the year ended June 30, 2003 and incorporated herein by reference.

     (4) Denotes document filed as an Exhibit to Health Card's Form 8-K filed on
November 13, 2003 and incorporated herein by reference.

     (5) Denotes  document  filed as an Exhibit to Health  Card's Report on Form
10-K/A  Amendment  Number 2 for the year  ended June 30,  2003 and  incorporated
herein by reference.

     (6) Denotes document filed as an Exhibit to Health Card's Form 8-K filed on
April 14, 2004 and incorporated herein by reference.

     (7) Denotes document filed as an Exhibit to Health Card's Form 10-Q for the
quarter ended March 31, 2004 and incorporated herein by reference.

     (8) Denotes document filed as an exhibit to Health Card's  Definitive Proxy
Statement on Schedule 14-A filed on February 19, 2004 and incorporated herein by
reference.

     (9) Denotes document filed as an exhibit to Health Card's Form 10-K for the
fiscal year ended June 30, 2004 and incorporated herein by reference.

     (10)  Denotes  document  filed on October  28, 2004 as an exhibit to Health
Card's  Definitive Proxy Statement on Schedule 14-A and  incorporated  herein by
reference.

     (11) Denotes  document filed as an exhibit to Health Card's Form 10-Q filed
on November 15, 2004 and incorporated herein by reference.

     (12) Denotes  document  filed as an exhibit to Health Card's Form 8-K filed
on February 3, 2005 and incorporated herein by reference.

     (13) Denotes  document  filed as an exhibit to Health Card's Form 8-K filed
on March 11, 2005 and incorporated herein by reference.


<PAGE>


                                   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:  May 16, 2005                 By: /s/James F. Smith
                                           James F. Smith
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)

                                    By: /s/ Stuart F. Fleischer
                                            Stuart F. Fleischer
                                            Chief Financial Officer
                                            (Principal Financial Officer)


<PAGE>
                                                                    EXHIBIT 31.1


                    CERTIFICATION PURSUANT TO RULES 13a-14(a)
            and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, James F. Smith, President and Chief Executive Officer, certify that:

     1. I have reviewed this quarterly  report on Form 10-Q of National  Medical
Health Card Systems, Inc. and its subsidiaries (the "Registrant");

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

     4. The Registrant's  other certifying  officer(s) and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal  control over financial
reporting  (as defined in Exchange Act Rules  13a-15(f) and  15d-15(f))  for the
Registrant, and we have:

          a) designed such disclosure  controls and  procedures,  or caused such
     disclosure controls and procedures to be designed under our supervision, to
     ensure that material information relating to the Registrant,  including its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly during the period in which this quarterly report is
     being prepared;

          b) designed such internal control over financial reporting,  or caused
     such internal  control over  financial  reporting to be designed  under our
     supervision,  to provide reasonable  assurance regarding the reliability of
     financial  reporting  and  the  preparation  of  financial  statements  for
     external  purposes  in  accordance  with  generally   accepted   accounting
     principles;

          c) evaluated the effectiveness of the Registrant's disclosure controls
     and  procedures  and  presented  in this report our  conclusions  about the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the period covered by this report based on such evaluation; and

          d)  disclosed in this report any change in the  Registrant's  internal
     control over financial reporting that occurred during the Registrant's most
     recent fiscal quarter (the  Registrant's  fourth fiscal quarter in the case
     of an annual report) that has materially affected,  or is reasonably likely
     to materially  affect,  the  Registrant's  internal  control over financial
     reporting;

     5. The Registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial  reporting,  to
the Registrant's  auditors and the audit committee of the Registrant's  board of
directors (or persons performing the equivalent functions):

          a) all significant  deficiencies and material weaknesses in the design
     or  operation  of  internal  control  over  financial  reporting  which are
     reasonable  likely to adversely affect the Registrant's  ability to record,
     process, summarize and report financial information; and

          b) any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  Registrant's  internal
     control over financial reporting.

         Date: May 16, 2005

                                       /s/ James F. Smith
                                           James F. Smith
                                           President and Chief Executive Officer
                                          (Principal Executive Officer)

<PAGE>




                                                                   EXHIBIT 31.2


             CERTIFICATION PURSUANT TO RULES 13a-14(a) and 15d-14(a)
                   UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Stuart F. Fleischer, Chief Financial Officer, certify that:

     1. I have reviewed this quarterly  report on Form 10-Q of National  Medical
Health Card Systems, Inc. and its subsidiaries (the "Registrant");

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

     4. The Registrant's  other certifying  officer(s) and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal  control over financial
reporting  (as defined in Exchange Act Rules  13a-15(f) and  15d-15(f))  for the
Registrant, and we have:

          a) designed such disclosure  controls and  procedures,  or caused such
     disclosure controls and procedures to be designed under our supervision, to
     ensure that material information relating to the Registrant,  including its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly during the period in which this quarterly report is
     being prepared;

          b) designed such internal control over financial reporting,  or caused
     such internal  control over  financial  reporting to be designed  under our
     supervision,  to provide reasonable  assurance regarding the reliability of
     financial  reporting  and  the  preparation  of  financial  statements  for
     external  purposes  in  accordance  with  generally   accepted   accounting
     principles;

          c) evaluated the effectiveness of the Registrant's disclosure controls
     and  procedures  and  presented  in this report our  conclusions  about the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the period covered by this report based on such evaluation; and

          d)  disclosed in this report any change in the  Registrant's  internal
     control over financial reporting that occurred during the Registrant's most
     recent fiscal quarter (the  Registrant's  fourth fiscal quarter in the case
     of an annual report) that has materially affected,  or is reasonably likely
     to materially  affect,  the  Registrant's  internal  control over financial
     reporting;

     5. The Registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial  reporting,  to
the Registrant's  auditors and the audit committee of the Registrant's  board of
directors (or persons performing the equivalent functions):

          a) all significant  deficiencies and material weaknesses in the design
     or  operation  of  internal  control  over  financial  reporting  which are
     reasonably  likely to adversely affect the registrant's  ability to record,
     process, summarize and report financial information; and

          b) any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     control over financial reporting.

Date:  May 16, 2005
                                         /s/ Stuart F. Fleischer
                                             Stuart F. Fleischer
                                             Chief Financial Officer
                                             (Principal Financial Officer)

<PAGE>



                                                                  EXHIBIT 32.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection  with the Quarterly  Report of National  Medical  Health Card
Systems,  Inc. (the "Company") on Form 10-Q for the period ending March 31, 2005
as filed with the  Securities  and Exchange  Commission  on the date hereof (the
"Report"),  I, James F.  Smith,  President  and Chief  Executive  Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

         (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.





/s/ James Smith
James F. Smith
President and Chief Executive Officer
(Principal Executive Officer)
May 16, 2005


<PAGE>



                                                                  EXHIBIT 32.2


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection  with the Quarterly  Report of National  Medical  Health Card
Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2005,
as filed with the  Securities  and Exchange  Commission  on the date hereof (the
"Report"),  I, Stuart F.  Fleischer,  Chief  Financial  Officer of the  Company,
certify,  pursuant to 18 U.S.C.  ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:

         (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.


/s/ Stuart F. Fleischer
Stuart F. Fleischer
Chief Financial Officer
(Principal Financial Officer)
May 16, 2005