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U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-Q/A
Amendment No. 1

|(Mark One)                                                    |                                                                                          
|------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|For the quarterly period ended December 31, 2003             
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|For the transition period
from                             to

Commission file number 000-26749

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

|Delaware(State or Other Jurisdiction
of Incorporation or Organization)                          |  | 11-2581812(IRS Employer Identification No.)
|----------------------------------------------------------------------------------------------- |  | -------------------------------------------
|26 Harbor Park Drive, Port Washington, NY(Address of Principal Executive Offices)               |  | 11050(Zip Code)                            
|(516) 626-0007Registrant's Telephone Number, Including Area Code                               
|Not ApplicableFormer Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

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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 ý    No o

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of the issuer's Common Stock, as of February 6, 2004 was 7,965,327 shares.

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Explanatory Note

In connection with a review by the Securities and Exchange Commission (the "SEC"), this quarterly report on Form 10-Q/A of National Medical
Health Card Systems, Inc., a Delaware corporation ("Health Card" or the "Company"), hereby amends the following information in its Form 10-Q for the quarter ended
December 31, 2003, as filed with the SEC on February 17, 2004 by amending and restating the information contained therein to describe in Note 11 to the Condensed Financial
Statements (Item 1 of Part I) the calculation of the beneficial conversion amount that will be recorded by the Company upon the closing of the transactions contemplated by the preferred stock
purchase agreement between New Mountain Partners, L.P. and the Company, dated October 30, 2003, as amended and restated on November 26, 2003.

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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

INDEX

|        |  |   |  |                                                                                                                   |  | Page
|------- |  | - |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |   |  | FORWARD-LOOKING STATEMENTS                                                                                        |  | 3   
|PART I  |  |  |  | FINANCIAL INFORMATION                                                                                             |  | 4   
|ITEM 1  |  |  |  | CONDENSED FINANCIAL STATEMENTS:                                                                                   |  | 4   
|        |  |   |  | CONSOLIDATED BALANCE SHEET as of
December 31, 2003 (unaudited) and June 30, 2003                                  |  | 4   
|        |  |   |  | CONSOLIDATED STATEMENT OF INCOME (unaudited)
for the three months and six months ended December 31, 2003 and 2002 |  | 5   
|        |  |   |  | CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
for the six months ended December 31, 2003 and 2002              |  | 6   
|        |  |   |  | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                              |  | 7   
|ITEM 2  |  |  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                             |  | 16  
|ITEM 3  |  |  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        |  | 26  
|ITEM 4  |  |  |  | CONTROLS AND PROCEDURES                                                                                           |  | 26  
|PART II |  |  |  | OTHER INFORMATION                                                                                                 |  | 27  
|ITEM 1  |  |  |  | LEGAL PROCEEDINGS                                                                                                 |  | 27  
|ITEM 2  |  |  |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                         |  | 27  
|ITEM 3  |  |  |  | DEFAULTS UPON SENIOR SECURITIES                                                                                   |  | 27  
|ITEM 4  |  |  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               |  | 27  
|ITEM 5  |  |  |  | OTHER INFORMATION                                                                                                 |  | 27  
|ITEM 6  |  |  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                  |  | 27  

2

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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 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 "Business" in Item 1 and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003, filed with the Securities and Exchange Commission on
September 29, 2003.

3

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PART 1FINANCIAL INFORMATION

ITEM 1CONDENSED FINANCIAL STATEMENTS

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
($ in thousands)

|                                     |                                                                                                                                                       | December 31,
2003                          |   | June 30,
2003 |        
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------- | -------
|
|Assets                               |                                                                                                                                                       |                                            |   |               |        
|Current:                             |                                                                                                                                                       |                                            |   |               |        
|                                     | Cash and cash equivalents (including cash equivalent investments of $1,189 in each period)                                                            |                                            | $ | 7,019         |        
|                                     | Restricted cash                                                                                                                                       |                                            |   | 2,088         |        
|                                     | Accounts receivable, less allowance for doubtful accounts of $2,366 and $2,014, respectively                                                          |                                            |   | 65,727        |        
|                                     | Rebates receivable                                                                                                                                    |                                            |   | 20,508        |        
|                                     | Inventory                                                                                                                                             |                                            |   | 1,814         |        
|                                     | Due from affiliates                                                                                                                                   |                                            |   | 274           |        
|                                     | Deferred tax asset                                                                                                                                    |                                            |   | 2,065         |        
|                                     | Other current assets                                                                                                                                  |                                            |   | 1,983         |        
|                                     |                                                                                                                                                       |                                            |   |               |        
|                                     |                                                                                                                                                       | Total current assets                       |   |               | 101,478
|                                     | Property, equipment and software development costs, net                                                                                               |                                            |   | 9,683         |        
|                                     | Intangible assets, net of accumulated amortization of $1,655 and $1,210, respectively                                                                 |                                            |   | 2,438         |        
|                                     | Goodwill                                                                                                                                              |                                            |   | 57,385        |        
|                                     | Other assets                                                                                                                                          |                                            |   | 369           |        
|                                     |                                                                                                                                                       |                                            |   |               |        
|                                     |                                                                                                                                                       | Total Assets                               |   | $             | 171,353
|                                     |                                                                                                                                                       |                                            |   |               |        
|Liabilities and Stockholders' Equity |                                                                                                                                                       |                                            |   |               |        
|Current Liabilities:                 |                                                                                                                                                       |                                            |   |               |        
|                                     | Accounts payable and accrued expenses                                                                                                                 |                                            | $ | 121,523       |        
|                                     | Revolving credit facility and loans payable-current                                                                                                   |                                            |   | 8,778         |        
|                                     | Current portion of capital lease obligations                                                                                                          |                                            |   | 468           |        
|                                     | Due to officer/stockholder                                                                                                                            |                                            |   |              |        
|                                     | Income taxes payable                                                                                                                                  |                                            |   | 2,015         |        
|                                     | Other current liabilities                                                                                                                             |                                            |   | 155           |        
|                                     |                                                                                                                                                       |                                            |   |               |        
|                                     |                                                                                                                                                       | Total current liabilities                  |   |               | 132,939
|                                     | Capital lease obligations, less current portion                                                                                                       |                                            |   | 101           |        
|                                     | Long term loans payable and other liabilities                                                                                                         |                                            |   | 2,207         |        
|                                     | Deferred tax liability                                                                                                                                |                                            |   | 2,245         |        
|                                     |                                                                                                                                                       |                                            |   |               |        
|                                     |                                                                                                                                                       | Total liabilities                          |   |               | 137,492
|                                     |                                                                                                                                                       |                                            |   |               |        
|Commitments and Contingencies        |                                                                                                                                                       |                                            |   |               |        
|Stockholders' Equity:                |                                                                                                                                                       |                                            |   |               |        
|                                     | Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding                                                                        |                                            |   |              |        
|                                     | Common Stock, $.001 par value, 25,000,000 shares authorized, 8,099,997 and 7,812,907 shares issued, 7,908,997 and 7,621,907 outstanding, respectively |                                            |   | 8             |        
|                                     | Additional paid-in-capital                                                                                                                            |                                            |   | 16,597        |        
|                                     | Retained earnings                                                                                                                                     |                                            |   | 18,000        |        
|                                     | Treasury stock at cost, 191,000 shares                                                                                                                |                                            |   | (744          | )      
|                                     |                                                                                                                                                       |                                            |   |               |        
|                                     |                                                                                                                                                       | Total stockholders' equity                 |   |               | 33,861 
|                                     |                                                                                                                                                       |                                            |   |               |        
|                                     |                                                                                                                                                       | Total Liabilities and Stockholders' Equity |   | $             | 171,353
|                                     |                                                                                                                                                       |                                            |   |               |        

See accompanying condensed notes to consolidated financial statements

4

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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

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

|                                                                                                                                                                                        |         | Three months ended
December 31, |         | Six months ended
December 31, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------------------------- | ------- | ----------------------------- | -
|
|Revenue (includes co-payments collected of $125, $0, $161 and $0, respectively. Excludes co-payments retained by the pharmacies of $50,950, $49,384, $97,519 and $74,332, respectively) |         | $                               | 163,896 |                               | $
|Cost of claims (excludes co-payments retained by the pharmacies of $50,950, $49,384, $97,519 and $74,332, respectively)                                                                 |         |                                 | 148,219 |                               |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|Gross Profit                                                                                                                                                                            |         |                                 | 15,677  |                               |  
|Selling, general and administrative expenses                                                                                                                                            |         |                                 | 11,821  |                               |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|Operating income                                                                                                                                                                        |         |                                 | 3,856   |                               |  
|Other income (expense):                                                                                                                                                                 |         |                                 |         |                               |  
|Interest expense                                                                                                                                                                        |         |                                 | (160    | )                             |  
|Interest income                                                                                                                                                                         |         |                                 | 31      |                               |  
|Other income, net                                                                                                                                                                       |         |                                 | 42      |                               |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|                                                                                                                                                                                        |         |                                 | (87     | )                             |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|Income before provision for income taxes                                                                                                                                                |         |                                 | 3,769   |                               |  
|Provision for income taxes                                                                                                                                                              |         |                                 | 1,551   |                               |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|Net income                                                                                                                                                                              |         | $                               | 2,218   |                               | $
|                                                                                                                                                                                        |         |                                 |         |                               |  
|Earning per common share:                                                                                                                                                               |         |                                 |         |                               |  
|                                                                                                                                                                                        | Basic   |                                 | $       | 0.29                          |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|                                                                                                                                                                                        | Diluted |                                 | $       | 0.25                          |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|Weighted average number of common shares outstanding:                                                                                                                                   |         |                                 |         |                               |  
|                                                                                                                                                                                        | Basic   |                                 |         | 7,764                         |  
|                                                                                                                                                                                        |         |                                 |         |                               |  
|                                                                                                                                                                                        | Diluted |                                 |         | 8,888                         |  
|                                                                                                                                                                                        |         |                                 |         |                               |  

See accompanying condensed notes to consolidated financial statements

5

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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

|                                                     |            | Six months ended
December 31,                                                     |                                                    
|---------------------------------------------------- | ---------- | --------------------------------------------------------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:                |            |                                                                                   |                                                    
|                                                     | Net income |                                                                                   | $                                                  
|                                                     |            | Adjustments to reconcile net income to net cash provided by operating activities: |                                                    
|                                                     |            |                                                                                   | Depreciation and amortization                      
|                                                     |            |                                                                                   | Amortization of deferred gain                      
|                                                     |            |                                                                                   | Net gain on disposal of capital assets             
|                                                     |            |                                                                                   | Provision for doubtful accounts                    
|                                                     |            |                                                                                   | Compensation expense accrued to officer/stockholder
|                                                     |            |                                                                                   | Interest accrued on stockholders'/affiliate's loans
|                                                     |            | Changes in assets and liabilities, net of effect from acquisitions:               |                                                    
|                                                     |            |                                                                                   | Restricted cash                                    
|                                                     |            |                                                                                   | Accounts receivable                                
|                                                     |            |                                                                                   | Rebates receivable                                 
|                                                     |            |                                                                                   | Inventory                                          
|                                                     |            |                                                                                   | Other current assets                               
|                                                     |            |                                                                                   | Due to/from affiliates                             
|                                                     |            |                                                                                   | Other assets                                       
|                                                     |            |                                                                                   | Accounts payable and accrued expenses              
|                                                     |            |                                                                                   | Income taxes payable and other current liabilities 
|                                                     |            |                                                                                   | Other long term liabilities                        
|                                                     |            |                                                                                   |                                                    
|Net cash provided by operating activities            |            |                                                                                   | 12,098                                             
|                                                     |            |                                                                                   |                                                    
|Cash flows from investing activities:                |            |                                                                                   |                                                    
|                                                     |            | Capital expenditures                                                              |                                                    
|                                                     |            | Repayment of loan from affiliate                                                  |                                                    
|                                                     |            | Repayment of loan from officer                                                    |                                                    
|                                                     |            | Proceeds from disposal of capital assets                                          |                                                    
|                                                     |            | Acquisition of Integrail                                                          |                                                    
|                                                     |            | Acquisition of PAI                                                                |                                                    
|                                                     |            | Acquisition of Centrus                                                            |                                                    
|                                                     |            | Acquisition of PPP, net of cash acquired                                          |                                                    
|                                                     |            |                                                                                   |                                                    
|Net cash used in investing activities                |            |                                                                                   | (4,823                                             
|                                                     |            |                                                                                   |                                                    
|Cash flows from financing activities:                |            |                                                                                   |                                                    
|                                                     |            | Proceeds from exercise of stock options                                           |                                                    
|                                                     |            | Repayment of convertible note offering                                            |                                                    
|                                                     |            | Proceeds from revolving credit facility                                           |                                                    
|                                                     |            | Repayment of revolving credit facility                                            |                                                    
|                                                     |            | Deferred financing costs                                                          |                                                    
|                                                     |            | Repayment of debt and capital lease obligations                                   |                                                    
|                                                     |            |                                                                                   |                                                    
|Net cash used in financing activities                |            |                                                                                   | (5,478                                             
|                                                     |            |                                                                                   |                                                    
|Net increase (decrease) in cash and cash equivalents |            |                                                                                   | 1,797                                              
|Cash and cash equivalents at beginning of period     |            |                                                                                   | 5,222                                              
|                                                     |            |                                                                                   |                                                    
|Cash and cash equivalents at end of period           |            | $                                                                                 | 7,019                                              
|                                                     |            |                                                                                   |                                                    

See accompanying condensed notes to consolidated financial statements

6

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NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

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

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"), Ascend Specialty
Pharmacy Services, Inc. (See Note 3) ("Ascend") and PBM Technology Inc. ("PBM Tech"). 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 the 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 Securities and Exchange Commission in instructions to Form 10-Q and in Article 10 of
Regulation S-X. Accordingly, they do 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 December 31, 2003 and 2002 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, 2003. The results of operations for the three and six month periods ended December 31, 2003 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, 2003 (the "Annual Report").

2. STOCK-BASED COMPENSATION

In December 2002, the FASB issued 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.

7

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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:

Three Months Ended
December 31,2003

2002Reported net income

$
2,218

$
1,638Stock compensation expense included in net income





Pro forma compensation expense


(499
)

(413
)Pro forma net income

$
1,719

$
1,225Pro forma earnings per share:Basic

$
0.22

$
0.16Diluted

$
0.19

$
0.15


Six Months Ended
December 31,2003

2002Reported net income

$
3,865

$
3,003Stock compensation expense included in net income





Pro forma compensation expense


(985
)

(792
)Pro forma net income

$
2,880

$
2,211Pro forma earnings per share:Basic

$
0.37

$
0.29Diluted

$
0.33

$
0.28


3. BUSINESS ACQUISITIONS

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") 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 below). The Company intends to position 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 $2,973, which consists of the following components (subject to a final formal valuation of the
assets): (i) customer relationships valued at $295, which will be amortized over seven (7) years;

8

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(ii) employment
and non-compete agreements valued at $100 each, which will be amortized over four (4) years; (iii) the Portland Professional Pharmacy trade name valued
at $100 which will be amortized over four (4) years; and (iv) goodwill of $2,378, 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, $322 has been earned and accrued.

In
connection with the PPP Acquisition, several members of PPP's management team have joined the Company as employees, and have been granted stock options to purchase an aggregate of
150,000 shares of Common Stock, under the Company's 1999 Stock Option Plan, as amended. As of August 1, 2003, the Company's wholly-owned subsidiary, Ascend Specialty Pharmacy
Services, Inc. ("Ascend") acquired all of the shares of PPP. Each of PRXA and PPRX continues to operate under their respective names, as subsidiaries of Ascend, in the state of Maine.

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 will be 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. 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

9

---

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 will be amortized over five (5) years; (ii) an employment agreement valued at $83, which will be amortized
over two (2) years: (iii) non-compete contracts valued at $76, which will be 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 year and $2,000 has been earned. Of this amount, $1,000 was paid in May 2003 and another $1,000 will be paid in
May 2004. As of the current date, it appears, subject to final adjustments, that the minimum performance targets for the second year will be achieved during the second year which would obligate
the Company to pay up to a maximum of an additional $1,000 in May 2004 and $1,000 in May 2005.

On
January 29, 2002, the Company and certain of its subsidiaries entered into a $40,000 secured revolving credit facility (the "Facility") with HFG Healthco-4 LLC, a
specialty finance company. In connection with the Facility, the Company and certain of its subsidiaries have agreed to transfer, on an on-going basis, their accounts receivable to Funding.
Funding utilizes those receivables as collateral to secure borrowings under the Facility. The Facility has a three year term, provides for borrowings of up to $40,000 at the London InterBank Offered
Rate (LIBOR) plus 2.40% (3.52% at December 31, 2003) and is secured by receivables and other assets of the Company and certain of its subsidiaries as defined. Borrowings of $28,700 under the
Facility were used to finance part of the purchase price of the Centrus Acquisition and will also be used by the Company and certain of its subsidiaries for working capital purposes and future
acquisitions in support of its business plan. The outstanding balance as of December 31, 2003 was approximately $8,774, which was all classified as short term debt. The Facility requires the
Company to remain in compliance with certain financial and other covenants. The financial maintenance covenants include: 1) consolidated net worth (total assets less total liabilities),
2) consolidated tangible net worth (consolidated net worth less intangible assets), 3) quarterly EBITDA, 4) accounts receivable turnover (revenue divided by accounts receivable),
5) debt to consolidated net worth, 6) current assets to current liabilities, 7) consolidated interest coverage ratio (EBITDA less capital expenditures divided by interest expense,
8) annual capital expenditures, and 9) debt service coverage (EBITDA divided by interest expense plus short term debt excluding borrowings under the Facility). Other covenants under the
Facility restrict the Company's ability to pay dividends, incur senior debt, and sell assets other than in the ordinary course. The Company was in compliance with all covenants at December 31,
2003.

10

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The
summarized unaudited pro forma results of operations set forth below for the three and six months ended December 31, 2003 and 2002 assumes the Integrail and PPP acquisitions
had occurred as of the beginning of these periods.

Three Months Ended
December 31, 2003

Three Months Ended
December 31, 2002Revenue

$
163,896

$
154,881Net income (loss)

$
2,218

$
1,325Net income per common share:Basic

$
0.29

$
0.17Diluted

$
0.25

$
0.16Pro forma weighted-average number of common shares outstanding:Basic


7,764


7,611Diluted


8,888


8,088


Six Months Ended
December 31, 2003

Six Months Ended
December 31, 2002Revenue

$
316,064

$
305,499Net income (loss)

$
3,840

$
1,292Net income per common share:Basic

$
0.50

$
0.17Diluted

$
0.44

$
0.16Pro forma weighted-average number of common shares outstanding:Basic


7,703


7,568Diluted


8,681


8,004


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.

The
change in the carrying amount of goodwill for the six months ended December 31, 2003 is as follows:

Balance as of July 1, 2003

$
53,669PPP acquisition


2,378PPP additional consideration earned


322Centrus additional consideration earned


1,000Integrail final valuation


16Balance as of December 31, 2003

$
57,385


Approximately
$49,512 of the Company's December 31, 2003 goodwill is deductible for income tax purposes on a straight-line basis over 15 years.

11

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4. STOCK OPTIONS

During the six months ended December 31, 2003, the Company granted 494,671 stock options and 83,739 stock options were cancelled for a net of 410,932 stock
options under the 1999 Stock Option Plan (the "Plan"). The options granted during this period are exercisable at prices ranging from $9.75 to $21.13 and terminate five to ten years from the grant
date. The total number of shares of common stock reserved by the Company for issuance under the Plan is 2,850,000 plus an indeterminable number of shares of common stock 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. Shares issuable pursuant to options granted under the Plan as of December 31, 2003 equal 2,149,736, net of 619,226 options exercised to date.

5. EARNINGS PER SHARE

A reconciliation of shares used in calculating basic and diluted earnings per share follows:

Three Months Ended
December 31,2003

2002Basic

7,764,485

7,610,907Effect of assumed exercise of employee stock options

1,083,754

476,908Effect of assumed exercise of warrants

40,154

Diluted weighted average number of shares outstanding

8,888,393

8,087,815


Six Months Ended
December 31,2003

2002Basic

7,702,690

7,567,673Effect of assumed exercise of employee stock options

935,378

435,862Effect of assumed exercise of warrants

42,558

Diluted weighted average number of shares outstanding

8,680,626

8,003,535


6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

December 31,
2003

June 30,
2003Claims payable

$
82,966

$
76,195Rebates payable to sponsors


31,228


24,082Trade payables, accrued expenses and other payables


7,329


6,398$
121,523

$
106,675


7. RELATED PARTY TRANSACTIONS

As of January 1, 2002, the Company had eliminated the majority of its historical related party service transactions with the exception being rent and some
administrative services. For the periods presented, certain general, administrative and other expenses reflected in the financial statements

12

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include
allocations of certain 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 $235 for the three months ended December 31, 2003 and $223 for
the three months ended December 31, 2002. Included in the statement of income for the six months ended December 31, 2003 and 2002 were general and administrative expenses related to
transactions with affiliates of $478 and $520, respectively.

Due
from affiliates at June 30, 2003 included a note from a company affiliated by common ownership. As of December 31, 2003, the entire balance due from this affiliate,
including accrued interest, was paid. This note bore interest at 8.5% per annum, payable quarterly. The note was collateralized by 1,022,758 shares of $.001 par value common stock of the Company
registered in the name of the Company's Chairman of the Board and was secured by his personal guarantee.

On
February 8, 2001, the President gave to the Company his Promissory Note in the amount of $34 as evidence of the loan. On April 12, 2002, the Promissory Note was amended
and the Company agreed to increase the loan to $100. The loan bears interest at 8%, and was due on April 25, 2003. The interest rate was lowered effective July 1, 2002 to the rate at
which the Company borrows money. The repayment obligation under the Promissory Note, including accrued interest has been satisfied through a set-off from the bonus paid to the President in
July 2003 as part of his annual compensation.

In
connection with a potential bonus, to be earned pursuant to an employment agreement dated September 30, 2002, between the president of the Company's mail order operations and
the Company, the Company loaned him $250 as an advance against the potential bonus. The loan was evidenced by a promissory note made in favor of the Company. The loan bore an interest rate of 9% and
was due and payable on September 30, 2003 in the event the bonus was not earned. A bonus has been paid and the loan repaid as of January 2004.

The
Company currently occupies office space at 26 Harbor Park Drive, Port Washington, New York 11050 (the "Leased Premises"). The Company subleases the Leased Premises from an affiliate
of the Chairman of the Board (the "Affiliate"). The Affiliate has the right to purchase the Leased Premises from the landlord upon expiration of this lease in March 2005 for a purchase price of
$1. The Affiliate subleases a portion of the Leased Premises to the Company (the "Lease"). Additional space is currently being built in the Leased Premises which will allow the Company to reconfigure
its existing space and to move all of its employees in Port Washington into contiguous space. As of October 23, 2003, the Company and the Affiliate amended the Lease. Effective when the space
is ready for occupancy, the Company will lease additional square footage in the Leased Premises. The total square footage leased by the Company at that time will be 34,270. The annual rent will then
be $531 per annum plus expenses related to real estate taxes, utilities and maintenance which are paid directly to the entities to whom payment must be made. 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 on December 31, 2013. In addition, the Company has early termination rights which it may exercise
by delivery of a notice to the landlord 60 days prior to the end of the December 31, 2008 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, 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 facility were $1,214 during the six months ended December 31, 2003.

13

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8. MAJOR CUSTOMERS AND PHARMACIES

For the three and six months ended December 31, 2003, approximately 39% and 40%, respectively, of the consolidated revenue of the Company was from two plan
sponsors, MVP Health Plan, Inc. and Boston Medical Center HealthNet, administering multiple plans. For the three and six months ended December 31, 2002 approximately 46% and 42%,
respectively, of the consolidated revenue of the Company was from two plan sponsors administering multiple plans. Amounts due from these sponsors as of December 31, 2003 approximated
$11.4 million.

For
the three months ended December 31, 2003 approximately 46% of cost of claims was from three pharmacy chains. For the three months ended December 31, 2002, approximately
50% of the cost of claims were from three pharmacy chains. For the six months ended December 31, 2003 approximately 33% of cost of claims was from three pharmacy chains. For the six months
ended December 31, 2002, approximately 49% of the cost of claims were from three pharmacychains. Amounts payable to the three pharmacy chains at December 31, 2003 were approximately
$23.2 million.

9. SUPPLEMENTAL CASH FLOW INFORMATION

During the six months ended December 31, 2003 and December 31, 2002, the Company paid $405 and $631 in interest and $1,308 and $1,506 in income
taxes, respectively. In a non-cash transaction, the Company issued 41,668 shares of its common stock, valued at $250, as additional compensation to the shareholders of PAI in
August 2002.

10. 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 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
Midwest's failure to pay under a contract. In late June 2002, Midwest agreed to make two payments in the amount of $1.34 million and $1.36 million to partially settle the
Company's claims against Midwest. Midwest has now added a fiduciary duty claim. The Company continues to have counterclaims totaling over $200,000 against Midwest for Midwest's failure to pay the
amounts it had agreed to pay Health Card for goods and services. The Company's motion for partial summary judgment and motion to dismiss the fiduciary duty claim is currently scheduled to be heard in
February, 2004. The court has not set a trial date. Discovery closed September 30, 2003. The Company intends 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.

11. RECENT DEVELOPMENTS

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 $80,000. Once certain conditions have been met or waived,

14

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including
receipt of certain stockholder approvals sought by a definitive proxy statement to be distributed to the Company's stockholders, the Company will be obligated to complete the sale of the
series A preferred stock to New Mountain Partners and to use approximately $50,000 of the proceeds of the sale of the series A preferred stock to fund the purchase price for a tender
offer for up to 4,545,455 shares of the Company's outstanding common stock at $11.00 per share. Bert Brodsky, the chairman of the board of directors, and certain stockholders related to him, currently
hold (assuming the exercise of 330,000 options and warrants held by Mr. Brodsky), in the aggregate, approximately 60% of the Company's outstanding common stock and have agreed to tender
4,448,900 shares, or approximately 54% of the Company's outstanding common stock, held by them, into the tender offer.

If
the tender offer is fully subscribed by the Company's stockholders and assuming the exercise of 330,000 options and warrants held by Mr. Brodsky, after the tender offer is
completed, New Mountain Partners will own securities that are initially convertible into approximately 65% of the Company's issued and outstanding common stock and prior to conversion of the
series A preferred stock will be entitled to cast that number of votes that is equal to approximately 61% of the Company's aggregate voting power. Following the closing of the sale of the
series A preferred stock and the tender offer (collectively, the "Contemplated Transactions"), New Mountain Partners will initially be entitled to nominate and elect 60% of the members of the
Company's board of directors.

The
Company will primarily use the remaining proceeds from the issuance and sale of the series A preferred stock of approximately $22 million, excluding expenses related to
the closing of the Contemplated Transactions, for potential acquisitions and working capital purposes. However, except under certain circumstances, the Company will be prohibited from using such
proceeds to pay any outstanding amounts due under the Company's outstanding credit facility for six months following the closing of the Contemplated Transactions.

The
preferred stock will provide 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 will be 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.

Upon
the closing of the Contemplated Transactions, the Company will record a 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 will reflect the
difference between the fair market value of the Company's common stock on the date of the closing of the Contemplated Transactions and the effective conversion price of $11.29 (after deducting the
closing payment of $1,450,000 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 is capped at $80,000,003 and it will be charged if the fair market value of the Company's common stock on the
date of the closing of the Contemplated Transactions is equal to or greater than $22.79 per share.

15

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

Results of Operations

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

Revenue increased $12.9 million, or approximately 9%, from $151.0 million for the three months ended December 31, 2002, to
$163.9 million for the three months ended December 31, 2003. Revenue recognized for contracts recorded on a gross revenue basis was $150.7 million for the three months ended
December 31, 2002 and $163.4 million for the three months ended December 31, 2003. Revenue recognized for contracts recorded on a net revenue basis was $0.3 million for the
three months ended December 31, 2002 and $0.5 million for the three months ended December 31, 2003. 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 three months ended December 31, 2003, there was approximately $125,000 of co-payments included in revenue versus zero for the
three months ended December 31, 2002. Co-payments retained by pharmacies on prescriptions filled for Health Card's members and not included in Health Card's revenue were
$51.0 million and $49.4 million, for the three months ended December 31, 2003 and 2002, respectively.

Of
the $12.9 million increase in revenue in the three months ended December 31, 2003, $4.5 million was due to the inclusion of PPP which was included in the revenue
for the quarter ended December 31, 2003, but not in the quarter ended December 31, 2002. Another approximate $28.3 million of the increase was due to revenue related to new
sponsors or new services offered during the quarter ended December 31, 2003 excluding contracts recorded on a net revenue basis. An additional increase of approximately $23.6 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 the amount of rebates retained and other miscellaneous revenue items. These revenue increases were offset by revenue decreases
related to: 1) the termination of existing customer contracts including a major sponsor, which terminated its contract with Health Card effective December 31, 2002, leading to a
reduction in revenue of approximately $41.1 million, and 2) the Company recognized on a net revenue basis one contract during the three months ended December 31, 2003 that was
recognized on a gross revenue basis for one month during the three months ended December 31, 2002. Due to a change in contract terms effective November 1, 2002, this customer's revenue
was recognized on a net basis from that point. The revenue impact of this change was a reduction in gross revenue of approximately $2.4 million.

Cost
of claims increased $8.9 million, or approximately 6%, from $139.3 million for the three months ended December 31, 2002, to $148.2 million for the three
months ended December 31, 2003. PPP accounted for $3.7 million of the increase. Increases in cost of claims totalingapproximately $48.3 million related to the activity of new
sponsors as well as the growth in existing sponsors were offset by the factors described in the previous paragraph, namely, the loss of sponsors which reduced cost of claims by approximately
$39.4 million and the recognizing of a certain contract on a net revenue basis which reduced cost of claims by approximately $2.4 million. In addition, cost of claims was reduced by the
fact that there was an increase of $1.3 million in gross rebates received, which is treated as a reduction in cost of claims. As a percentage of revenue, cost of claims decreased from 92.3% to
90.4% for the three months ended December 31, 2002 and December 31, 2003, respectively. These same factors contributed to the declining costs as a percentage of revenue. The terminated
major sponsor is a managed care organization. Industry-wide, managed care clients have a greater cost of

16

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claims,
and consequently a lower gross margin, than other types of business in the PBM industry. While not all of the revenue associated with this sponsor was replaced by new business, the new
business, for the most part was not managed care, so consequently the cost of claims on the new business was lower than on the business it replaced. In addition, the contracts 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. The acquisition of PPP in
July 2003 also had an impact in reducing the cost of claims as specialty pharmacy distribution typically generates lower cost of claims than a PBM.

Gross
profit increased from $11.7 million for the three months ended December 31, 2002 to $15.7 million for the three months ended December 31, 2003; a
$4.0 million, or 34.5%, increase. In addition to PPP adding approximately $800,000 to gross profit, the replacement of the terminated major sponsor with new greater margin business led to
greater gross profits for the Company,. Gross profit, as a percentage of revenue, increased from 7.7% to 9.6% for the three months ended December 31, 2002 and December 31, 2003,
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 its sponsors, have
had the effect of partially offsetting the increases in gross margin described above.

Selling,
general, and administrative expenses increased $3.1 million, or approximately 36%, from $8.7 million for the three months ended December 31, 2002 to
$11.8 million for the three months ended December 31, 2003. Approximately $2.1 million, or 71%, of this increase in selling, general, and administrative expenses is related to new
entities which were part of the Company in the three months ended December 31, 2003 which were not part of the Company during all of the three months ended December 31, 2002. The
services provided by these entities include specialty pharmacy distribution through the Company's acquisition of PPP as of July 31, 2003 (see Note 3 of Item 1), predictive modeling and
consulting services through the Company's acquisition of Integrail as of November 1, 2002 (see Note 3 of Item 1), and mail order distribution through the Company's owned facility in
Miramar, Florida as of July, 2003. The major components of the $2.1 million increase in expenses related to new services was: 1) salaries and benefitsapproximately $822,000,
2) postage and suppliesapproximately $174,000, 3) equipment rentalapproximately $165,000, and 4) depreciation and amortizationapproximately
$152,000.

General
and administrative expenses charged by affiliates increased approximately $12,000, or 5%, year-over-year from approximately $223,000 to approximately
$235,000 for the three months ended December 31, 2002 and December 31, 2003, respectively. The increase reflects escalations on existing rental properties rather than an increase in
services provided.

Selling,
general, and administrative expenses as a percent of revenue increased from 5.7% for the three months ended December 31, 2002 to 7.2% for the three months ended
December 31, 2003. The main reason for the increase is the impact of recognizing more contracts on a net revenue basis, as that has the effect of dividing these same expenses over a smaller
gross revenue base. In addition, the three new services described above also led to an increase in this percentage, particularly mail order which led to an increase of 0.7% due to the fact that
resources were required to be hired in advance of the revenue.

For
the three months ended December 31, 2002 and December 31, 2003, the Company recognized other expense, net, of approximately $202,000 and $87,000, respectively. The
components of the approximate $115,000 decrease in net expense were an approximate $151,000 decrease in interest expense incurred on the Company's revolving credit facility (See Note 3 of Item
1) and an approximate $4,000 increase in other income related to the amortization of a deferred gain on a sale leaseback.

17

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These
increases were partially offset by an approximate $40,000 decrease in interest income due to the affiliated company note being repaid as of July 31, 2003 (See Note 7 of Item 1).
The decrease in interest expense is primarily due to the Company's increased cash generated from operations and the fact that interest rates on the Company's revolving credit facility have declined
year over year.

Income
before the provision for income taxes increased approximately $1.0 million, or 36%, from approximately $2.8 million, for the quarter ended December 31, 2002,
to approximately $3.8 million for the quarter ended December 31, 2003. The primary factors leading to the increase were the gross profit increase described above and the reduction in
interest expense 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 estimated tax rate for the full fiscal year.

Net
income for the quarter ended December 31, 2003 was approximately $2.2 million as compared to approximately $1.6 million for the quarter ended December 31,
2002; a 35% increase. Earnings per diluted share increased by $0.05, to $0.25 for the quarter ended December 31, 2003.

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002

Revenue increased $16.4 million, or approximately 6%, from $298.3 million for the six months ended December 31, 2002, to
$314.7 million for the six months ended December 31, 2003. Revenue recognized for contracts recorded on a gross revenue basis was $297.8 million for the six months ended
December 31, 2002 and $313.6 million for the six months ended December 31, 2003. Revenue recognized for contracts recorded on a net revenue basis was $0.5 million for
thesix months ended December 31, 2002 and $1.1 million for the six months ended December 31, 2003. 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. For the six months ended December 31, 2003, there was approximately $161,000 of co-payments included in revenue versus zero for the six months ended
December 31, 2002. Co-payments retained by pharmacies on prescriptions filled for Health Card's members and not included in Health Card's revenue were $97.5 million and
$74.3 million, for the six months ended December 31, 2003 and 2002, respectively.

Of
the $16.4 million increase in revenue in the six months ended December 31, 2003, $7.3 million was due to the inclusion of PPP which was included in the revenue
for the six months ended December 31, 2003, but not in the six months ended December 31, 2002. Another approximate $51.2 million of the increase was due to revenue related to new
sponsors or new services offered during the six months ended December 31, 2003 excluding contracts recorded on a net revenue basis. An additional increase of approximately $67.7 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: 1) the termination of existing
customer contracts including a major sponsor, which terminated its contract with Health Card effective December 31, 2002, leading to a reduction in revenue of approximately
$97.3 million, 2) the Company recognized on a net revenue basis one contract during the six months ended December 31, 2003 that was recognized on a gross revenue basis for four
months during the six months ended December 31, 2002. Due to a change in contract terms effective November 1, 2002, this customer's revenue was recognized on a net basis from that point.
The revenue impact of this change was a reduction in gross revenue of approximately $9.2 million, and 3) rebates payable to the Company's sponsors increased by $3.3 million for
the six months ended December 31,

18

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2003
as compared to the six months ended December 31, 2002. Since these rebates are treated as a reduction in revenue, this led to a reduction in the overall
year-over-year revenue increase.

Cost
of claims increased $9.7 million, or approximately 4%, from $275.8 million for the six months ended December 31, 2002, to $285.5 million for the six
months ended December 31, 2003. PPP accounted for $6.0 million of the increase. Increases in cost of claims totaling approximately $110.1 million related to the activity of new
sponsors as well as the growth in existing sponsors were offset by the factors described in the previous paragraph, namely, the loss of sponsors which reduced cost of claims by approximately
$92.6 million and the recognizing of a certain contract on a net revenue basis which reduced cost of claims by approximately $9.2 million. In addition, cost of claims was reduced by the
fact that there was an increase of $4.6 million in gross rebates received, which is treated as a reduction in cost of claims. As a percentage of revenues, cost of claims decreased from 92.4% to
90.7% for the six months ended December 31, 2002 and December 31, 2003, respectively. These same factors contributed to the declining costs as a percentage of revenue. The terminated
major sponsor is a managed careorganization. Industry-wide, managed care clients have a greater cost of claims, and consequently a lower gross margin, than other types of business in the
PBM industry. While not all of the revenue associated with this sponsor was replaced by new business, the new business, for the most part was not managed care, so consequently the cost of claims on
the new business was lower than on the business it replaced. In addition, the contracts recognized on a net revenue basis decrease 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. The acquisition of PPP in July 2003 also had an impact in reducing the cost of claims as specialty pharmacy distribution
typically generates lower cost of claims than a PBM.

Gross
profit increased from $22.5 million for the six months ended December 31, 2002 to $29.2 million for the six months ended December 31, 2003, a
$6.7 million, or 29.5%, increase. In addition to PPP adding $1.3 million to gross profit, the replacement of the terminated major sponsor with new greater
margin business led to greater gross profits for the Company.. Gross profit, as a percentage of revenue, increased from 7.6% to 9.3% for the six months ended December 31, 2002 and
December 31, 2003, 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 its sponsors has had the effect of partially offsetting the increases in gross margin described above.

Selling,
general, and administrative expenses increased $5.4 million, or approximately 31%, from $17.0 million for the six months ended December 31, 2002 to
$22.4 million for the six months ended December 31, 2003. Approximately $4.1 million, or 78%, of this increase in selling, general, and administrative expenses is related to new
entities which were part of the Company in the six months ended December 31, 2003 which were not part of the Company during all of the six months ended December 31, 2002. The services
provided by these entities include specialty pharmacy distribution through the Company's acquisition of PPP, predictive modeling and consulting services through the Company's acquisition of Integrail,
and mail order distribution through the Company's owned facility in Miramar, Florida. The major components of the $4.1 million increase in expenses related to new services was:
1) salaries and benefitsapproximately $1,643,000, 2) postage and suppliesapproximately $315,000, 3) equipment rentalapproximately $184,000,
4) travel and entertainmentapproximately $184,000, and 5) depreciation and amortizationapproximately $227,000.

Of
the remaining approximate 22% increase in selling, general and administrative expenses during the six months ended December 31, 2003, the majority of the increase is related to
the increased revenue and volume in the PBM. Salary and benefits related to new hires, temporary help, travel and entertainment, and commissions to internal sales people as well as external brokers
have all increased year over year due to the increased volume of activity.

19

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General
and administrative expenses charged by affiliates decreased approximately $42,000, or 8%, year-over-year from approximately $520,000 to approximately
$478,000 for the six months ended December 31, 2002 and December 31, 2003, respectively. The decrease reflects the fact that these related party services are continuing to be replaced by
Company employees.

Selling,
general, and administrative expenses as a percent of revenue increased from 5.7% for the six months ended December 31, 2002 to 7.1% for the six months ended
December 31, 2003. The main reason for the increase is the impact of recognizing more contracts on a net revenue basis, as that has the effect of dividing these same expenses over a smaller
gross revenue base. In addition, the three new services described above also led to an increase in this percentage particularly mail order which led to an increase of 0.6% due to the fact that
resources were required to be hired in advance of the revenue.

For
the six months ended December 31, 2002 and December 31, 2003, the Company recognized other expense, net, of approximately $427,000 and $262,000, respectively. The
components of the approximate $165,000 decrease in net expense were an approximate $226,000 decrease in interest expense incurred on the Company's revolving credit facility (See Note 3 of Item
1) and an approximate $4,000 increase in other income related to the amortization of a deferred gain on a sale leaseback. These increases were partially offset by an approximate $65,000
decrease in interest income due to the affiliated company note being repaid as of July 31, 2003 (See Note 7 of Item 1). The decrease in interest expense is primarily due to the Company's
increased cash generated from operations and the fact that interest rates on the Company's revolving credit facility have declined year over year.

Income
before the provision for income taxes increased approximately $1.5 million, or 29%, from approximately $5.1 million, for the six months ended December 31,
2002, to approximately $6.6 million for the six months ended December 31, 2003. The primary factors leading to the increase were the gross profit increase described above and the
reduction in interest expense 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 estimated tax rate for the full fiscal year.

Net
income for the six months ended December 31, 2003 was approximately $3.9 million as compared to approximately $3.0 million for the six months ended
December 31, 2002; a 29% increase. Earnings per diluted share increased by $0.07, to $0.45 for the six months ended December 31, 2003.

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 also requires cash to carry inventory in its mail order and specialty pharmacy facilities. The Company also requires cash to
execute its strategy of pursuing acquisitions of other PBM companies or of companies providing related services. As of December 31, 2003, the Company had a working capital deficit of
$31.5 million as compared to a working capital deficit of $32.6 million as of June 30, 2003. The primary reason for the improvement in working capital was the profitability
generated by the Company during the six months ended December 31, 2003. This improvement was achieved even after the $3.6 million in cash paid for the acquisition of PPP and the
$1.3 million current liability incurred for additional consideration to be paid in connection with the Centrus and PPP acquisitions. Thesetransactions increased goodwill and other intangible
assets which are long-term assets, while decreasing working capital. The Company has now acquired five companies since July 2000 utilizing primarily cash. This has had the effect of
increasing the Company's working capital deficits until sufficient profitability is generated to pay back the cost of the acquisitions. In addition, the Company's revolving credit facility is treated
all as a short-term liability per generally accepted accounting principles even though its terms do not expire until January 2005.

20

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Net
cash provided by operating activities was $12.1 million for the six months ended December 31, 2003. Net cash provided by operating activities was $3.8 million
for the six months ended December 31, 2002. The main factor that led to the $8.3 million increase in cash provided by operations was the $7.1 million increase in the change in
accounts payables and accrued expenses.

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 $4.8 million for the six months ended December 31, 2003, as compared to $3.2 million for the six months ended
December 31, 2002. The primary differences in the two periods were the acquisition of PPP and the repayment of affiliate loans in the period ended December 31, 2003, and a
$3.2 million increase in capital expenditures for the six months ended
December 31, 2003 as compared to the six months ended December 31, 2002. The net cash outlay for PPP was $3.6 million, representing the initial payment of $3.2 million to
the Sellers, $609,000 to pay off PPP's bank debt plus $64,000 of related expenses. Cash in the amount of approximately $177,000 was assumed in the acquisition. In addition, $322,000 has been accrued
as additional purchase price related to an earn-out provision.

During
the six months ended December 31, 2003 the Company repaid a net of approximately $6.9 million under its revolving credit facility. The repayment of the affiliated
note plus the increased profitability and related cash flow enabled the Company to borrow less during the six months.

On
January 29, 2002, the Company entered into a $40 million revolving credit facility (the "Facility"), details of which are set forth in Note 3 to the financial
statements in Part 1. Borrowings of $28.7 million under the Facility were used to finance part of the purchase price of the Company's acquisition of Centrus. The Facility contains
various covenants that, among other things, require the Company to maintain certain financial ratios. As of February 4, 2004, approximately $7.2 million was outstanding under the
Facility, and the Company was in compliance with its financial covenants.

Three
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, EBITDA for the current fiscal quarter, interest coverage ratio, and debt service coverage for the previous twelve months, are evaluated by the Lender as a measure of the Company's
liquidity and its ability to meet all of its obligations under the 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 nor liquidity under
generally accepted accounting principles, it is provided as information for investors for analysis 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 $1.9 million or
25%, from $7.6 million for the six months ended December 31, 2002 to $9.5 million for the six months ended December 31, 2003, is

21

---

calculated
as follows (see Consolidated Statement of Cash Flows comprising Item 1 hereof for more details):

Six Months Ended
December 31,2003

2002Cash flow from operations

$
12,098

$
3,777Provision for income taxes


2,696


2,087Other (income) expense, net


262


427Net change in assets and liabilities


(5,064
)

1,884Non-cash items to reconcile net cash from operations to net income


(446
)

(535
)EBITDA

$
9,546

$
7,640


The
Company has entered into various capital lease transactions for hardware and software. The Company has also assumed various capital leases through its acquisitions. The principal
balance of all capital leases as of December 31, 2003 was approximately $569,000.

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 Vice Chairman. See Note 9 to the Consolidated
Financial Statements comprising Item 8 of Form 10 -K, for the year ended June 30, 2003 for a further description of these various leases.

The
total future payments under these contractual obligations as of December 31, 2003, is as follows:

Contractual Obligations

Payments Due by Period
($ in thousands)

|                          |                                    | Total |        | Less than
1 Year |   | 1-3
Years |        | 3-5
Years |       | After
5 Years
|------------------------- | ---------------------------------- | ----- | ------ | ---------------- | - | --------- | ------ | --------- | ----- | -------------
|Long Term Debt            |                                    | $     | 8,778  |                  | $ | 8,778     |        | $         |      |              
|Capital Lease Obligations |                                    |       | 569    |                  |   | 468       |        |           | 101   |              
|Operating Leases          |                                    |       | 12,495 |                  |   | 3,040     |        |           | 4,812 |              
|Sale-leasebacks           |                                    |       | 790    |                  |   | 510       |        |           | 280   |              
|                          |                                    |       |        |                  |   |           |        |           |       |              
|                          | Total Contractual Cash Obligations |       | $      | 22,632           |   | $         | 12,796 |           | $     | 5,193        
|                          |                                    |       |        |                  |   |           |        |           |       |              

The
members of PMP are eligible to receive additional consideration of up to $1,000,000 if certain PMP clients are retained over the first three years after acquisition. These targets
were not met in the first two years so no additional consideration was due and payable. It is the Company's expectation that these amounts will not be earned in the third year either as the identified
clients were not generally retained directly, although they were replaced.

22

---



The shareholders of Centrus are eligible to receive additional consideration of up to $4,000,000, payable over three years, if certain financial targets are met over the first two years
after acquisition. The financial performance targets were achieved during the first year and $2 million has been earned. Of this amount, $1 million was paid in May 2003 and
another $1 million will be paid in May 2004. As of the current date, it appears, subject to final adjustments, that the minimum performance targets for the second year will be achieved
during the second year which would obligate the Company to pay up to a maximum of an additional $1,000 in May 2004 and $1,000 in May 2005.

The
shareholders of PPP are eligible to receive additional consideration of up to $7,000,000, 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. To date, $321,988 has been earned and accrued as additional purchase price.

In
February 1998, the Company entered into an agreement with an unaffiliated party for computer software products and professional services. The agreement required the Company to
pay an initial license fee. In addition, if certain milestones are met based on the number of processed claims, as defined in the agreement, the initial license fee increases in specified increments.
To date, four such milestones have been met, resulting in a 100% increase in the license fee. The agreement also provides for the annual payment of a fee for maintenance and updating services equal to
18% of the initial license fee, as defined. If the remaining milestone is reached, the cash outlay by the Company would be $100,000.

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 $80,000,003. Once certain conditions have been met or waived, including receipt of certain stockholder approvals sought by a definitive proxy
statement to be distributed to the Company's stockholders, the Company will be obligated to complete the sale of the series A preferred stock to New Mountain Partners and to use approximately
$50 million of the proceeds of the sale of the series A preferred stock to fund the purchase price for a tender offer for up to 4,545,455 shares of the Company's outstanding common stock
at $11.00 per share. Bert Brodsky, the chairman of the board of directors, and certain stockholders related to him, currently hold, in the aggregate, approximately 60% of the Company's outstanding
common stock and have agreed to tender 4,448,900 shares, or approximately 54% of the Company's outstanding common stock, held by them, into the tender offer.

If
the tender offer is fully subscribed by the Company's stockholders, after the tender offer is completed, New Mountain Partners will own securities that are initially convertible into
approximately 65% of the Company's issued and outstanding common stock and prior to conversion of the series A preferred stock will be entitled to cast that number of votes that is equal to
approximately 61% of the Company's aggregate voting power. Following the closing of the sale of the series A preferred stock and the tender offer (collectively, the "Contemplated
Transactions"), New Mountain Partners will initially be entitled to nominate and elect 60% of the members of the Company's board of directors.

The
Company will primarily use the remaining proceeds from the issuance and sale of the series A preferred stock of approximately $22 million, excluding expenses related to
the closing of the Contemplated Transactions, for potential acquisitions and working capital purposes. However, except under certain circumstances, the Company will be prohibited from using such
proceeds to pay any outstanding amounts due under the Company's outstanding credit facility for six months following the closing of the Contemplated Transactions.

23

---

The
preferred stock will provide 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 will be 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, after its five 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 andcompanies 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 Facility and the Contemplated Transactions 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 effect 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, 2003), the following may involve a higher degree of judgment and complexity than others:

Revenue Recognition

24

---



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 thefuture, 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.

25

---

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 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 within 90 days of the filing date of this quarterly report. Based on that evaluation, the Company's
principalexecutive officer and the Company's principal financial officer have concluded that these controls and procedures are effective. There have been no significant changes in the Company's
internal controls including those controls over financial reporting in this period, or in other factors that could significantly affect these controls, subsequent to the date of the evaluation.

26

---



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 9 to the consolidated financial statements of Health Card's Annual Report on From 10-K for the year ended June 30, 2003 and Part II, Item 1 of Health Card's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

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 Midwest's failure to pay under
a contract. In late June 2002, Midwest agreed to make two payments in the amount of $1.34 million and $1.36 million to partially settle the Company's claims against Midwest.
Midwest has now added a fiduciary duty claim. The Company continues to have counterclaims totaling over $200,000 against Midwest for Midwest's failure to pay the amounts it had agreed to pay Health
Card for goods and services. The Company's motion for partial summary judgment and motion to dismiss the fiduciary duty claim is currently scheduled to be heard in February, 2004. The court has not
set a trial date. Discovery closed September 30, 2003. The Company intends 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CHANGES IN SECURITIES AND USE OF PROCEEDS

For information concerning the Company's 1999 Stock Option Plan, and the options currently issued and outstanding thereunder, see Note 4 to the Financial
Statements comprising Item 1 of Part I of this Form 10-Q.

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 AND REPORTS ON FORM 8-K

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                            
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Asset Purchase Agreement dated as of November 1, 2002, by and between Health Card, Integrail Acquisition Corp., Health Solutions, Ltd., and certain security holders of Health Solutions, Ltd.(10)
|               |  |                                                                                                                                                                                                   

27

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|2.2   |  | Assignment Agreement dated as of November 1, 2002, by and between Health Card, Integrail Acquisition Corp., and Health Solutions, Ltd.(10)                                                        
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.3   |  | 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(12)
|2.4   |  | Stock Purchase Agreement dated October 30, 2003 by and between Health Card and New Mountain Partners, L.P.(13)                                                                                    
|3.1   |  | Certificate of Incorporation of Health Card(7)                                                                                                                                                    
|3.2   |  | By-Laws of Health Card(7)                                                                                                                                                                         
|4.1   |  | Form of Warrant Agreement, including form of Representatives' Warrants(1)                                                                                                                         
|10.1  |  | Mail Service Provider Agreement, dated July 1, 1996, between Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services(1)                                                                 
|10.2  |  | Amendment to Mail Service Provider Agreement, dated January 1, 1997, between Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services(1)                                                 
|10.3  |  | Software License Agreement and Professional Service Agreement, dated February 18, 1998, between Health Card and Prospective Health, Inc.(1)                                                       
|10.4  |  | 1999 Stock Option Plan(1)                                                                                                                                                                         
|10.5  |  | Employee Covenant Agreement, dated June 16, 1998, between Health Card and Ken Hammond(1)                                                                                                          
|10.6  |  | Stock Option Agreement, dated August 3, 1999, between Health Card and Ken Hammond(4)                                                                                                              
|10.7  |  | Employment Agreement, dated March 27, 2000, between Health Card and David Gershen(4)                                                                                                              
|10.8  |  | Stock Option Agreement, dated May 1, 2000, between Health Card and David Gershen(4)                                                                                                               
|10.9  |  | Employment Agreement, dated May 3, 2000, between Health Card and James Bigl(4)                                                                                                                    
|10.10 |  | Stock Option Agreement, dated June 12, 2000, between Health Card and James Bigl(4)                                                                                                                
|10.11 |  | Stock Option Agreement, dated August 3, 1999, between Health Card and Kenneth J. Daley(4)                                                                                                         
|10.12 |  | Stock Option Agreement, dated August 3, 1999, between Health Card and Gerald Angowitz(4)                                                                                                          
|10.13 |  | Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and Health Card(1)                                                                                                             
|10.14 |  | Acquisition and Merger Agreement, dated as of June 27, 2000, between Health Card and Pharmacy Associates, Inc.(3)                                                                                 
|10.15 |  | Asset Purchase Agreement dated as of March 5, 2001 among National Medical Health Card Systems, Inc., PMP Acquisition Corp., Provider Medical Pharmaceutical, LLC and Members of PMP(5)            
|10.16 |  | Employment Agreement, dated June 4, 2001, between National Medical Health Card Systems, Inc. and Tery Baskin(6)                                                                                   
|10.17 |  | Stock Option Agreement, dated June 4, 2001, between National Medical Health Card Systems, Inc. and Tery Baskin(6)                                                                                 
|      |  |                                                                                                                                                                                                   

28

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|10.18 |  | Stock Option Agreement, dated June 12, 2001, between National Medical Health Card Systems, Inc. and James Bigl(6)                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19 |  | Asset Purchase Agreement dated January 29, 2002 by and among the Company, Health Solutions Limited ("HSL"), HSL Acquisition Corp., a wholly-owned subsidiary of the Company, and the security holders of HSL(8)
|10.20 |  | Receivables Purchase and Transfer Agreement dated January 29, 2002 by and among the Company and certain of its subsidiaries and NMHC Funding, LLC(8)                                                           
|10.21 |  | Amendment No. 1 dated September 25, 2002 to Receivables Purchase and Transfer Agreement by and among the Company and certain of its subsidiaries and NMHC Funding, LLC(14)                                     
|10.22 |  | Amendment No. 2 dated June 30, 2003 to Receivables Purchase and Transfer Agreement by and among the Company and certain of its subsidiaries and NMHC Funding, LLC(14)                                          
|10.23 |  | Amendment No. 3 dated October 30, 2003 to Receivables Purchase and Transfer Agreement by and among the Company and certain of its subsidiaries and NMHC Funding, LLC(14)                                       
|10.24 |  | Loan and Security Agreement dated January 29, 2002, by and between NMHC Funding, LLC and HFC Healthco-4, LLC, an affiliate of Healthcare Finance Group, Inc.(8)                                                
|10.25 |  | Lease Agreement dated as of August 1, 2001, between National Medical Health Card Systems, Inc. and BFS Realty, LLC(6)                                                                                          
|10.26 |  | Amended Lease Agreement dated as of August 1, 2001, between National Medical Health Card Systems, Inc. and BFS Realty, LLC(6)                                                                                  
|10.27 |  | 2003 Employee Stock Purchase Plan(11)                                                                                                                                                                          
|10.28 |  | Amendment No. 2 dated April 15, 2002 to Employment Agreement between Health Card and James Bigl(12)                                                                                                            
|10.29 |  | Amendment No. 3 dated October 14, 2002 to Employment Agreement between Health Card and James Bigl(12)                                                                                                          
|10.30 |  | Amendment No. 4 dated November 6, 2002 to Employment Agreement between Health Card and James Bigl(12)                                                                                                          
|10.31 |  | Stock Option Agreement between Health Card and James Bigl dated February 20, 2001(12)                                                                                                                          
|10.32 |  | Stock Option Agreement between Health Card and James Bigl dated April 30. 2002(12)                                                                                                                             
|10.33 |  | Stock Option Agreement between Health Card and James Bigl dated June 26, 2002(12)                                                                                                                              
|10.34 |  | Stock Option Agreement between Health Card and James Bigl dated July 22, 2003(12)                                                                                                                              
|10.35 |  | Employment Agreement dated October 14, 2002 between Health Card and Bert Brodsky(12)                                                                                                                           
|10.36 |  | Employment Agreement dated November 20, 2002 between Health Card and Agnes Hall(12)                                                                                                                            
|10.37 |  | Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001(12)                                                                                                                            
|10.38 |  | Amendment to Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001(12)                                                                                                               
|10.39 |  | Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001(12)                                                                                                                            
|      |  |                                                                                                                                                                                                                

29

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|10.40 |  | Amendment to Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001(12)         
|----- |  | ---------------------------------------------------------------------------------------------------------
|10.41 |  | Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001(12)                     
|10.42 |  | Amendment to Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001(12)        
|10.43 |  | Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002(12)                        
|10.44 |  | Amendment to Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002(12)           
|10.45 |  | Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003(12)                       
|10.46 |  | First Amendment dated November 6, 2002 to Employment Agreement between Health Card and David Gershen(12) 
|10.47 |  | Stock Option Agreement between Health Card and David Gershen dated February 20, 2001(12)                 
|10.48 |  | Stock Option Agreement between Health Card and David Gershen dated September 24, 2001(12)                
|10.49 |  | Stock Option Agreement between Health Card and David Gershen dated August 1, 2002(12)                    
|10.50 |  | Stock Option Agreement between Health Card and David Gershen dated August 1, 2003(12)                    
|10.51 |  | First Amendment dated November 6, 2002 to Employment Agreement between Health Card and Tery Baskin(12)   
|10.52 |  | Stock Option Agreement between Health Card and Tery Baskin dated July 20, 2000(12)                       
|10.53 |  | Stock Option Agreement between Health Card and Tery Baskin dated August 10, 2001(12)                     
|10.54 |  | Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2002(12)                      
|10.55 |  | Stock Option Agreement between Health Card and Tery Baskin dated September 19, 2002(12)                  
|10.56 |  | Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003(12)                      
|10.57 |  | Employment Agreement between Health Card and Patrick McLaughlin dated January 29, 2002(12)               
|10.58 |  | Stock Option Agreement between Health Card and Patrick McLaughlin dated January 29, 2002(12)             
|10.59 |  | Stock Option Agreement between Health Card and Patrick McLaughlin dated August 1, 2003(12)               
|10.60 |  | Amendment to Stock Option Agreement dated January 29, 2002 between Health Card and Patrick McLaughlin(12)
|10.61 |  | Stock Option Agreement between Health Card and Gerald Angowitz dated November 20, 2000(12)               
|10.62 |  | Stock Option Agreement between Health Card and Gerald Angowitz dated February 20, 2001(12)               
|10.63 |  | Stock Option Agreement between Health Card and Gerald Angowitz dated April 9, 2003(12)                   
|      |  |                                                                                                          

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|10.64 |  | Stock Option Agreement between Health Card and Kenneth J. Daley dated November 20, 2000(12)                                                            
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|10.65 |  | Stock Option Agreement between Health Card and Kenneth J. Daley dated February 20, 2001(12)                                                            
|10.66 |  | Stock Option Agreement between Health Card and Kenneth J. Daley dated April 9, 2003(12)                                                                
|10.67 |  | Stock Option Agreement between Health Card and Ronald L. Fish dated November 20, 2000(12)                                                              
|10.68 |  | Stock Option Agreement between Health Card and Ronald L. Fish dated February 20, 2001(12)                                                              
|10.69 |  | Stock Option Agreement between Health Card and Ronald L. Fish dated April 9, 2003(12)                                                                  
|10.70 |  | Stock Option Agreement between Health Card and Paul J. Konigsberg dated November 20, 2000(12)                                                          
|10.71 |  | Stock Option Agreement between Health Card and Paul J. Konigsberg dated February 20, 2001(12)                                                          
|10.72 |  | Stock Option Agreement between Health Card and Paul J. Konigsberg dated April 9, 2003(12)                                                              
|10.73 |  | Stock Option Agreement between Health Card and Bert E. Brodsky dated February 20, 2001(12)                                                             
|10.74 |  | Stock Option Agreement between Health Card and Gerald Shapiro dated February 20, 2001(12)                                                              
|10.75 |  | Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between National Medical Health Card Systems, Inc. and James J. Bigl(14)       
|10.76 |  | Lease dated November 1, 2002 between B/A Airport Park Solutions, LLC and Health Card(12)                                                               
|10.77 |  | Lease Addendum dated March 10, 2003 between B/A Airport Park Solutions, LLC and Health Card(12)                                                        
|10.78 |  | Lease Agreement dated November 18, 2002 between Sunbeam Development Corporation and NMHCRx Mail Order, Inc.(12)                                        
|10.79 |  | Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development Corporation and NMHCRx Mail Order, Inc.(12)                 
|10.80 |  | AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc. d/b/a NMHCmail and AmerisourceBergen Drug Corporation(12)
|10.81 |  | Release, dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc.(14)                                                                 
|10.82 |  | Amendment to Lease Agreement, dated as of October 23, 2003, by and among BFS Realty, LLC and National Medical Health Card Systems, Inc.(14)            
|10.83 |  | Lease Agreement, dated August 1, 2001, between Brodsky Sibling Realty Juniper Road, LLC and National Medical Health Card Systems, Inc.(14)             
|10.84 |  | Lease Agreement (30 Sea Cliff), dated May 1, 2002, between Living in Style, LLC and National Medical Health Card Systems, Inc.(14)                     
|      |  |                                                                                                                                                        

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|10.85 |  | 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.(14)                    
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.86 |  | Lease Agreement (32 Sea Cliff), dated May 1, 2002, between Living in Style, LLC and National Medical Health Card Systems, Inc.(14)                                            
|10.87 |  | 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.(14)                    
|10.88 |  | Lease Agreement, dated September 11, 2001, between TC Meridian Tower, LP and National Medical Health Card Systems, Inc.                                                       
|10.89 |  | Second Amendment to Employment Agreement, dated October 30, 2003, by and between National Medical Health Card Systems, Inc. and Bert E. Brodsky(14)                           
|14.   |  | Code of Ethics(12)                                                                                                                                                            
|21.   |  | List of Subsidiaries(12)                                                                                                                                                      
|23.1  |  | Consent of Ernst & Young LLP to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-8224) of its report dated September 5, 2003            
|23.2  |  | Consent of Goldstein Golub Kessler LLP to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-8224) of its report dated September 31, 2003.
|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                                                                                         

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SIGNATURES

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

|NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.(Registrant)
|------------------------------------------------------
|                                                      
|Date: February 19, 2004                               
|                                                      
|                                                      
|                                                      

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