# UNITED STATES

# SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

_________________

# FORM 10-Q

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

For the quartery period ended September 30, 2004

OR

[ ] Transition report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period
from _______ to _________

Commission file number
000-26749

NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC.(Exact name of
registrant as specified in its charter)

|Delaware | 11-2581812
|-------- | ----------

|(State or other jurisdiction of incorporation or organization | (I.R.S. Employee Identification No.)
|------------------------------------------------------------- | ------------------------------------

26 Harbor Park Drive,   Port Washington, NY   
(Address of principal executive offices)

11050   (Zip Code)

Registrants
telephone number, including area code:(516) 626-0007

Not ApplicableFormer Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes___ No X

# 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 __

# APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate
the number of shares outstanding of the registrants common stock, as of the latest
practicable date: 4,419,325 shares outstanding as of November 8, 2004.

# INDEX

PAGE

|                           |  | 
|-------------------------- |  | 
|Forward Looking Statements |  | 

PART I  FINANCIAL INFORMATION

|        |  |                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------
|ITEM 1. |  | CONDENSED FINANCIAL STATEMENTS:                                                                         
|        |  | CONSOLIDATED BALANCE SHEET as of September 30, 2004 (unaudited) and June 30,  2004                      
|        |  | CONSOLIDATED STATEMENT OF INCOME (unaudited) for the three months ended September 30, 2004 and 2003     
|        |  | CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)  for the three months ended September 30, 2004 and 2003
|        |  | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                    
|ITEM 2. |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   
|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                              
|ITEM 4. |  | CONTROLS AND PROCEDURES                                                                                 

PART II - OTHER INFORMATION

|        |  |                                                            
|------- |  | -----------------------------------------------------------
|ITEM 1. |  | LEGAL PROCEEDINGS                                          
|ITEM 2. |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES                            
|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS        
|ITEM 5. |  | OTHER INFORMATION                                          
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K                           

2

Forward Looking Statements

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

3

# PART I 
FINANCIAL INFORMATION

ITEM 1  CONDENSED
FINANCIAL STATEMENTS

NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

|CONSOLIDATED BALANCE SHEET                                                           
|-------------------------------------------------------------------------------------
|
|
|
|
|Assets                                                                               
|Current:                                                                             
|Cash and cash equivalents (including cash equivalent investments of $2,191           
|and $1,191, respectively                                                             
|Restricted cash                                                                      
|Accounts receivable, less allowance for doubtful accounts of $2,468                  
|and $2,312, respectively                                                             
|Rebates receivable                                                                   
|Inventory                                                                            
|Due from affiliates                                                                  
|Deferred tax asset                                                                   
|Other current assets                                                                 
|                                                                                     
|Total current assets                                                                 
|Property, equipment and software development costs, net                              
|Intangible assets, net of accumulated amortization of $2,467 and $2,106, respectively
|Goodwill                                                                             
|Other assets                                                                         
|                                                                                     
|Total Assets                                                                         
|                                                                                     
|                                                                                     
|Liabilities, Redeemable Preferred Equity, and Common Stockholders' Deficit           
|Current Liabilities:                                                                 
|Accounts payable and accrued expenses                                                
|Revolving credit facility and loans payable-current                                  
|Current portion of capital lease obligations                                         
|Income taxes payable                                                                 
|Other current liabilities                                                            
|                                                                                     
|Total current liabilities                                                            
|Capital lease obligations, less current portion                                      
|Long term loans payable and other liabilities                                        
|Deferred tax liability                                                               
|                                                                                     
|Total liabilities                                                                    
|                                                                                     
|Commitments and Contingencies                                                        
|Redeemable Preferred Equity                                                          
|Redeemable convertible preferred stock $.10 par value; 15,000,000 shares             
|authorized, 6,956,522 issued and outstanding                                         
|Common Stockholders' Deficit:                                                        
|Common Stock, $.001 par value, 35,000,000 shares authorized, 9,055,513               
|and 8,969,694 shares issued, 4,415,613 and 4,329,794 outstanding, respectively       
|Additional paid-in-capital                                                           
|Retained deficit                                                                     
|Treasury stock at cost, 4,639,900 shares                                             
|                                                                                     
|Total common stockholders' deficit                                                   
|                                                                                     
|Total Liabilities, Redeemable Preferred Equity,    and Common Stockholders' Deficit  
|                                                                                     
|                                                                                     
|                                                                                     

See accompanying
condensed notes to consolidated financial statements

4

NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

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

|                                                                |  | Three months ended
|--------------------------------------------------------------- |  | ------------------
|
|
|Revenue (includes co-payments collected of $2,277               |  |                   
|and $36, respectively; and excludes co-payments retained by the |  |                   
|pharmacies of $53,921 and $47,696, respectively)                |  |                   
|Cost of claims (excludes co-payments retained by the            |  |                   
|pharmacies of $53,921 and $47,696, respectively)                |  |                   
|                                                               
|Gross Profit                                                    |  |                   
|Selling, general and administrative expenses                    |  |                   
|                                                               
|Operating income                                                |  |                   
|Other income (expense):                                         |  |                   
|Interest expense                                                |  |                   
|Interest income                                                 |  |                   
|Other income, net                                               |  |                   
|                                                               
|                                                                |  |                   
|                                                               
|Income before provision for income taxes                        |  |                   
|Provision for income taxes                                      |  |                   
|                                                               
|Net income                                                      |  |                   
|                                                               
|Preferred stock cash dividend                                   |  |                   
|Accretion of transaction expenses                               |  |                   
|                                                               
|Net income available to common stockholders                     |  |                   
|                                                               
|Earnings per common share:                                      |  |                   
|Basic                                                           |  |                   
|                                                               
|                                                               
|Diluted *                                                       |  |                   
|                                                               
|                                                               
|Weighted average number of common shares outstanding:           |  |                   
|Basic                                                           |  |                   
|                                                               
|                                                               
|Diluted *                                                       |  |                   
|                                                               
|                                                               

See accompanying
condensed notes to consolidated financial statements

---

| | * |  | For
the three months ended September 30, 2004, the number of weighted average diluted shares
was calculated using the as if converted method.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

5

NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

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

|                                                                    |  | Three months ended
|------------------------------------------------------------------- |  | ------------------
|
|
|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                                       |  |                   
|Provision for doubtful accounts                                     |  |                   
|Compensation expense accrued to officer/stockholder                 |  |                   
|Deferred income taxes                                               |  |                   
|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                           |  |                   
|                                                                   
|Cash flows from investing activities:                               |  |                   
|Capital expenditures                                                |  |                   
|Repayment of loan from affiliate                                    |  |                   
|Repayment of loan from officer                                      |  |                   
|Acquisition of Integrail                                            |  |                   
|Acquisition of PPP, net of cash acquired                            |  |                   
|                                                                   
|Net cash used in investing activities                               |  |                   
|                                                                   
|Cash flows from financing activities:                               |  |                   
|Proceeds from exercise of stock options                             |  |                   
|Proceeds from revolving credit facility                             |  |                   
|Repayment of revolving credit facility                              |  |                   
|Payment of preferred stock dividends                                |  |                   
|Deferred financing costs                                            |  |                   
|Repayment of debt and capital lease obligations                     |  |                   
|                                                                   
|Net cash used in financing activities                               |  |                   
|                                                                   
|Net increase (decrease) in cash and cash equivalents                |  |                   
|Cash and cash equivalents at beginning of period                    |  |                   
|                                                                   
|Cash and cash equivalents at end of period                          |  |                   
|                                                                   
|                                                                   
|                                                                    |  |                   

See accompanying
condensed notes to consolidated financial statements

6

---

NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

# CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(All $ in thousands,
except share and 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), Portland Professional Pharmacy and Portland
Professional Pharmacy Associates (collectively, PPP or Ascend)
(See Note 4), Inteq Corp. and Inteq TX Corp. (collectively Inteq) (See Note 4)
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
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
September 30, 2004 and 2003 unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair presentation
of results for these interim periods. In the opinion of the Companys management, the
disclosures contained in this Form 10-Q are adequate to make the information presented not
misleading when read in conjunction with the Notes to Consolidated Financial Statements
included in the Companys Form 10-K for the year ended June 30, 2004. The results of
operations for the three month period ended September 30, 2004 are not necessarily
indicative of the operating results to be expected for the full year.

For information concerning the
Companys significant accounting policies, reference is made to the Companys
Annual Report on Form 10-K for the year ended June 30, 2004 (the Annual
Report).

2.    
          STOCK-BASED COMPENSATION

Pro forma information regarding net
income applicable to common stockholders is required by SFAS 123, Accounting for
Stock-Based Compensation, which also requires that the information be determined as
if the Company has accounted for its stock options under the fair value method of that
statement. For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The fair value for these
options was estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for all grants in the three months ended September 30,
2004 and 2003: no dividend yield, weighted-average expected life of the option of between
four and five years, risk-free interest rate of 3.4% and between 2.93% and 3.36%
respectively and a volatility of 75%, and 76.5%, respectively, for all grants. The
weighted-average value of options granted is $15.21 and $7.24 for the three months ended
September 30, 2004 and 2003, respectively.

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

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

|                                           |  | Three Months Ended September 30,
|------------------------------------------ |  | --------------------------------
|
|Reported net income available to           |  |                                 
|common stockholders                        |  |                                 
|Stock compensation expense included in net |  |                                 
|income available to common                 |  |                                 
|stockholders                               |  |                                 
|Pro forma compensation expense             |  |                                 
|Pro forma net income available to          |  |                                 
|common stockholders                        |  |                                 
|Pro forma earnings per share:              |  |                                 
|Basic                                      |  |                                 
|Diluted                                    |  |                                 

3.    
          NEW MOUNTAIN TRANSACTION

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

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

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

The preferred stock provides for an
initial annual cash dividend equal to 7% of the investment amount, which decreases to 3.5%
after the fifth anniversary of issuance. The preferred stock is convertible into 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 New Mountain
Transaction, the Company recorded a non-recurring, non-cash charge to net income available
to holders of the Companys common stock for a beneficial conversion feature related
to the series A preferred stock, which is convertible into the Companys common stock
at $11.50 per share. Such non-cash charge reflects the difference between the fair market
value of the Companys common stock on the date of the closing of the New Mountain
Transaction and the effective conversion price of $11.29 (after deducting the closing
payment of $1,450 payable to New Mountain Partners) multiplied by 6,956,522, the number of
shares of the Companys common stock into which the series A preferred stock held by
New Mountain Partners is convertible. The maximum amount of the beneficial conversion
feature was limited to $80,000, which is the purchase price of the series A preferred
stock.

4.    
          BUSINESS ACQUISITIONS

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

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

On July 31, 2003, the Company entered
into a Stock Purchase Agreement with Portland Professional Pharmacy (PPRX),
Portland Professional Pharmacy Associates (PRXA, and together with PPRX,
PPP or Ascend) and the individual shareholders (the PPP
Shareholders) to purchase all of the shares of PPP for $3,150 (the PPP
Acquisition). PPP provides specialty-pharmacy services in a broad range of areas,
including womens health, pediatric care, mens health and transplant. Funds for
the PPP Acquisition were supplied by the Companys revolving credit facility that was
put in place in January 2002 (see 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 $2,986, which consists of the following components:
(i) customer relationships valued at $295, which is being amortized over seven (7) years;
(ii) employment and non-compete agreements valued at $100 each, which are being amortized
over four (4) years; (iii) the Portland Professional Pharmacy trade name valued at $100
which is being amortized over four (4) years; and (iv) goodwill of $2,391, which will not
be amortized for book purposes per SFAS 142. For tax purposes, the Company has made an
election which will allow it to amortize the goodwill and other intangibles over fifteen
years. In addition, the Company agreed to pay to the PPP Shareholders up to $7,000 over a
three-year period if the PPP business achieved certain financial targets. To date, $889
has been earned and accrued, of which $358 has been paid in cash and $358 has been settled
by the issuance of 12,650 shares of common stock, and the remaining $173 will be paid in
September 2005.

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

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

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

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

The summarized unaudited pro forma
results of operations set forth below for the three months ended September 30, 2004 and
2003 assumes the Inteq and PPP Acquisitions had occurred as of the beginning of these
periods.

|                                            |  | Three Months Ended  September 30,
|------------------------------------------- |  | ---------------------------------
|
|Revenue                                     |  |                                  
|Net income available to common stockholders |  |                                  
|Earnings per common share:                  |  |                                  
|Basic                                       |  |                                  
|Diluted                                     |  |                                  
|Pro forma weighted-average number of        |  |                                  
|common shares outstanding:                  |  |                                  
|Basic                                       |  |                                  
|Diluted                                     |  |                                  

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 three months ended September 30, 2004 is as follows:

|                                      | 
|------------------------------------- | 
|Balance as of June 30, 2004           | 
|Inteq additional consideration earned | 
|PPP additional consideration earned   | 
|                                      | 
|Balance as of September 30, 2004      | 

Approximately $80,271 of the
Companys September 30, 2004 goodwill is deductible for income tax purposes on a
straight-line basis over 15 years.

Acquired intangible assets subject to
amortization consisted of the following:

|                       |  | September 30, 2004 |   | June 30, 2004
|---------------------- |  | ------------------ | - | -------------
|
|Asset Class            |  |                    |   |              
|                       |  |                   
|Customer relationships |  |                    | $ | 4,931        
|Non-compete agreements |  |                    |   | 220          
|Employment agreements  |  |                    |   | 186          
|Trade name             |  |                    |   | 100          
|Company know how       |  |                    |   | 572          
|                      
|                       |  |                    | $ | 6,009        
|                      

5. DEBT

On January 29, 2002, the Company and
certain of its subsidiaries entered into a $40,000 secured revolving credit facility (the
revolving credit facility) with HFG Healthco-4 LLC, a specialty finance
company. In connection with the revolving credit 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
revolving credit facility. The revolving credit facility has a three year term, provides
for borrowings of up to $40,000 at the London InterBank Offered Rate (LIBOR) plus 2.40%
(4.24% at September 30, 2004) and is secured by receivables and other assets of the
Company and certain of its subsidiaries as defined. Borrowings of $28,700 under the
revolving credit facility were used to finance part of the purchase price of the Centrus
Acquisition (See Note 4) 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 September 30, 2004 was approximately $50,
which was all classified as short-term debt. The revolving credit 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 revolving
credit facility). Other covenants under the revolving credit 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 September 30,
2004.

6.              STOCK
OPTIONS

During the three months ended
September 30, 2004, the Company granted 201,071 stock options and 13,048 stock options
were cancelled for a net of 188,023 stock options under the 1999 Stock Option Plan, as
amended (the Plan). The options granted during this period are exercisable at
prices ranging from $23.93 to $29.06 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 4,850,000 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. There are 1,705,203 shares issuable pursuant to options granted under the Plan
as of September 30, 2004.

7.              EARNINGS
PER SHARE

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

|                                                                       | Three Months Ended
|---------------------------------------------------------------------- | ------------------
|
|
|Basic                                                                  |                   
|Effect of assumed exercise of employee stock options                   |                   
|Effect of assumed exercise of warrants                                 |                   
|Effect of assumed conversion of redeemable convertible preferred stock |                   
|                                                                      
|Diluted weighted average number of shares outstanding                  |                   

Basic net income per common share is
computed by dividing the net income available to common stockholders by the
weighted-average number of common shares outstanding during the period. For the three
months ended September 30, 2004, diluted net income per share is computed by dividing the
net income by the weighted-average number of common and dilutive common equivalent shares
(consisting of employee stock options, warrants and redeemable preferred stock as if
converted) outstanding during the period. For the three months ended September 30, 2003,
the diluted net income per share is computed by dividing the net income available to
common stockholders by the weighted-average number of common and dilutive common
equivalent shares (consisting of employee stock options and warrants) outstanding during
the period.

8.              ACCOUNTS
PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses
consist of the following:

|                                              | September 30,
     2004 | June 30,
  2004
|--------------------------------------------- | ----------------------- | ---------------
|Claims payable                                |                         |                
|Rebates payable to sponsors                   |                         |                
|Trade and Other payables and accrued expenses |                         |                
|                                              |                         |                

9.              RELATED
PARTY TRANSACTIONS

The Company receives certain general,
administrative and other services from an affiliate. The financial statements include
allocations of these corporate expenses from affiliates, which management believes were
made on a reasonable basis. General and administrative expenses related to transactions
with affiliates included in the statement of income were $298 for the three months ended
September 30, 2004 and $244 for the three months ended September 30, 2003.

The Company occupied approximately
26,500 square feet of office space located at 26 Harbor Park Drive, Port Washington, New
York 11050 until April 30, 2004 (the Leased Premises). The Company subleases
the Leased Premises from BFS Realty, LLC, an affiliate of the Companys former
Chairman and current director (the Affiliate). The Affiliate leases the Leased
Premises from the Nassau County Industrial Development Agency (NCIDA) pursuant
to a lease that was entered into by NCIDA and the Affiliate in July 1994, which expires in
March 2005. The Affiliate has the right to purchase the Leased Premises upon expiration of
that lease for the purchase price of one dollar. The Affiliate subleases a portion of the
Leased Premises to the Company (the Lease). As of November 1, 2001, the
Company and the Affiliate amended the Lease. The Lease provided that, effective August 1,
2001, the rent payable by the Company would be an aggregate annual rent of $308. While
formerly the Company made estimated monthly real estate tax, utilities and
maintenance-expense payments to the Affiliate, the Lease provided that the Company would
pay its pro-rata share of such expenses directly, to the entities to whom payment must be
made. The annual rent would increase by 5% per year during the term of the Lease.

Additional space was built in the
Leased Premises which allowed the Company to reconfigure its existing space and to move
all of its employees in Port Washington into contiguous space. The Company and the
Affiliate amended the Lease for the space on October 23, 2003 and April 26, 2004.
Effective on the occupancy date of the new space, as of May 1, 2004, the Affiliate leased
additional square footage in the Leased Premises to the Company. The total space leased by
the Company is currently 37,108 square feet. The Lease provides that, effective May 1,
2004, the rent payable by the Company shall be an aggregate annual rent of $580 over a ten
year term, plus expenses related to real estate taxes, utilities and maintenance 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 ten years from the occupancy date of May 1, 2004. In addition, the Company
has early termination rights which it may exercise by delivery of a notice to the
Affiliate 60 days prior to the end of the April 30, 2009 lease year. In consideration of
such early termination rights, the Company would pay to the Affiliate the rent that would
otherwise be payable by the Company to the Affiliate for the succeeding 30 months and
subject to adjustments if the Affiliate is able to lease the Leased Premises to another
party during said 30 month period. Leasehold improvements made to this space during the
three months ended September 30, 2004 were approximately $32.

10.              MAJOR
CUSTOMERS AND PHARMACIES

For the three months ended September
30, 2004, approximately 20% of the consolidated revenue of the Company was from one plan
sponsor, MVP Health Plan, Inc., administering multiple plans. For the three months ended
September 30, 2003, approximately 41% of the consolidated revenue of the Company was from
two plan sponsors administering multiple plans. Amounts due from the sponsor as of
September 30, 2004 approximated $8.8 million.

For the three months ended September
30, 2004 no pharmacy chains exceeded 10% of cost of claims. For the three months ended
September 30, 2003, approximately 11% of the cost of claims was from one pharmacy chain.

11.              SUPPLEMENTAL
CASH FLOW INFORMATION

During the three months ended
September 30, 2004 and September 30, 2003, the Company paid $135 and $245 in interest and
$119 and $958 in income taxes, respectively.

12. LITIGATION

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

NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

ITEM 2 
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF
OPERATIONS

|OPERATING INCOME      
|----------------------
|
|
|
|                      
|Revenue               
|Cost of Claims        
|                      
|                      
|Gross profit          
|Selling, general, and 
|administrative expense
|                      
|                      
|Operating Income      

# Results of Operations

Three Months Ended
September 30, 2004 Compared to Three Months Ended September 30, 2003

Revenue increased $34.0 million, or
approximately 23%, from $150.8 million for the three months ended September 30, 2003, to
$184.8 million for the three months ended September 30, 2004. Revenue recognized for
contracts recorded on a gross revenue basis was $150.2 million for the three months ended
September 30, 2003 and $184.0 million for the three months ended September 30, 2004.
Revenue recognized for contracts recorded on a net revenue basis was $0.6 million for the
three months ended September 30, 2003 and $0.8 million for the three months ended
September 30, 2004. 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 September 30, 2004, there was approximately $2.3 million of co-payments included in
revenue versus $36,000 for the three months ended September 30, 2003. Co-payments retained
by pharmacies on prescriptions filled for Health Cards members and not included in
Health Cards revenue were $53.9 million and $47.7 million, for the three months
ended September 30, 2004 and 2003, respectively.

Of the $34.0 million increase in
revenue in the three months ended September 30, 2004, $16.7 million was attributable to
the inclusion of revenue generated by Inteq which was included in the revenue for the
quarter ended September 30, 2004, but not in the quarter ended September 30, 2003. In
addition, $1.8 million of the increase was attributable to the PPP Acquisition, which took
place on July 31, 2003 and therefore was only included in the revenue for two months in
the quarter ended September 30, 2003. Co-payments received from the Mail Order operations
accounted for $2.2 million of the increase. Another approximately $13.6 million of the
increase was due to revenue related to new sponsors or new services offered during the
quarter ended September 30, 2004 excluding contracts recorded on a net revenue basis. An
additional increase of approximately $19.2 million was attributable to other existing
sponsors related to, among other things, higher costs for pharmaceuticals, availability of
new drugs, plan participant growth and an increase in the average number of claims per
plan participant, as well as changes in other miscellaneous revenue items. These revenue
increases were offset by revenue decreases related to the termination of existing customer
contracts leading to a reduction in revenue of approximately $19.5 million.

Cost of claims increased $27.9
million, or approximately 20%, from $137.3 million for the three months ended September
30, 2003 to $165.2 million for the three months ended September 30, 2004. Inteq accounted
for $14.6 million and PPP accounted for another $1.4 million of the increase. Increases in
cost of claims totaling approximately $30.3 million related to the activity of new
sponsors as well as the growth in existing sponsors were partially offset by the loss of
sponsors which reduced cost of claims by approximately $18.4 million. As a percentage of
revenue, cost of claims decreased from 91.0% to 89.4% for the three months ended September
30, 2003 and September 30, 2004, respectively. The contracts the Company recognized on a
net revenue basis decreased the overall Company costs as a percentage of revenue due to
the cost not being recognized on the contracts recorded on the net revenue basis. The
acquisition of PPP in July 2003 also had an impact in reducing the Companys overall
cost of claims as a percent of revenue as specialty pharmacy distribution typically
generates lower cost of claims than a PBM. In addition, the receipt of an additional $2.2
million in co-payments for the Mail Order operations resulted in a lower cost of claims as
a percent of revenue, since no additional cost of claims are incurred due to these
operations.

Gross profit increased from $13.5
million for the three months ended September 30, 2003 to $19.7 million for the three
months ended September 30, 2004; a $6.2 million, or 45.6%, increase. In addition to
increases in gross profit related to the increases in revenue, Inteq added $2.1 million to
gross profit, and the gross profit from the expanding mail order and specialty operations
increased by approximately $2.3 million. Net rebates retained by the Company added another
approximately $1.8 million to gross profit. Gross profit, as a percentage of revenue,
increased from 9.0% to 10.6% for the three months ended September 30, 2003 and September
30, 2004, respectively. The contracts the Company recognizes on a net revenue basis have
the effect of improving the Companys gross margin as a percentage of revenue due to
the fact that recorded revenue and cost is lower since only the administrative fees
related to these contracts are recorded. Competitive pressures which have led to a decline
in some prices that the Company charges to its sponsors have had the effect of partially
offsetting the increases in gross margin described above.

Selling, general, and administrative
expenses increased $4.5 million, or approximately 43%, from $10.6 million for the three
months ended September 30, 2003 to $15.1 million for the three months ended September 30,
2004. Approximately $3.0 million, or 67%, of this increase in selling, general, and
administrative expenses is related to the new acquisitions and expanding mail order
operations. The major components of the $3.0 million increase in expenses related to new
services was: 1) salaries and benefits  approximately $1.2 million, 2) postage and
supplies  approximately $0.3 million, 3) equipment rental  approximately $0.6
million, 4) depreciation and amortization  approximately $0.3 million, and 5) broker
commissions  approximately $0.6 million.

General and administrative expenses
charged by affiliates increased approximately $54,000, or 22%, year-over-year from
approximately $244,000 to approximately $298,000 for the three months ended September 30,
2003 and September 30, 2004, respectively. The increase is the result of higher rent costs
due to the expanded space in the Companys Port Washington, NY offices.

Selling, general, and administrative
expenses as a percent of revenue increased from 7.0% for the three months ended September
30, 2003 to 8.2% for the three months ended September 30, 2004.

For the three months ended September
30, 2003, the Company recognized other expense, net, of approximately $176,000. For the
three months ended September 30, 2004, the Company recognized other expense, net, of
approximately $79,000. The components of the approximately $97,000 decrease in other
expense were a $106,000 decrease in interest expense incurred on the Companys
revolving credit facility (See Note 5 to the Financial Statements comprising Item 1 of
Part 1 of this Form 10-Q) and a $12,000 increase in other income from the sale of assets,
offset by a $21,000 decrease in interest income. The decrease in interest expense is
primarily due to the Companys increased cash generated from operations which reduced
the average outstanding loan balance by 64%.

Income before the provision for
income taxes increased approximately $1.7 million, or 62%, from approximately $2.8
million, for the quarter ended September 30, 2003, to approximately $4.5 million for the
quarter ended September 30, 2004. The primary factors leading to this increase in income
before income taxes 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 current estimated tax rate for the full fiscal year.

Net income for the quarter ended
September 30, 2004 was approximately $2.7 million as compared to approximately $1.6
million for the quarter ended September 30, 2003; a 62% increase. The increase in net
income is attributable to the same factors causing the increase in income before income
taxes.

In addition, there were two charges
against income available to common shareholders related to the New Mountain Transaction
(See Note 3 of Part 1, Item 1). The first of these charges relates to preferred stock cash
dividends, which amounted to approximately $1.4 million. The preferred stock provides for
an initial cash dividend equal to 7% of the investment amount (currently $80 million),
which decreases to 3.5% after the fifth anniversary of issuance. The dividend of
approximately $1.4 million represents the amount accrued and paid for the three months
ended September 30, 2004. The second charge is for the accretion of transaction expenses
which were approximately $119,000 for the three months ended September 30, 2004. Certain
transaction costs related to the New Mountain preferred stock investment of approximately
$4.7 million were deducted from net proceeds and the carrying value of the preferred
stock. These transaction costs are accreted to the preferred stock carrying value over the
ten-year life of the preferred stock investment.

After deducting these two charges
from net income there remained a net income available to common stockholders of
approximately $1.1 million for the three months ended September 30, 2004, as compared to
approximately $1.6 million for the three months ended September 30, 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 requires cash to carry inventory in its mail order and
specialty pharmacy facilities. Also, the Company requires cash to execute its strategy of
pursuing acquisitions of other PBM companies or of companies providing related services.
As of September 30, 2004, the Company had a working capital deficit of $26.0 million as
compared to a working capital deficit of $27.7 million as of June 30, 2004. The primary
reason for the improvement in working capital was the profit generated by the Company
during the three months ended September 30, 2004. The Company has now acquired six
companies since July 2000 utilizing primarily cash. This has had the effect of increasing
the Companys working capital deficits until sufficient profitability is earned to
offset these deficits.

Net cash provided by operating
activities was $2.9 million for the three months ended September 30, 2004, compared to
$7.6 million for the three months ended September 30, 2003. The main factor contributing
to this $4.7 million decrease in cash provided by operations was the $4.4 million decrease
in accounts payables and accrued expenses during the three months ended September 30,
2004.

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

Net cash used in investing activities
was $1.3 million for the three months ended September 30, 2004, as compared to $2.9
million for the three months ended September 30, 2003. This decrease of $1.6 million in
net cash used in investing activities was the result of a decrease in capital expenditures
of $1.1 million along with a reduction in the cash paid for the PPP Acquisition of $3.3
million, offset by the receipt of $2.7 million in the three months ended September 30,
2003 relating to officer and affiliate loans. The cash payments of $358,000 during the
three months ended September 30, 2004 for the PPP Acquisition are for additional payments
due under the earn-out provision (See Note 4 of Part 1, Item 1). The Company has accrued
$173,000 through September 30, 2004 as additional purchase price related to the earn-out
provision, which will be paid in September 2005.

During the three months ended
September 30, 2004, the Company used $1.4 million for financing activities compared to
$5.0 million in the three months ended September 30, 2003. This decrease of $3.7 million
is the result of $5.1 of net repayments under the revolving credit facility in the three
months ended September 30, 2003 offset by $1.4 million of dividends paid on redeemable
convertible preferred stock during the three months ended September 30, 2004. During the
quarter ended September 30, 2004, borrowings and repayments were approximately even under
the revolving credit facility.

On January 29, 2002, the Company
entered into a $40 million revolving credit facility, details of which are set forth in
Note 5 to the financial statements in Part 1. The revolving credit facility contains
various covenants that, among other things, require the Company to maintain certain
financial ratios. As of September 30, 2004 approximately $50,000 was outstanding under the
revolving credit 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 revolving credit
facility. EBITDA is presented as cash flow from operations plus or minus the net changes
in assets and liabilities and the changes in certain non-cash reconciling items from net
cash from operations to net income over the reported periods. While EBITDA is not a
measure of financial performance or liquidity under generally accepted accounting
principles, it is provided as information for investors for analytical purposes in light
of the financial covenants referred to above. EBITDA is not meant to be considered a
substitute or replacement for net income as prepared in accordance with accounting
principles generally accepted in the United States. EBITDA, which increased by
approximately $1.8 million or 42%, from $4.4 million for the three months ended September
30, 2003 to $6.2 million for the three months ended September 30, 2004, is calculated as
follows (see Consolidated Statement of Cash Flows comprising Item 1 hereof for more
details):

|                            |  | Three Months Ended September 30,
|--------------------------- |  | --------------------------------
|
|Cash flow from operations   |  |                                 
|Provision for income taxes  |  |                                 
|Interest expense, net       |  |                                 
|Net change in assets and    |  |                                 
|liabilities                 |  |                                 
|Non-cash items to reconcile |  |                                 
|net cash from operations to |  |                                 
|net income                  |  |                                 
|                           
|                           
|EBITDA                      |  |                                 
|                           

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
September 30, 2004 was approximately $209,000.

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 former Chairman and current Director. See Note 11 to the Consolidated
Financial Statements comprising Item 8 of Form 10K for the year ended June 30, 2004
for a further description of these various leases.

The total future payments under these
contractual obligations as of September 30, 2004, are as follows:

|Contractual Obligations   |  | Payments Due by Period
|------------------------- |  | ----------------------
|
|
|Long Term Debt            |  |                       
|Capital Lease Obligations |  |                       
|Operating Leases          |  |                       
|Sale-leasebacks           |  |                       
|                         
|                         
|Total Contractual Cash    |  |                       
|Obligations               |  |                       
|                         
|                          |  |                       

The shareholders of the Inteq Group
are eligible to receive additional compensation of up to $4.2 million, if certain
financial targets are met over the first year. Of this potential amount, $3 million was
deposited in escrow at the time of closing. As of September 30, 2004, $957,000 has been
earned and was released from escrow on October 5, 2004.

The shareholders of PPP are eligible
to receive additional consideration of up to $7 million, if certain financial targets are
met over the first three years. Such amounts earned are payable within 45 days after the
first, second, and third anniversary of the date of acquisition. In the sole discretion of
the Company, up to 50% of any amounts earned can be paid in the Companys stock in
lieu of cash. For the year ended July 31, 2004, $716,010 has been earned and was paid on
September 15, 2004. Of this amount, $358,005 was paid in cash and $358,005 was satisfied
by the issuance of 12,650 shares of common stock. For the period of August 1, 2004 through
September 30, 2004, an additional $173,000 has been earned and accrued as additional
purchase price that will be paid in September 2005.

The shareholders of Centrus were
eligible to receive additional consideration of up to $4 million, payable over three
years, if certain financial targets were met over the first two years after acquisition.
The financial performance targets were achieved and $4 million has been earned. Of this
amount, $1 million was paid in May 2003, $2 million was paid in May 2004, and another $1
million will be paid in May 2005.

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

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

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

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

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

The Company anticipates that current
cash positions, after its six acquisitions together with anticipated cash flow from
operations, will be sufficient to satisfy the Companys contemplated cash
requirements for at least 24 months. This is based upon current levels of capital
expenditures and anticipated operating results for the next 24 months. However, it is one
of the Companys stated goals to acquire other pharmacy benefit management companies
and companies providing related services. Depending on the Companys evaluation of
future acquisitions, additional cash may be required to complete these acquisitions. In
addition, the Company will require cash to acquire inventory for its mail order and
specialty distribution operations. In the event that the Companys plans change or
its assumptions prove to be inaccurate, or the proceeds from the revolving credit facility
and the New Mountain Transaction prove to be insufficient to fund operations and
acquisitions, the Company could be required to seek additional financing sooner than
anticipated. There can be no assurance that such financing could be obtained at rates or
on terms acceptable to the Company, if at all.

# Other Matters

# Inflation

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

# Critical Accounting
Policies and Estimates

General

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

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

Revenue Recognition

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

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

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

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

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

Bad Debt

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

Goodwill and Intangible
Asset Impairment

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

Deferred Taxes

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

Capitalized Software

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

ITEM 3 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4  CONTROLS
AND PROCEDURES

Disclosure controls and procedures
are the controls and procedures designed to ensure that information that the Company is
required to disclose in its reports under the 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
principal executive officer and the Companys principal financial officer have
concluded that these controls and procedures are effective in alerting them to material
information, on a timely basis, required to be included in the Companys periodic
Securities and Exchange Commission filings. There have been no 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.

# PART II  OTHER
INFORMATION

ITEM 1  LEGAL
PROCEEDINGS

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

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

ITEM 2 
UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS

For information concerning the
Companys 1999 Stock Option Plan, as amended, and the options currently issued and
outstanding thereunder, see Note 6 to the Financial Statements comprising Item 1 of Part I
of this Form 10-Q.

In addition, the Company agreed to
pay to the PPP Shareholders up to $7 million over a three-year period if the PPP business
achieved certain financial targets (See Note 4 of Part 1, Item 1). To date, $889,000 has
been earned and accrued, of which $358,000 has been paid in cash and $358,000 has been
settled by the issuance of 12,650 shares of common stock on September 15, 2004. The
remaining $173,000 will be paid in September 2005.

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

(a) Exhibits

|ExhibitNumber |  | Description of Exhibit
|------------- |  | ----------------------

|2.1 |  | Stock Purchase Agreement dated July 31, 2003, among Health Card and Portland
      Professional Pharmacy, Portland Professional Pharmacy Associates and the individuals
      listed on Schedule I thereto (3)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.2 |  | Amended and Restated Stock Purchase Agreement dated November 26, 2003 by and
      between Health Card and New Mountain Partners, L.P. (8)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|2.3   |  | Asset Purchase Agreement among Health Card, Inteq PBM, LP, Inteq-RX Group, LLP,             and  the  individuals  named  therein
        dated April 1, 2004 (6)       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Certificate of Incorporation of Health Card (2)                                                                                                                         
|3.2   |  | Certificate of Amendment to the Certificate of Incorporporation of Health Card (7)                                                                                      
|3.3   |  | Amended and Restated By Laws of Health Card                                                                                                                             
|3.4   |  | Amended and Restated Audit Committee Charter (7)                                                                                                                        
|4.1   |  | Form of Warrant Agreement, including for of Representatives' Warrants (1)                                                                                               
|4.2   |  | Certificate of Designation, Preferences and Rights of Series A 7% Convertible Preferred Stock of Health Card (7)                                                        
|10.1  |  | 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 (5)
|10.2  |  | Stock Option Agreement between Health Card and James Bigl dated July 22, 2003 (3)                                                                                       
|10.3  |  | Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003 (3)                                                                                      
|10.4  |  | Stock Option Agreement between Health Card and David Gershen dated August 1, 2003 (3)                                                                                   
|10.5  |  | Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003 (3)                                                                                     
|10.6  |  | Stock Option Agreement between Health Card and Patric McLaughlin dated August 1,  2003 (3)                                                                              
|10.7  |  | Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between Health Card and James J. Bigl (5)                                                       
|10.8  |  | Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development Corporation and NMHCRX Mail Order, Inc. (3)                                  
|10.9  |  | AmerisouseBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc. and AmerisourseBergen Drug Corporation (3)                                 
|10.10 |  | Release, dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc. (5)                                                                                  
|10.11 |  | Amendment to Lease Agreement, dated as of October 23, 2003 by and among BFS Realty, LLC and Health Card (5)                                                             
|10.12 |  | Amendment to Lease Agreement (30 Sea Cliff), dated as of October 30, 2003, between Living in Style LLC and Health Card (5)                                              
|10.13 |  | Amendment to Lease Agreement (32 Sea Cliff), dated as of October 30, 2003, between Living in Style LLC and Health Card (5)                                              
|10.14 |  | Second Amendment to Employment Agreement, dated October 30, 2003, by and between Health Card and Bert E. Brodsky (5)                                                    
|10.15 |  | Amended and Restated Employment Agreement dated June 14, 2004 between Health Card and James J. Bigl (9)                                                                 
|10.16 |  | Form of Stock Agreement between Health Card and Non-Employee Directors dated May 4, 2004 for a grant of 15,000 shares of common stock (9)                               
|10.17 |  | Form of Stock Agreement between Health Card and Non-Employee Directors dated May 4, 2004 for a grant of 20,000 shares of common stock (9)                               
|10.18 |  | Employment Agreement between Health Card and James Smith dated August 31, 2004                                                                                          
|10.19 |  | Employment Agreement between Health Card and Bill Masters dated October 4, 2004                                                                                         
|10.20 |  | Stock Option Agreement between Health Card and James Smith dated August 31, 2004                                                                                        
|10.21 |  | Stock Option Agreement between Health Card and Bill Masters dated October 4, 2004                                                                                       
|14    |  | Amended and Restated Code of Ethics (10)                                                                                                                                
|21    |  | List of Subsidiaries                                                                                                                                                    
|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                                                                                   

---

|(1) |  | Denotes
document filed as an Exhibit to Health Card's  Registration  Statement on Form S-1
 (Registration  Number:  333-72209) and incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Denotes
 document filed as an Exhibit to Health Card's  Definitive Proxy Statement on Schedule
14-A filed on December 21, 2001 and incorporated herein by reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

|(b)              Reports on Form 8-K
|------------------------------------

The
following Current Reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 2004:

| | (i) | A Form 8-K was filed on September 2, 2004 reporting the hiring of a new CEO and President.
| | --- | ------------------------------------------------------------------------------------------

| | (ii) | A Form 8-K was filed on September 14, 2004 reporting the results of the
                Companys fiscal fourth quarter.
| | ---- | ------------------------------------------------------------------------------------------------------------------------

SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.          (Registrant)By: /s/ James F. Smith
James F. SmithPresident and Chief Executive OfficerDate: November 15, 2004
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|By: /s/ Stuart F. Fleischer
Stuart F. FleischerChief Financial OfficerDate: November 15, 2004
|-----------------------------------------------------------------------------------------------------------