UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

| |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| |  | ---------------------------------------------------------------------------------------

| | For
the quarterly period ended October 31, 2006
| | -----------------------------------------------

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
0-12927

|                                                               | NATIONAL HOME HEALTH CARE CORP.                                                   |                                  
|-------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------
|                                                               | (Exact name of Registrant as Specified in Its Charter)                            |                                  
|Delaware                                                       |                                                                                   | 22-2981141                       
|(State or Other Jurisdiction of
Incorporation or Organization) |                                                                                   | (IRS Employer Identification No.)
|                                                               | 700 White Plains Road, Scarsdale, New York 10583                                  |                                  
|                                                               | (Address of Principal Executive Offices with Zip Code)                            |                                  
|                                                               | Registrant's Telephone Number Including Area Code: 914-722-9000                   |                                  
|                                                              
|                                                               | Former 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. Yes   No

Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer    Accelerated Filer 
Non-Accelerated Filer

Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No

# APPLICABLE ONLY TO
CORPORATE ISSUERS:

The number of shares of common stock
outstanding as of December 14, 2006 was 5,662,531.



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# NATIONAL HOME HEALTH
CARE CORP.
Form 10-Q
For the Quarter Ended October 31, 2006
Table of Contents

|PART I.       | FINANCIAL INFORMATION                                                                                                        | Page 
|------------- | ---------------------------------------------------------------------------------------------------------------------------- | -----
|Item 1.       | Financial Statements                                                                                                         |      
|              | Condensed Consolidated Balance Sheets as of October 31, 2006 and July 31, 2006 (unaudited)                                   | 3-4  
|              | Condensed Consolidated Statements of Operations for the three months ended October 31, 2006 and October 31, 2005 (unaudited) | 5    
|              | Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2006 and October 31, 2005 (unaudited) | 6    
|              | Notes to Condensed Consolidated Financial Statements                                                                         | 7-10 
|Item 2.       | Management's Discussion and Analysis of Financial Condition and Results of Operations                                        | 11-15
|Item 3.       | Quantitative and Qualitative Disclosure About Market Risk                                                                    | 15   
|Item 4.       | Controls and Procedures                                                                                                      | 15   
|PART II.      | OTHER INFORMATION                                                                                                            |      
|Item 1.       | Legal Proceedings                                                                                                            | 16   
|Item 6.       | Exhibits                                                                                                                     | 17   
|SIGNATURES    |                                                                                                                              | 18   
|EXHIBIT INDEX |                                                                                                                              | 19   

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NATIONAL HOME HEALTH
CARE CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)

|                                                     | October 31, 2006 |  | July 31, 2006 |           
|---------------------------------------------------- | ---------------- |  | ------------- | ----------
|ASSETS                                               |                  | 
|Current:                                             |                  |  |               |           
|Cash and cash equivalents                            |                  |  | $             | 20,827,000
|Accounts receivable-less allowance for possible      |                  | 
|losses of $1,756,000 and $1,419,000                  |                  |  |               | 18,965,000
|Prepaid expenses and other                           |                  |  |               | 642,000   
|Deferred income taxes                                |                  |  |               | 397,000   
|                                                     |                  |  |               |           
|                                                     |                  | 
|Total current assets                                 |                  |  |               | 40,831,000
|                                                     |                  | 
|                                                     |                  | 
|Furniture, equipment and leasehold improvements, net |                  |  |               | 1,811,000 
|Goodwill                                             |                  |  |               | 14,463,000
|Other intangible assets, net                         |                  |  |               | 900,000   
|Deposits and other assets                            |                  |  |               | 533,000   
|                                                     |                  |  |               |           
|                                                     |                  | 
|TOTAL                                                |                  |  | $             | 58,538,000
|                                                     |                  |  |               |           

(continued)

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NATIONAL HOME HEALTH
CARE CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED
BALANCE SHEETS(UNAUDITED)

|                                                
|------------------------------------------------
|LIABILITIES AND STOCKHOLDERS' EQUITY            
|                                                
|Current liabilities:                            
|Accounts payable and accrued expenses           
|Estimated third-party payor settlements         
|Deferred revenue                                
|Dividend payable                                
|Income taxes payable                            
|                                                
|                                                
|Total current liabilities                       
|                                                
|                                                
|Stockholders' equity:                           
|Common stock, $.001 par value; authorized       
|20,000,000 shares, issued  7,125,544 shares     
|Additional paid-in capital                      
|Retained earnings                               
|                                                
|                                                
|                                                
|Less:  treasury stock (1,462,953 shares) at cost
|                                                
|                                                
|Total stockholders' equity                      
|                                                
|                                                
|TOTAL                                           
|                                                

See accompanying notes
to consolidated financial statements.

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NATIONAL HOME HEALTH CARE CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                               | For the three months
ended October 31, | 
|---------------------------------------------- | -------------------------------------- | 
|                                               | 2006                                   | 
|Net patient revenue                            |                                        | 
|                                               |                                        | 
|Operating expenses:                            |                                        | 
|Cost of revenue                                |                                        | 
|General and administrative                     |                                        | 
|Amortization of intangibles                    |                                        | 
|Allowance for possible losses                  |                                        | 
|                                               |                                        | 
|Total operating expenses                       |                                        | 
|                                               |                                        | 
|                                               |                                        | 
|Income from operations                         |                                        | 
|                                               |                                        | 
|Other income :                                 |                                        | 
|Interest                                       |                                        | 
|                                               |                                        | 
|                                               |                                        | 
|Income before income taxes                     |                                        | 
|                                               |                                        | 
|Provision for income taxes                     |                                        | 
|                                               |                                        | 
|                                               |                                        | 
|Net income                                     |                                        | 
|                                               |                                        | 
|                                               |                                        | 
|Net income per common share:                   |                                        | 
|Basic                                          |                                        | 
|                                               |                                        | 
|Diluted                                        |                                        | 
|                                               |                                        | 
|                                               |                                        | 
|Weighted average number of shares outstanding: |                                        | 
|Basic                                          |                                        | 
|                                               |                                        | 
|Diluted                                        |                                        | 
|                                               |                                        | 
|                                               |                                        | 
|Dividends declared per share                   |                                        | 
|                                               |                                        | 

See accompanying notes
to consolidated financial statements.

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NATIONAL HOME HEALTH
CARE CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                            | For the three months ended
October 31, |     
|----------------------------------------------------------- | -------------------------------------- | ----
|                                                            | 2006                                   | 2005
|Cash flows from operating activities:                       |                                        |     
|Net income                                                  |                                        |     
|Adjustments to reconcile net income                         |                                        |     
|to net cash provided by operating activities:               |                                        |     
|Depreciation and amortization                               |                                        |     
|Allowance for possible losses, net of writeoffs             |                                        |     
|Deferred income taxes                                       |                                        |     
|Changes in assets and liabilities:                          |                                        |     
|Accounts receivable                                         |                                        |     
|Prepaid expenses and other                                  |                                        |     
|Accounts payable and accrued expenses                       |                                        |     
|Estimated third-party payor settlements                     |                                        |     
|Income taxes payable                                        |                                        |     
|Deferred revenue                                            |                                        |     
|                                                            |                                        |     
|Net cash provided by operating activities                   |                                        |     
|                                                            |                                        |     
|                                                            |                                        |     
|Cash flows from investing activities:                       |                                        |     
|Purchase of furniture, equipment and leasehold improvements |                                        |     
|Proceeds from sale of investments                           |                                        |     
|                                                            |                                        |     
|Net cash used in investing activities                       |                                        |     
|                                                            |                                        |     
|                                                            |                                        |     
|Cash flows from financing activities:                       |                                        |     
|Payment of dividends                                        |                                        |     
|                                                            |                                        |     
|Net cash used in financing activities                       |                                        |     
|                                                            |                                        |     
|                                                            |                                        |     
|Net increase in cash and cash equivalents                   |                                        |     
|                                                            |                                        |     
|                                                            |                                        |     
|Cash and cash equivalents-beginning of period               |                                        |     
|                                                            |                                        |     
|                                                            |                                        |     
|Cash and cash equivalents-end of period                     |                                        |     
|                                                            |                                        |     
|                                                            |                                        |     
|Supplemental disclosures of cash flow information:          |                                        |     
|Cash paid during the period for:                            |                                        |     
|Interest                                                    |                                        |     
|Income taxes                                                |                                        |     
|Dividends declared and not paid                             |                                        |     

See accompanying notes
to consolidated financial statements.

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NATIONAL HOME HEALTH
CARE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

NOTE 1  BASIS OF
PRESENTATION

The
accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period ended
October 31, 2006 are not necessarily indicative of the results that may be expected for
the year ending July 31, 2007. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys annual report on
Form 10-K for the year ended July 31, 2006.

NOTE 2  RECLASSIFICATIONS

Certain
reclassifications have been made in prior periods financial statements to conform to
classifications used in the current period.

NOTE 3  NET INCOME
PER SHARE DATA

A
reconciliation of shares used in calculating basic and diluted net income per share is as
follows:

|                              | For the three months ended
October 31, |     
|----------------------------- | -------------------------------------- | ----
|                              | 2006                                   | 2005
|                              | Shares                                 |     
|Basic EPS:                    |                                        |     
|Effect of dilutive securities |                                        |     
|                              |                                        |     
|Diluted EPS:                  |                                        |     
|                              |                                        |     

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NOTE 4  STOCK-BASED
COMPENSATION

The
Company adopted Statement of Financial Accounting Standards No. 123 (revised) ,
Share-Based Payment (SFAS 123R) in the first quarter of fiscal 2006. This
standard requires that the Company measure the cost of employee services received in
exchange for any award of equity instruments based on the grant date fair value of the
award. That cost will be recognized over the period in which the employee is required to
provide the services  the requisite service period (usually the vesting period)
 in exchange for the award. The grant date fair value for options and similar
instruments will be estimated using option pricing models. Under SFAS 123R, the Company is
required to select a valuation technique or option pricing model that meets the criteria
as stated in the standard, which includes a binomial model and the Black-Scholes model. At
the present time, the Company is continuing to use the Black  Scholes model. The
adoption of SFAS 123R, applying the modified prospective method, as elected by
the Company, requires the Company to value stock options prior to its adoption of SFAS
123R under the fair value method and expense these amounts over the remaining vesting
period of the stock options. SFAS 123R requires that the Company estimate forfeitures for
stock options and reduce compensation expense accordingly. The adoption of SFAS 123R
did not have any impact on the Companys overall results of operations or financial
position as of October 31, 2006. Prior to the adoption of SFAS 123R, the Company
accounted for stock-based compensation using the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock option plan by recording as
compensation expense the excess of the fair market value of the underlying common stock
over the exercise price per share as of the date of grant. Because the exercise price of
the Companys employee stock options equaled the market price of the underlying stock
on the date of grant, no compensation expense was recognized.

NOTE 5  LITIGATION

On
February 28, 2006, Lerai Jones, individually and on behalf
of all other persons similarly situated, filed a lawsuit against
the Company for alleged unpaid overtime wages pursuant to the New York Labor Law. 
Plaintiff seeks to certify a class of regular full-time hourly employees working within
the State of New York. The legal issues in this case are closely intertwined and connected
to the legal issues currently being litigated in the matter of Coke v. Long Island Care
at Home, 376 F.3d 118 (2d Cir. 2004), which involves the exemption for home health
care aides under the Fair Labor Standards Act. On August 31, 2006, upon a remand from the
United States Supreme Court, the United States District Court for the Second Circuit
affirmed the decision of the United States District Court for the Southern District of New
York ruling that the exemption did not apply to home health aides employed by third
parties. This decision, however, has been stayed pending an appeal to the United
States Supreme Court and the defendant in the Coke decision is currently in the
process of appealing this decision to the United States Supreme Court. Thus, because
of this pending appeal of the Coke decision, Jones and the Company have agreed
to enter into a stipulation extending the defendants time to answer the
complaint or agreeing to have plaintiff stipulate to a discontinuance of this matter
within thirty (30) days after a ruling in the Coke decision by the United States
Supreme Court. Based on the United States Supreme Courts earlier remand, the
Company believes that the Supreme Court will overturn the decision of the United
States Court of Appeals for the Second Circuit and uphold the exemption from overtime
wages for home health aides. The Company cannot predict the ultimate resolution of this
matter or the total amount of legal fees or other expenses to be incurred in connection
with this matter.

On
October 3, 2006, the Companys New York subsidiary received an Information Subpoena
with Restraining Notice by certified mail in connection with a Judgment obtained by Ida
Faulkner against the New York subsidiary in the amount of $2,149,180 entered on default on
January 4, 2005 in the Supreme Court of New York, Bronx County. The Company had no prior
knowledge of Ms. Faulkners

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action, nor of the entry of the
default. Upon a review of the Courts file, the Company has ascertained that the
action was commenced on or about August 21, 2003 and service of the Summons and Verified
Complaint was made at an incorrect address. All subsequent notices were to the Company at
this incorrect address and were not received by the Company. The Verified Complaint
asserted causes of action for negligence and breach of contract and alleged that Ms.
Faulkner suffered unspecified personal injuries. On October 6, 2006, the Company moved by
Order to Show Cause to vacate the default based upon its lack of notice of the Summons and
Verified Complaint. On October 11, 2006, the Court signed the Order to Show Cause setting
oral argument on the Companys motion to vacate the default for October 30, 2006. The
hearing was later adjourned to January 8, 2007. The Company cannot predict the ultimate
resolution of this matter, or the total amount of legal fees or other expenses to be
incurred in connection with this matter. The Order to Show Cause contains a temporary
restraining order enjoining Ms. Faulkner from taking any further steps to enforce the
Judgment or the Information Subpoena with Restraining Notice pending the hearing of the
motion to vacate. The Company believes that the Judgment is without merit and intends to
vigorously defend it.

In
November 2006 Americare at Home, Inc. bought an action against Medical Resources, Inc.
(MRI), a subsidiary of the Company, and certain others, in the Superior Court
of the Commonwealth of Massachusetts. The plaintiff alleges that there was an existing
contract between it and defendant Psychiatric Home Care, Inc. (PHC) and that
MRI entered into a contract with PHC tortiously interfering with such contract and
interfering with an advantageous relationship. Plaintiff seeks damages of approximately
$573,000 against all of the defendants. MRI is in the process of filing its responsive
pleading which will be served in January 2007. The Company cannot predict the ultimate
resolution of this matter or the total amount of legal fees or other expenses to be
incurred in connection with this matter.

NOTE 6  SUBSEQUENT
EVENT

On
November 28, 2006, the Company, AG Home Health Acquisition Corp., a Delaware corporation
(the Acquisition Corp), and AG Home Health LLC, a Delaware limited liability
company (the Parent) entered into an Agreement and Plan of Merger, dated
November 28, 2006 (the Merger Agreement), pursuant to which and subject to the
conditions set forth therein, the Acquisition Corp will merge with and into the Company,
with the Company continuing as the surviving corporation under the laws of the State of
Delaware. The Parent is an affiliate of Angelo, Gordon & Co.

At
the effective time and as a result of the merger, each share of the Companys common
stock, par value $.001 per share (each a Common Share) issued and outstanding
immediately prior to the effective time will be cancelled, extinguished and converted into
the right to receive either of the following per share amounts, payable in cash (the
Merger Consideration): (i) $11.35 per share if the adjusted EBITDA of the
Company (calculated in accordance with the Merger Agreement) for the EBITDA Period (as
defined in the Merger Agreement) is equal to or greater than $7,900,000 but less than
$8,150,000, or (ii) $11.50 per share if the EBITDA of the Company for the EBITDA Period is
equal to or greater than $8,150,000. Pursuant to a separate agreement among the Company,
the Acquisition Corp, the Parent and Mr. Frederick H. Fialkow, Mr. Fialkow will contribute
a portion of his Common Shares to the Company in exchange for an 8% subordinated note in a
principal amount equal to the amount of cash he would otherwise have received for such
Common Shares.

At
the effective time of the merger, all options issued under the Companys Stock Option
Plans shall be converted into the right to receive a cash payment equal to the product of
(i) the total number of Common Shares otherwise issuable upon exercise of such option and
(ii) the amount, if any, by which the Merger Consideration per Common Share exceeds the
applicable exercise price per Common Share of such option.

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Consummation
of the transactions contemplated by the Merger Agreement is conditioned upon, among other
things, (1) approval of the Merger Agreement by the stockholders of the Company, (2)
expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act, (3) other regulatory approvals, including healthcare regulatory
approvals, (4) an adjusted EBITDA of the Company for the EBITDA Period of at least
$7,900,00, (5) the absence of a material adverse change in the Company and (6) the
amendment of the lease for the Companys Queens, New York facility. The landlord to
this lease is 175-20 Hillside Avenue Associates, which is a company that is controlled by
Frederick Fialkow, the Chairman of the Companys Board of Directors and the holder of
approximately 36% of the Companys outstanding common stock. The amendment of this
lease will, among other things, extend the term of the lease for an additional 5 years
(with two additional five year renewal options) and during such five year period, the
yearly rent will be subject to a 3% increase per year. Subject to the satisfaction of the
conditions to closing, it is anticipated that the merger will be consummated during the
Companys fourth fiscal quarter ending July 31, 2007.

The
Merger Agreement contains customary representations and warranties by the Company, the
Acquisition Corp and the Parent. The Merger Agreement also contains customary covenants
and agreements, including with respect to the operation of the business of the Company and
its subsidiaries between signing and closing, restrictions on solicitation of proposals
with respect to alternative transactions, governmental filings and approvals, public
disclosures and similar matters. Nothing in the Merger Agreement, however, prevents the
Company from furnishing information to, or engaging in discussions or negotiations with,
any person that offers the Company a Superior Proposal (as defined by the Merger
Agreement), or from accepting a Superior Proposal, which in either such case the board of
directors of the Company, upon the recommendation of the special committee of the board of
directors, determines in good faith (after consultation with independent legal counsel)
that such action is necessary for the board to comply with its fiduciary duties to the
Companys shareholders. If the Company accepts a Superior Proposal, however, it must
pay the Parent and Acquisition Corp a break-up fee of $2,300,000 plus the lesser of (i)
the aggregate amount of Parents and Acquisition Corps Expenses (as defined in
the Merger Agreement) and (ii) $1,250,000.

The
Merger Agreement may be terminated by any of the parties if there is any law that
prohibits the consummation of the merger; if a governmental order is issued that prohibits
the consummation of the merger or the payment of the Merger Consideration; if the
Companys shareholders do not approve the Merger Agreement; or if the merger is not
consummated before September 1, 2007. The Parent or Acquisition Corp may terminate the
Merger Agreement if, among other things, any of its closing conditions are incapable of
being satisfied; if the Company materially breaches any of its representations, warranties
or agreements in the Merger Agreement; or if the Companys board or its special
committee withdraws or adversely modifies its favorable recommendation of the Merger
Agreement, or fails to recommend against any Acquisition Proposal (as defined in the
Merger Agreement), or fails to call its shareholder meeting or mail its proxy statement to
its shareholders within 15 days after clearance from the SEC. The Company may terminate
the Merger Agreement if, among other things, any of its closing conditions are incapable
of being satisfied; if the Parent or Acquisition Corp materially breaches any of its
representations, warranties or agreements in the Merger Agreement; or if the Company
complies with its covenants in the Merger Agreement and an Acquisition Proposal
constitutes a Superior Proposal.

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ITEM 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations.

# General

The following discussion and analysis provides information which the Companys
management believes is relevant to an assessment and understanding of the Companys
results of operations and financial condition. This discussion and analysis should be read
in conjunction with the attached unaudited consolidated financial statements and notes
thereto, and with the Companys audited financial statements and notes thereto for
the fiscal year ended July 31, 2006 included with the Companys annual report on Form
10-K with respect to such fiscal year.

Certain
matters set forth in this report are forward-looking statements that are dependent on
certain risks and uncertainties, including but not limited to risks and uncertainties
relating to whether the Company can identify, consummate and integrate on favorable terms
acquisitions or market penetrations, market acceptance, pricing and demand for the
Companys services, changing regulatory environment, changing economic conditions,
whether the Company can attract and retain qualified personnel, the ability to manage the
Companys growth, and other risks detailed in the Companys other filings with
the Securities and Exchange Commission.

The
Company is subject to external factors that could significantly impact its business,
including potential reductions in reimbursement rates by Medicare, Medicaid and other
third party payers for the Companys services, retroactive adjustments due to prior
year audits, reviews and investigations, government fraud and abuse initiatives and other
such factors that are beyond the control of the Company. These factors could cause future
results to differ materially from historical results.

New
England Home Care, Inc. (New England), as a participant in the State of
Connecticut Department of Social Services Medicaid program, is subject to survey and
audits of operational, clinical and financial records with respect to proper applications
of general regulations governing operations and billing of claims. These audits can result
in retroactive adjustments for payments received from this program. In October 2006, New
England received the results of an audit for the period covering April 1, 2003 through
March 31, 2005 which resulted in a liability of $247,000. There can be no assurance that
federal, state or local governments will not change existing standards or impose
additional standards. There can be no assurance that future Medicaid audits will not have
a material adverse impact on the Company.

The
Balanced Budget Act (the Act) was signed into law in August 1997. The Act made
significant changes in the reimbursement system for Medicare home health care services.
The primary change that affects the Company is the restructuring of the reimbursement
system related to Medicare certified home health care agencies. Prior to the Act, Medicare
reimbursed providers on a reasonable cost basis subject to program-imposed cost per visit
limitations.

Under
the Act, changes in Medicare home care reimbursement were scheduled in two phases. A
temporary or interim payment system (IPS) took effect for cost reports
beginning on or after October 1, 1997. Under IPS, home health care providers were
reimbursed the lowest of (i) their actual costs, (ii) cost limits based on 105% of median
costs of freestanding home health agencies, or (iii) an agency-specific per patient cost
limit, based on 1994 costs adjusted for inflation. Under IPS, most Medicare providers were
actually reimbursed under an agency-specific per patient cost limit. Effective October 1,
2000, under the prospective payment system, Medicare reimburses providers a predetermined
base payment. The payment is adjusted for the health condition and care needs of the
beneficiary and is also adjusted for

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geographic differences in wages
across the country. Medicare provides home health agencies with payments for 60-day
episodes of care.

The
final phase of the Act implemented a 15% cut in Medicare reimbursement rates effective
October 1, 2002. In two of the last three fiscal years, less than five percent of the
Companys net patient revenue was derived directly from Medicare, and accordingly the
change to the prospective payment system has not, to date, had a material adverse effect
on the Company. However, there can be no assurance that the Medicare prospective payment
system will not adversely impact the Companys reimbursement rates in the future or
otherwise have a material adverse effect on the Company. The Companys operations in
New York are dependent upon referrals, primarily from Medicare certified home health care
agencies, whose reimbursement has been adversely affected by the prospective payment
system. Under the prospective payment system, there can be no assurance that the
Companys future referrals will not result in reduced reimbursement rates or reduced
volume of business.

The
Company derives a substantial amount of revenue from state sponsored Medicaid programs.
Approximately 47%, 46% and 43% of net patient revenue for the fiscal years ended July 31,
2006, 2005 and 2004, respectively, were derived from state law under federal guidelines.
States differ as to reimbursement policies and rates. The Company is a licensed Medicaid
provider in Connecticut, Massachusetts, New Jersey and in Nassau and Westchester Counties,
New York.

From
March 1, 2004 through August 23, 2005, the Division of Health Systems Regulation for the
Connecticut Department of Public Health (the DPH) conducted various licensing
and certification inspections of New England, the Companys certified and licensed
home health care subsidiary in Connecticut. In December 2005, New England and DPH entered
into a Consent Order for the purpose of resolving DPHs findings at the conclusion of
those inspections. The Consent Order provides for the adoption of certain policies and
procedures pursuant to a Plan of Correction approved by DPH. The terms of the Consent
Order will generally remain in effect until the fall of 2007.

In
December 2004, New York State adopted legislation to increase the State minimum wage from
$5.15 per hour to $7.15 per hour over a two-year period. The law increased the minimum
wage to $6.00 per hour starting January 1, 2005. The minimum wage was raised to $6.75 per
hour on January 1, 2006 and will be raised to $7.15 per hour on January 1, 2007. This
minimum wage legislation has impacted and will continue to impact the Companys New
York operations on two fronts. Firstly, the Company will be paying higher base wages and
secondly, overtime in New York is computed at 1.5 times the state minimum wage, thus
increasing overtime costs to the Company.

On
May 13, 2005, Accredited Health Services, Inc., (Accredited), the
Companys New Jersey wholly-owned subsidiary, received a copy of a Petition for
Certification of Representative, pursuant to the provisions of the National Labor
Relations Act. On March 21, 2006 the home health aides of Accredited, in a mail ballot
election, rejected union representation by SEIU 1199 New Jersey.

On
July 1, 2005, the State of New Jersey Medicaid Program introduced a revised Personal Care
Assistant (PCA) Beneficiary Tool (the Tool). The Tool is used to
determine the weekly hours a PCA Beneficiary receives. As a result of the implementation
of the Tool, Accredited has experienced a reduction in the total hours per week that each
PCA Beneficiary receives. For the fiscal year ended July 31, 2006, the State of New Jersey
Medicaid Program accounted for approximately 82% of Accrediteds revenue.

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# Results of Operations
and Effects of Inflation

# Three Months Ended
October 31, 2006 Compared to Three Months Ended October 31, 2005.

Net Patient Revenue.  For the three months ended October 31, 2006, net patient revenue
decreased $87,000, or .3%, to $26,234,000 from $26,321,000 for the three months ended
October 31, 2005. This decrease was attributable to (i) a decrease of $1,001,000 in
Connecticut as a result of the above mentioned inspections and elimination of small margin
revenue and (ii) a decrease of $300,000 in New Jersey as a result of the implementation of
the Tool. This decrease was offset by (i) the expansion of operations in Massachusetts,
where revenue increased $846,000 and (ii) additional hours being subcontracted in New
York, where revenue increased $368,000.

Gross
Profit.   Gross profit margin decreased to 33.6% for the three months ended October 31,
2006 from 34.2% for the three months ended October 31, 2005. This decrease is attributable
to (i) higher wages paid to home health aides in New York as a result of union increases,
the increase in the state minimum wages and the increase in Medicaid wages paid to home
health aides in Westchester County, New York as a result of the living wage law that was
enacted in 2004 and (ii) increases in direct payments to all caregivers and increased
worker compensation costs.

General
and Administrative.  General and administrative expenses decreased $224,000, or 3.2%,
to $6,815,000 for the three months ended October 31, 2006 from $7,039,000 for the three
months ended October 31, 2005. This decrease is primarily attributable to (i) elimination
of the non-recurring legal, consulting and administrative costs related to the above
mentioned inspections in Connecticut incurred in the prior three month period and (ii)
reduced occupancy and administrative personnel costs in New Jersey, as the Company reduced
costs to compensate for the effects of the Tool. The decrease was offset by (i) increases
in general and administrative costs in New York and Massachusetts as a result of their
expansion of operations and (ii) professional fees incurred with respect to the Merger
Agreement.

Amortization.
  Amortization of intangibles decreased $30,000, or 27.3%, to $80,000 for the
          three months ended October 31, 2006 from $110,000 for the three months ended
          October 31, 2005. This decrease is attributable to intangibles from previous
          acquisitions that have now been fully amortized.

Allowance
for Possible Losses.  Allowance for possible losses increased $275,000, or 262% to
$380,000 for the three months ended October 31, 2006, as compared to $105,000 for the
three months ended October 31, 2005. This increase is primarily attributable to the
Company recording an allowance for 75% of an accounts receivable balance with a Medicare
certified agency in New York that filed for Chapter 11 bankruptcy protection in November
2006.

Income
from Operations.  As a result of the foregoing, income from operations decreased
$225,000, or 12.8% to $1,527,000 for the three months ended October 31, 2006 from
$1,752,000 for the three months ended October 31, 2005.

Interest
Income.  Interest income increased $115,000, or 121.0%, to $210,000 for the three
months ended October 31, 2006 from $95,000 for the three months ended October 31, 2005.
This increase is attributable to the higher cash balances of the Company and increased
interest rates.

Income
Taxes.  The Companys effective tax rate increased to 40.2 % for the three months
ended October 31, 2006 from 38.2% for the three months ended October 31, 2005. This
increase is attributable to higher state income tax rates and reduced work opportunity tax
credits in the current three month period.

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Net
Income.  Net income decreased $104,000, or 9.1%, to $1,038,000, or $.18 per diluted
share, in the three months ended October 31, 2006 from $1,142,000, or $.20 per diluted
share, in the three months ended October 31, 2005.

The
rate of inflation had no material effect on operations for the three months ended October
31, 2006.

# Financial Condition and
Capital Resources

Current assets increased to $40,831,000 and current liabilities increased to
$5,062,000 at October 31, 2006. This resulted in an increase in working capital of
$736,000 from $35,033,000 at July 31, 2006 to $35,769,000 at October 31, 2006. Cash and
cash equivalents increased $1,526,000 to $20,827,000 at October 31, 2006 from $19,301,000
at July 31, 2006. The increase in cash and cash equivalents and working capital was
primarily attributable to the cash generated by operating activities, offset by the
payments of cash dividends.

Operating
activities provided net cash of $2,040,000 for the three months ended October 31, 2006 as
compared to net cash provided by operating activities of $1,432,000 for the three months
ended October 31, 2005. The increase in net cash provided by operating activities of
$608,000 is attributable to an increase in operating cash flow of $48,000, a decrease in
operating assets, primarily accounts receivable of $393,000, and an increase in operating
liabilities of $167,000 over the comparable period for the three months ended October 31,
2005.

The
net cash used in investing activities for the three months ended October 31, 2006
consisted of the purchase of equipment. Net cash used in investing activities for the
three months ended October 31, 2005 consisted of the purchase of equipment, offset by the
proceeds from the sale of investments.

The
net cash used in financing activities for the three months ended October 31, 2006 and
October 31, 2005 consisted of the payment of a cash dividends.

The
nature of the Companys business requires weekly payments to health care personnel at
the time services are rendered. The Company typically receives payment for these services
in 90 to 150 days with respect to contracted and insurance business and 8 to 45 days with
respect to certain governmental payers, such as Medicare and Medicaid programs. Accounts
receivable turnover was 74 days at October 31, 2006 as compared to 71 days at October 31,
2005.

The
Company closed on a $7,500,000 revolving credit facility (the credit facility)
with Bank of America on April 28, 2006. The credit facility provides for the
Companys subsidiaries to borrow up to $7,500,000 at the banks prime rate or
LIBOR plus 1.5%. The credit facility expires on April 2, 2007 and requires the Company to
meet certain financial covenants and ratios. At October 31, 2006, there was no outstanding
balance under the credit facility. Borrowings are secured by a pledge of all assets of the
Company and its subsidiaries and guaranteed by the Company.

The
Company intends to incur capital expenditures of approximately $500,000 during the fiscal
year ending July 31, 2007 in connection with the proposed implementation of new computer
hardware, telephone equipment and networking equipment. These expenditures would be
designed to, among other things, update certain data input capability regarding services
rendered at certain locations. The Company believes that the software will provide
efficiencies in data organization, retrieval and analysis, both for continuing operations
and in connection with certain audits. The Company intends to fund these expenditures,
acquisitions and cash dividends declared by the Board of Directors and otherwise meet its
short term and long term liquidity needs from its current cash balances, cash flow from
operations and its credit facility.

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# Contractual Obligations

The Company rents various office facilities through 2009 under terms of several lease
agreements that include escalation clauses. At October 31, 2006, minimum rental
commitments under noncancellable operating leases are as follows:

Operating Leases

|                 | 
|---------------- | 
|Less than 1 year | 
|                 | 
|1-3 years        | 
|                 | 
|3-5 years        | 
|                 | 
|                 | 
|Total            | 
|                 | 

# Item 3.  Quantitative and
Qualitative Disclosure About Market Risk.

None.

# Item 4.  Controls and
Procedures.

The Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that the Company is required to
file under the Securities Exchange Act of 1934 (the Exchange Act Reports) is
recorded, processed summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to
the Companys management, including the Principal Executive Officer and Principal
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Companys management necessarily has applied its judgement in
assessing the costs and benefits of such controls and procedures, which, by their nature,
can provide only reasonable assurances that the Companys controls and procedures
will achieve managements control objectives.

Prior
to the filing date of this report, the Company carried out an evaluation, under the
supervision and with the participation of its management, including the President and
Chief Executive Officer and the Vice President of Finance and Chief Financial Officer, of
the effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15 as of October 31, 2006. Based upon
that evaluation, the President and Chief Executive Officer and the Vice President of
Finance and Chief Financial Officer concluded that the Companys disclosure controls
and procedures are effective in timely alerting them to material information relating to
the Company (and its consolidtaed subsidiaries) required to be included in its Exchange
Act Reports.

# Changes in Internal
Controls Over Financial Reporting

The evaluation referred to above did not identify any changes in the Companys
internal controls over financial reporting that occurred during the quarter ended October
31, 2006 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

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# PART II   OTHER INFORMATION

# Item 1.  Legal Proceedings

On
February 28, 2006, Lerai Jones, individually and on behalf
of all other persons similarly situated, filed a lawsuit against
the Company for alleged unpaid overtime wages pursuant to the New York Labor Law. 
Plaintiff seeks to certify a class of regular full-time hourly employees working within
the State of New York. The legal issues in this case are closely intertwined and connected
to the legal issues currently being litigated in the matter of Coke v. Long Island Care
at Home, 376 F.3d 118 (2d Cir. 2004), which involves the exemption for home health
care aides under the Fair Labor Standards Act. On August 31, 2006, upon a remand from the
United States Supreme Court, the United States District Court for the Second Circuit
affirmed the decision of the United States District Court for the Southern District of New
York ruling that the exemption did not apply to home health aides employed by third
parties. This decision, however, has been stayed pending an appeal to the United
States Supreme Court and the defendant in the Coke decision is currently in the
process of appealing this decision to the United States Supreme Court. Thus, because
of this pending appeal of the Coke decision, Jones and the Company have agreed
to enter into a stipulation extending the defendants time to answer the
complaint or agreeing to have plaintiff stipulate to a discontinuance of this matter
within thirty (30) days after a ruling in the Coke decision by the United States
Supreme Court. Based on the United States Supreme Courts earlier remand, the
Company believes that the Supreme Court will overturn the decision of the United
States Court of Appeals for the Second Circuit and uphold the exemption from overtime
wages for home health aides. The Company cannot predict the ultimate resolution of this
matter or the total amount of legal fees or other expenses to be incurred in connection
with this matter.

On
October 3, 2006, the Companys New York subsidiary received an Information Subpoena
with Restraining Notice by certified mail in connection with a Judgment obtained by Ida
Faulkner against the New York subsidiary in the amount of $2,149,180 entered on default on
January 4, 2005 in the Supreme Court of New York, Bronx County. The Company had no prior
knowledge of Ms. Faulkners action, nor of the entry of the default. Upon a review of
the Courts file, the Company has ascertained that the action was commenced on or
about August 21, 2003 and service of the Summons and Verified Complaint was made at an
incorrect address. All subsequent notices were to the Company at this incorrect address
and were not received by the Company. The Verified Complaint asserted causes of action for
negligence and breach of contract and alleged that Ms. Faulkner suffered unspecified
personal injuries. On October 6, 2006, the Company moved by Order to Show Cause to vacate
the default based upon its lack of notice of the Summons and Verified Complaint. On
October 11, 2006, the Court signed the Order to Show Cause setting oral argument on the
Companys motion to vacate the default for October 30, 2006. The hearing was later
adjourned to January 8, 2007. The Company cannot predict the ultimate resolution of this
matter, or the total amount of legal fees or other expenses to be incurred in connection
with this matter. The Order to Show Cause contains a temporary restraining order enjoining
Ms. Faulkner from taking any further steps to enforce the Judgment or the Information
Subpoena with Restraining Notice pending the hearing of the motion to vacate. The Company
believes that the Judgment is without merit and intends to vigorously defend it.

In
November 2006 Americare at Home, Inc. bought an action against Medical Resources, Inc.
(MRI), a subsidiary of the Company, and certain others, in the Superior Court
of the Commonwealth of Massachusetts. The plaintiff alleges that there was an existing
contract between it and defendant Psychiatric Home Care, Inc. (PHC) and that
MRI entered into a contract with PHC tortiously interfering with such contract and
interfering with an advantageous relationship. Plaintiff seeks damages of approximately
$573,000 against all of the defendants. MRI is in the process of filing its responsive
pleading which will be served in January 2007. The Company cannot predict the ultimate
resolution of

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this matter or the total amount of
legal fees or other expenses to be incurred in connection with this matter.

# Item 6. Exhibits

| | (a)                        The
following exhibits are filed herewith:
| | ---------------------------------------------------------------------

|        | 
|------- | 
|Exhibit | 
|Number  | 
|        | 
|31.1    | 
|        | 
|31.2    | 
|        | 
|32.1    | 
|        | 
|32.2    | 

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SIGNATURES

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

|                         | 
|------------------------ | 
|                         | 
|                         | 
|                         | 
|Date:  December 14, 2006 | 
|                         | 
|                         | 
|                         | 

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EXHIBIT INDEX

|        | 
|------- | 
|Exhibit | 
|Number  | 
|        | 
|31.1*   | 
|        | 
|31.2*   | 
|        | 
|32.1*   | 
|        | 
|32.2*   | 

_________________

* Filed herewith

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