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

FORM 10-K

| |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
               1934 
               For the fiscal year ended July 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) |                                                        | (I.R.S. Employer
Identification No.)
|700 WHITE PLAINS ROAD, SCARSDALE, NEW YORK                     | 10583                                                 
|(Address of Principal Executive Offices)                       | (Zip Code)                                            

Registrants telephone number,
including area code: 914-722-9000

Securities registered pursuant to
Section 12(b) of the Act:  None.

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.001 per share.

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No

Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes  No

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 if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

|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

The aggregate market value of the
Common Stock of the registrant, its only class of voting securities, held by
non-affiliates of the registrant, calculated on the basis of the average of the closing
bid and asked prices of the Common Stock as of the last business day of the
registrants most recently completed second fiscal quarter (January 31, 2006), was
approximately $31,524,295.

The number of shares of the
registrants Common Stock outstanding on October 26, 2006 was 5,662,531.

Certain information to be included in
the registrants definitive proxy statement, to be filed no later than 120 days after
the end of the fiscal year covered by this report, for the registrants 2006 Annual
Meeting of Stockholders is incorporated by reference into Part III of this Annual Report
on Form 10-K.



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# TABLE OF CONTENTS

|                     |                                                                                                              | Page
|-------------------- | ------------------------------------------------------------------------------------------------------------ | ----
|                     | PART I                                                                                                       |     
|Cautionary Statement | 1                                                                                                           
|Item 1.              | Business                                                                                                     | 1   
|Item 1A.             | Risk Factors                                                                                                 | 10  
|Item 1B.             | Unresolved Staff Comments                                                                                    | 14  
|Item 2.              | Properties                                                                                                   | 14  
|Item 3.              | Legal Proceedings                                                                                            | 16  
|Item 4.              | Submission of Matters to a Vote of Security Holders                                                          | 17  
|                     | PART II                                                                                                      |     
|Item 5.              | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 17  
|Item 6.              | Selected Financial Data                                                                                      | 18  
|Item 7.              | Management's Discussion and Analysis of Financial Condition and Results of Operations                        | 19  
|Item 7A.             | Quantitative and Qualitative Disclosures About Market Risk                                                   | 27  
|Item 8.              | Financial Statements and Supplementary Data                                                                  | 27  
|Item 9A.             | Controls and Procedures                                                                                      | 27  
|Item 9B.             | Other Information                                                                                            | 28  
|                     | PART III                                                                                                     |     
|Item 10.             | Directors and Executive Officers of the Registrant                                                           | 28  
|Item 12.             | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 28  
|Item 13.             | Certain Relationships and Related Transactions                                                               | 28  
|Item 14.             | Principal Accountant Fees and Services                                                                       | 28  
|                     | PART IV                                                                                                      |     
|Item 15.             | Exhibits and Financial Statement Schedules                                                                   | 28  



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# PART I

# Cautionary Statement

The
Annual Report on Form 10-K contains certain forward-looking statements that involve a
number of risks and uncertainties. Forward-looking statements may be identified by the use
of forward-looking terminology such as may, will,
expect, believe, estimate, project,
anticipate, continue, or similar terms, variations of those terms
or the negative of those terms. Important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are set forth in
this document. These include but are 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; ability to manage the Companys
growth; and other risks detailed in this document. Please refer to Risk
Factors in Item 1A and Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7.

# Item 1. Business.

# General

National
 Home Health Care Corp.  (the  "Company")  is a Delaware  corporation  that is a provider
of home health care and staffing services in the Northeast region.

# Industry Overview

United
States health care spending continues to outpace the rate of inflation, and the population
of older Americans continues to increase. The Company believes that alternatives to costly
hospital and nursing home stays will continue to create demand for home health care.
Medicare, Medicaid and other managed care insurance companies continue to look for a
setting whereby the aged population can receive health care services most cost
efficiently. Home health care has evolved as the acceptable and most preferred alternative
in this continuum. Patient comfort and substantial cost savings can generally be realized
through treatment at home as an alternative to traditional institutional settings.
Continuing economic pressures within the home health care industry and the changes to
Medicare reimbursement have forced providers to modify the manner in which they provide
home health care services. Those companies that successfully operate with efficient
business models can provide quality patient care and manage costs under the current
reimbursement system.

The
home health care industry has traditionally been highly fragmented, composed of
not-for-profit and for-profit smaller local home health agencies offering limited
services. These smaller agencies do not generally have the necessary capital to expand
their operations or services and are often unable to achieve the cost efficiencies to
compete effectively. The implementation of the Medicare Prospective Payment system and
other legislation at the state levels has created major industry consolidation.

-1-



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# Home Health Care Services

Home
health care services include four broad categories: (1) home health nursing services, (2)
infusion therapy, (3) respiratory therapy and (4) home medical equipment. According to
statistics from the Centers for Medicare and Medicaid Services (CMS) Office of
the Actuary, total expenditures by payers on home health nursing services was
approximately $43 billion in 2004. Medicare is the largest single payer, accounting for
approximately $16 billion in 2004.

The
Company currently operates 31 offices consisting of one parent corporate office,
twenty-one offices that coordinate home health care services and nine satellite offices.
The Company has two Medicare provider numbers and is a Medicaid provider in each of the
four states in which it operates. The Company provides a wide variety of home health care
services including:

| |  |  | Registered
nurses who provide specialty services, such as skilled monitoring, clinical nursing
assessments, evaluations, clinical interventions, medication supervision and/or
administration.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Licensed
practical nurses who perform technical procedures, administer medications and change
surgical and medical dressings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

| |  |  | Physical
and occupational therapists who work to strengthen muscles, restore range of motion and
help patients perform the activities of daily living.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Speech
pathologists/therapists who work to restore communication and oral skills.
| | - |  | ---------------------------------------------------------------------------------

| |  |  | Medical
social workers who help families address the problems associated with acute and chronic
illnesses.
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | Home
health aides who perform personal care such as bathing or assistance in walking.
| | - |  | -------------------------------------------------------------------------------------

| |  |  | Private
duty services such as continuous hourly nursing care and sitter services.
| | - |  | ---------------------------------------------------------------------------------

The
Company has five principal operating subsidiaries:

| |  |  | Health
 Acquisition  Corp.,  formerly Allen Health Care Services,  Inc.  ("Allen Health Care"),
a New York                   corporation that conducts home health care operations in New
York.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | New
England Home Care,  Inc. ("New  England"),  a Connecticut  corporation  that conducts
home health care                   operations in Connecticut.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Connecticut
 Staffing  Works Corp.  ("Connecticut  Staffing"),  a  Connecticut  corporation  that
conducts                   healthcare staffing operations in Connecticut.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Accredited
Health Services, Inc.  ("Accredited"),  a New Jersey corporation that conducts home
health care                   operations in New Jersey.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Medical
 Resources Home Health Corp.  ("Medical  Resources"),  a Delaware  corporation  that
conducts home                   health care operations in Massachusetts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

During
the fiscal year ended July 31, 2004, the Company terminated its healthcare staffing
operations in both New York and New Jersey.

Health
Acquisition Corp. d/b/a Allen Health Care Services.Allen Health Care is a provider of
home health care services in New York State. Services are provided by personal care aides,
home health aides and homemakers (collectively, caregivers). Allen Health Care
is licensed by the State of New York Department of Health (DOH). Allen Health
Care maintains its principal administrative office in Jamaica, New York and has a branch
office in Hempstead, New York. Case coordinating of patients is performed at these two
offices. In addition, Allen Health Care has satellite offices in Brooklyn, Mount Vernon
and the Bronx, New York. The satellite offices are primarily used for the recruitment and
training of home health aides. Services are provided in the following counties in the
State of New York: Nassau, Westchester, Queens, Kings, New York and the Bronx.

Home
health care personnel are licensed or certified under a New York State approved program
and can be engaged on a full-time, part-time or live-in basis. Since July 1996, Allen
Health Care has required criminal background investigations for all new personnel. In
addition, urine drug testing is part of the pre-employment screening process and
thereafter is performed annually. In accordance with DOH regulations, effective April 1,
2005, all new non-licensed employees who are employed to provide direct care or
supervision to clients of Allen Health Care will undergo a criminal history record check
by the Federal Bureau of Investigation. In March 2005, Allen Health Care was re-surveyed
by the Joint Commission of Accreditation of Health Care Organizations (JCAHO),
an accrediting body for health care providers. JCAHO accreditation is associated with
providing quality services. This status is required by many of the certified home health
care agencies (CHHAs) and long-term home health care programs
(LTHHCPs) that Allen Health Care currently services. The re-survey resulted in
Allen Health Care extending its accredited status through March 2008.

Allen
Health Care is reimbursed primarily by CHHAs and LTHHCPs that subcontract their home
health aides from Allen Health Care, as well as by private payers and the Nassau and
Westchester County Departments of Social Services Medicaid Programs, for which Allen
Health Care is a participating provider.

Allen
Health Care provides home health aide services to its clients twenty-four hours per day,
seven days per week. Although Allen Health Cares offices are open during normal
business hours, personnel are available twenty-four hours per day to respond to
emergencies and to provide other service requests. The registered nurses of Allen Health
Care, in accordance with DOH regulations and contract requirements, visit patients
regularly and review records of service completed by the home health aide and personnel
care aides daily. These records are maintained by Allen Health Care. In addition, a home
care coordinator ensures that appropriate coverage is maintained for all patients and acts
as the liaison among family members, aides and professional staff.

Allen
Health Care has expanded in recent years through selected acquisitions of complementary
businesses or assets in its geographic region. These acquisitions included the August 1998
acquisition of certain assets of Bryan Employment Agency, Inc., d/b/a Bryan Home Care
Services (Bryan HomeCare), a New York licensed home health care agency that
provided home health aide services in Westchester

-3-



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County, New York. This acquisition
expanded the geographic presence of Allen Health Care and enabled it to become a
participating provider in the Westchester County Department of Social Services Medicaid
Program.

To
a large extent, Allen Health Cares continued growth depends on, among other things,
its ability to recruit and maintain qualified personnel. Allen Health Cares training
programs for home health aides and personal care aides have been approved by the New York
State Department of Health. Allen Health Care believes that it offers competitive salaries
and fringe benefits and has been able to keep its caregivers working on a steady basis.

New
England Home Care, Inc.In August 1995, the Company acquired New England. New England
is a Medicare certified and state licensed home health care company in Connecticut. In
February 2005, New England was re-surveyed by JCAHO, resulting in New England extending
its accredited status through February 2008. New England provides services throughout
Connecticut. Services include skilled nursing, physical therapy, occupational therapy,
medical social services, home health aide and homemaker services. In addition, New England
provides specialty services consisting of adult/geriatric, pediatric, post-acute
rehabilitation and behavioral health. New England provides full-service home health care
twenty-four hours per day, seven days per week. Weekends, holidays and after-hours are
supported by an on-call system for each office location with medical supervision by a
registered nurse at all times. All home health care personnel are licensed or certified
under a Connecticut state-approved program and can be engaged on a full-time, part-time or
live-in basis. New England performs a multi-state pre-employment criminal background check
on all new hires. In addition, a Social Security number verification, satisfactory
employer references and a pre-employment drug screen are required.

New
England maintains its principal administrative office in Cromwell, Connecticut. In
addition, New England has administrative offices in Milford, West Hartford, Shelton and
Waterbury, Connecticut, and a satellite office in Norwich, Connecticut. Case coordinating
of patients is performed at the administrative offices. Reimbursement for New
Englands services is primarily provided by the State of Connecticut Department of
Social Services Medicaid Program, the Federal Medicare Program, managed care companies,
private payers, hospices and other Medicare certified home health agencies and long-term
care providers that subcontract their home health aides from New England.

New
England has expanded its operations through increased penetration of market share in
Connecticut and selected acquisitions of complementary assets in its geographic region. In
November 1999, New England acquired certain assets of Optimum Care Services of
Connecticut, Inc., Optimum Home Health of Connecticut, Inc. and Optimum Home Care of
Connecticut, Inc. (collectively, the Optimum Entities). The Optimum Entities
included a Medicare certified and licensed home health care company engaged in providing
home health care services in Connecticut. The acquisition of these assets was coupled with
a successful penetration of the market share made available as a result of the liquidation
of the Optimum Entities.

In
October 2004, New England acquired certain assets from On Duty Metropolitan Connecticut,
LLC, a Medicare certified and licensed home health care company engaged in providing
nursing and home health care services in New Haven and Fairfield Counties, Connecticut.

The
continued growth of New England depends on, among other things, its ability to recruit and
retain qualified personnel. New England recruits personnel through employee referrals,
newsprint media,

-4-



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internet sourcing, direct mailings
and industry networking. New England believes that it offers competitive salaries and
fringe benefits and has been able to keep its employees working on a steady basis.

Connecticut
Staffing Works Corp.Connecticut Staffing was organized in October 1999 to operate
certain of the assets acquired from the Optimum Entities. Connecticut Staffing is a
full-service health care staffing company, maintaining its main administrative office in
Cromwell, Connecticut. It provides temporary staffing to hospitals, skilled nursing
facilities, long-term care centers, occupational health sites, juvenile detention centers,
correctional facilities, group homes, schools and other institutions. Staffing personnel
include registered nurses, licensed practical nurses, certified nursing assistants,
medical secretaries and medical assistants. Staffing services are provided twenty-four
hours per day, seven days per week. Staffing coordinators are available in the office
Monday to Friday 6:00 a.m. to 5:00 p.m, Saturday 6:00 a.m. to 2:00 p.m. and Sunday 6:00
a.m. to 12 noon. Holidays and after hours are supported by an on-call system which pages a
staffing coordinator. Connecticut Staffing performs a multi-state pre-employment criminal
background check on all new hires. In addition, a Social Security number verification,
satisfactory employer references and a pre-employment drug screen are required.

Connecticut
Staffing maintains a roster of quality professional personnel. The continued success of
Connecticut Staffing is dependent on, among other things, its ability to maintain a steady
roster of per diem workers to meet the staffing requirements of its clients. Connecticut
recruits personnel through employee referrals, newsprint media, internet sourcing, direct
mailings and industry networking. Connecticut Staffing believes that it offers competitive
salaries and fringe benefits and has been able to keep its personnel working on a steady
basis.

Accredited
Health Services, Inc.In October 1998, the Company acquired Accredited. Accredited is
a licensed health care service firm that provides home health aide services in Bergen,
Hudson, Passaic, Essex, Morris, Union, Somerset, Middlesex, Monmouth and Ocean Counties,
New Jersey. Accredited maintains its principal administrative office in Hackensack, New
Jersey and has branch offices in East Orange and Toms River, New Jersey. Case coordinating
of patients is performed in Hackensack and the other two branch offices. Accredited also
has satellite offices in Jersey City, Union City, Paterson and Elizabeth, New Jersey that
are used for recruitment, in services and orientation of home health aides.

Accredited
provides home health care services to its clients twenty-four hours per day, seven days
per week. Weekends, holidays and after-hours are supported by an on-call system for each
office. All home health aides are certified under a New Jersey state-approved program and
can be engaged on a full-time, part-time or live-in basis. Accredited has been approved by
the New Jersey Board of Nursing for the training of home health aides in the State of New
Jersey. Effective November 2003, all home health aides of Accredited have criminal
background checks performed by the State of New Jersey.

In
November 2005, Accredited was re-surveyed by the Commission on Accreditation for Home Care
(CAHC), one of the accrediting bodies required for participation as a Medicaid provider in
New Jersey. This accreditation was extended for an additional year. Reimbursement for
Accrediteds services is primarily by the State of New Jersey Medicaid Program,
Medicare certified home health care agencies that subcontract their home health aides from
Accredited and private payers.

In
May 2005, Accredited completed the acquisition of Helping Hands Health Care (Helping
Hands). Helping Hands provided home health aide services in Bergen, Hudson, Passaic,
Essex, Morris, Union, Middlesex, Somerset, Monmouth and Ocean Counties, New Jersey.

-5-



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Accrediteds
growth depends on, among other things, its ability to recruit and retain qualified home
health aides. Recruiting is conducted primarily through advertising, direct contact with
community groups and employment programs, and programs designed to encourage new employee
referrals by existing employees. Accredited believes that it offers competitive salaries
and fringe benefits and has been able to keep its caregivers working on a steady basis.

Medical
Resources Home Health Corp.In September 2002, the Company, through a wholly-owned
subsidiary, acquired certain assets of Medical Resources, Inc. and related entities
(collectively, the Medical Resources Entities). The Medical Resources Entities
provided home care services in Massachusetts.

The
Massachusetts State Home Care Program provides services to approximately 33,000 frail, low
income elders throughout the state. The funds and services are managed through
twenty-seven Aging Service Access Points (ASAPs) that are not-for-profit
organizations geographically dispersed throughout the state. Services provided through
this state program include homemaking, personal care, companion and shopping. Medical
Resources has contracts with certain of these ASAPs to provide homemaking and personal
care services. Services are provided twenty-four hours per day, seven days per week.
Weekends, holidays and after-hours are supported by an on-call system staffed by
coordinators and registered nurses. From inception, Medical Resources has performed
criminal background investigations on all new personnel.

Medical
Resources maintains its principal administrative office in Newton, Massachusetts and has
satellite offices in Boston, Lynn, Framingham, North Andover, Leominster, Worcester,
Chicopee, Bellingham, North Dartmouth and North Easton, Massachusetts. Case coordinating
of patients is performed in Newton and the satellite offices. The satellite offices are
also used as drop-off offices for paperwork, recruitment, in services, training and
orientation of new personnel.

In
April 2003, Medical Resources received its Medicare certification from the CMS. In June
2003, Medical Resources received its Medicaid provider number from the Commonwealth of
Massachusetts. As a result of receiving these certifications, Medical Resources expanded
its services to include nursing, physical therapy, occupational therapy, speech therapy,
medical social services and home health aide services to Medicare and Medicaid recipients.

The
growth of Medical Resources depends on, among other things, its ability to recruit and
retain staff as well as its ability to generate referrals of Medicare and Medicaid
patients. Medical Resources believes that it offers competitive salaries and fringe
benefits and has been able to keep its employees working on a steady basis.

# Organization

The
Companys corporate headquarters is located in Scarsdale, New York, where all senior
corporate administrative functions are performed. The Companys operations are
conducted by its five operating subsidiaries. Although the Company maintains separate
subsidiaries in its various jurisdictions of operations, it reviews its operations
primarily on an integrated rather than geographic or separate-subsidiary basis. Each
subsidiary has a main administrative office where all management functions are performed
and overseen by the subsidiary President. Each administrative office performs intake and
case

-6-



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coordinating of patients, corporate
compliance, human resources, marketing and all financial and accounting functions.

# Insurance

The
Company and its subsidiaries maintain casualty coverages for all of its operations,
including professional and general liability, workers compensation, automobile,
property, fiduciary liability and directors and officers insurance. The Company reviews
its insurance coverages throughout the year to insure that adequate coverages are in
place. In New York State, the Company self insures up to specified limits certain risks
related to workers compensation. While the Company believes its insurance policies
are adequate, in the wake of the terrorist events of September 11, 2001, the Company has
experienced substantial increases in the cost of its insurance coverage. As a result,
there can be no assurance that coverage will continue to be available in adequate amounts
or at a reasonable cost.

# Employees and Labor
Relations

As
of October 27, 2006, the Company had approximately 3,410 full and part-time employees. The
Company currently employs the following classifications of personnel: administrative
employees which consist of a senior management team (CEO and CFO) of the parent company
and a COO, CFO and vice-presidents at each subsidiary company; office administrative
staff, nursing directors and clinical managers; sales and marketing executives; licensed
and certified professional staff (RNs, LPNs, therapists); and non-licensed care givers
(home health and personal care aides). The Company has standardized procedures for
recruiting, interviewing and reference checking prospective health care personnel. All
nurses and home health aides must be licensed or certified by appropriate authorities.

Effective
May 1, 2004, Allen Health Care and District Council 1707, American Federation of State,
County and Municipal Employees (AFSCME), concluded negotiations on an initial
three-year labor contract. The labor contract provided covered home health
aides with some new benefits, consisting of an immediate wage increase, eligibility for
paid time off, increase in minimum hourly base rates, holiday premium pay and
representation by the Union in procedures and personnel matters. The Company has no other
union contracts with any of its employees. The Company believes its relationship with its
employees is satisfactory.

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. In this lawsuit, the plaintiff seeks to certify a class of
regular full-time hourly employees employed by Allen Health Care located and 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, the parties in the matter of
Lerai Jones, et al. v. National Home Health Care, have agreed to enter into a
stipulation extending the defendants time to answer the complaint or agreeing

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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. If the decision is not overturned on
appeal, the Companys labor cost in New York will increase, but the Company does not
believe that such increase would have a material adverse effect on its operating results.

On
May 13, 2005, Accredited 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.

# Competition

The
home health care field is highly competitive in each state in which the Company operates.
The Company is competing with numerous other licensed as well as certified home health
care agencies in each of the markets it serves. In addition, the Company competes with
companies that, in addition to providing home health aide and skilled nursing services,
also, unlike the Company, provide pharmaceutical products and other home health care
services that generate additional referrals. The Company believes it is one of the largest
competitors in the state of Connecticut. However, the Company believes that numerous
competitors in the other principal markets served by the Company (i.e., the states
of Massachusetts, New York and New Jersey) have substantially greater personnel, financial
and other resources than the Company. Competition also involves the quality of services
provided and the pricing for such services. The Companys largest competitors include
Gentiva Health Services, Inc., Premier Health Services, Patient Care, Inc., New York
Health Care, Inc. and Personal Touch Home Care, Inc. As a result of changes in Medicare
reimbursement and the competitive pressures of managed care, the home health care industry
continues to experience consolidation. In addition, the Company believes that smaller,
less financially secure home health agencies will continue to find it difficult to compete
for market share and comply with regulatory compliance standards.

The
Companys ability to attract a staff of highly trained personnel is a material
element of its business. There currently is intense competition for qualified personnel
and there can be no assurance that the Company will be successful in maintaining or in
securing additional qualified personnel. The Companys competition for personnel
comes from other industries as well. If and to the extent that reimbursement rates and
other factors constrain wages and other benefits to caregivers, other industries offering
more attractive compensation and other benefits also may attract eligible home health care
personnel. The Company recruits personnel principally through newspaper advertisements and
through referrals from existing personnel.

# Customers

The
Company provides its services to four types of payer sources. These sources include
federal and state funded public assistance programs (Medicare and Medicaid), other third
party payers (subcontracts), insurance companies and private payers.

A
substantial portion of the Companys revenue is derived from subcontracts that the
Company has with Medicare certified home health care agencies and long-term health care
provider programs that subcontract our caregivers. From time to time, some of these
agencies have requested bids from the home

-8-



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care agencies to which they
subcontract. If the Company is not successful in maintaining these contracts as they come
up for bid, it could have a materially adverse effect on the Companys results of
operations.

For
the fiscal years ended July 31, 2006, 2005 and 2004, the State of Connecticut Department
of Social Services Medicaid Program accounted for 27%, 28% and 27%, respectively, of the
Companys net patient revenue and the New Jersey Department of Human Services
Division of Medical Assistance and Health Services program accounted for 13%, 12% and 9%,
respectively, of the Companys net patient revenue. The loss of or a significant
adverse change in the business terms with either of the foregoing customers would have a
material adverse effect on the Company.

# Government Regulation
and Licensing

The
health care industry is highly regulated. The Companys business is subject to
substantial and frequently changing regulations by federal, state and local authorities.
The Company must comply with state licensing along with federal and state eligibility
standards for certification as a Medicare and Medicaid provider. The ability of the
Company to operate profitably will depend in part upon the Company obtaining and
maintaining all necessary licenses and other approvals in compliance with applicable
health care regulations.

The
Health Insurance Portability and Accountability Act. The Health Insurance Portability
and Accountability Act (HIPAA), enacted by the Federal government on August
12, 1996, requires organizations to adhere to certain standards to protect data integrity,
confidentiality and availability. HIPAA mandates, among other things, that the Department
of Health and Human Services adopt standards for the exchange of electronic health
information in an effort to encourage overall administrative simplification and enhance
the effectiveness and efficiency of the health care industry. Organizations were required
to be in compliance with certain HIPAA provisions relating to security and privacy
beginning April 14, 2003. Organizations are subject to significant fines and penalties if
found not to be compliant with the provisions outlined in the regulations. Regulations
issued pursuant to HIPAA impose ongoing obligations relative to training, monitoring and
enforcement, and management has implemented processes and procedures to ensure continued
compliance with these regulations.

Medicare.
          Title XVIII of the Social Security Act authorizes Part A of the Medicare
          program, the health insurance program that pays for home health care services
          for covered persons (typically, those aged 65 and older and long-term disabled).
          Home health care providers may participate in the Medicare program subject to
          certain conditions of participation and upon acceptance of a provider agreement
          by the Secretary of Health and Human Services. Only enumerated services, upon
          satisfaction of certain coverage criteria, are eligible for reimbursement as a
          Medicare provider. The Company is currently Medicare certified in Connecticut
          and Massachusetts. Approximately 4%, 6% and 5% of revenue for the fiscal years
          ended July 31, 2006, 2005 and 2004, respectively, were derived from the Medicare
          program (see Risk Factors  Risks Related to Federal and
          State Regulationsbelow for a discussion regarding the Companys
          participation in the Connecticut Medicare program).

Medicare
Fraud and Abuse. Provisions of the Social Security Act under Medicare and Medicaid
generally prohibit soliciting, receiving, offering or paying, directly or indirectly, any
form of remuneration in return for the referral of Medicare or state health care program
patients or patient care opportunities, or in return for the purchase, lease or order of
any facility item or service that is covered by Medicare or a state health care program.
The federal government has published regulations that provide exceptions, or

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safe harbors, for
business transactions that will be deemed not to violate the anti-kickback statute.
Violations of the statute may result in civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. The Company believes that its current
operations are not in violation of the anti-kickback statute.

Medicaid.
          Approximately 47%, 46% and 43% of revenue for the fiscal years ended July 31,
          2006, 2005 and 2004, respectively, were derived from state sponsored Medicaid
          programs. Reimbursement for home health care services rendered to eligible
          Medicaid recipients is made in an amount determined in accordance with
          procedures and standards established by state law under federal guidelines.
          States differ as to reimbursement policies and rates. The Company is a licensed
          Medicaid provider in Connecticut, New Jersey, Massachusetts and in Nassau and
          Westchester Counties, New York. Future Medicaid reimbursement rates may be
          reduced in response to state economic and budgetary constraints, as well as in
          response to changes in the Medicare program (see Risk Factors
           Risks Related to Federal and State Regulationsbelow for a
          discussion regarding the Companys participation in the Connecticut
          Medicaid program).

Surveys.
          From March 1, 2004 through August 23, 2005, the Division of Health Services
          Regulation for the Connecticut Department of Public Health (the DPH)
          conducted various licensing and certification inspections of New England. In
          December 2005, New England and the DPH entered into a Consent Order for the
          purpose of resolving the 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 the DPH.The
          terms of the Consent Order will generally remain in effect until the fall of
          2007.A failure by New England to achieve Medicare certification would
          result in New Englands termination from participation in the Medicare and
          Medicaid programs. Revenues derived from New Englands participation in
          these programs for the fiscal year ended July 31, 2006 were 30% of the
          Companys total revenues.

Audit.
          In August 2005, the Connecticut Department of Social Services, Office of Quality
          Assurance (the Department) performed an audit of Medical Assistance
          claims paid to New England covering the period April 1, 2003 through March 31,
          2005. The audit included a review of relevant claim information maintained by
          the Department and a review of the appropriate medical and administrative
          records maintained by New England. New England received approximately
          $53,000,000 in reimbursement during the audit period. In October 2006, the
          Company received the results of the audit, which resulted in a liability of
          $247,000 to the Department. The Company has recorded a liability in the
          financial statements to reflect the audit findings.

# Item 1A. Risk Factors

This
section summarizes certain risks, among others, that should be considered by stockholders
and prospective investors in the Company. Many of these risks are also discussed in other
sections of this report.

Risks Related to the
Companys Ability to Attract Qualified Caregivers.

The
Company relies significantly on its ability to attract and retain caregivers who possess
the skills, experience and licenses necessary to meet the requirements of the
Companys customers. The Company competes for home health care services personnel
with other providers of home health care

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services. The Company must continually evaluate and expand its network of caregivers to
          keep pace with its customers needs. Currently, there is a shortage of
          qualified nurses and a diminishing pool of home health aides in the states in
          which the Company conducts its business, competition for nursing personnel is
          increasing and wages and benefit costs have risen. The Company may be unable to
          continue to increase the number of caregivers that it recruits, adversely
          affecting the potential for growth of the Companys business. The
          Companys ability to attract and retain caregivers depends on several
          factors, including the Companys ability to provide such caregivers with
          assignments that they view as attractive and with competitive wages and
          benefits. There can be no assurance that the Company will be successful in any
          of these areas. The cost of attracting caregivers and providing them with
          attractive benefit packages may be higher than the Company anticipates and, as a
          result, if it is unable to obtain increased reimbursement rates, the
          Companys profitability could decline. Moreover, if the Company is unable
          to attract and retain caregivers, the quality of its services to its customers
          may decline and, as a result, it could lose certain customers.

Risks Related to
Collective Bargaining.

Effective
May 1, 2004, Allen Health Care and District Council 1707, AFSCME concluded negotiations on
an initial three-year labor contract. The Company is unable to estimate how upcoming
negotiations will affect the Companys future results of operations or financial
condition. On May 13, 2005, Accredited received a copy of a Petition for Certification of
Representative, pursuant to the provisions of the National Labor Relations Act. Although
on March 21, 2006, the home health aides of Accredited, in a mail ballot election,
rejected union representation by SEIU 1199 New Jersey, there can be no assurance that
further unionizing activity will not occur at this or other subsidiaries of the Company or
that any such activity or any new collective bargaining agreements will not have a
material adverse effect on the Company.

Risks Related to
Competition.

The
home health care business is highly competitive. Some of the Companys competitors,
unlike the Company, provide pharmaceutical products and other home health care services
that generate additional referrals. Some of the Companys competitors also may have
greater marketing and financial resources than the Company. The Company believes that the
primary competitive factors in obtaining and retaining customers are the quality of
services provided and the pricing of such services. Competition for referrals may increase
in the future and, as a result, the Company may not be able to remain competitive. To the
extent competitors gain or retain market share by reducing prices or increasing marketing
expenditures, the Company could lose market share or otherwise experience a material
adverse effect. The Company does not have long-term agreements or exclusive guaranteed
order contracts with its customers. The success of the Companys business is
dependent upon its ability to continually secure new business from its customers and to
service such new business with its caregivers. The Companys customers are free to
seek services from the Companys competitors and to use caregivers that such
competitors offer them. Therefore, the Company must maintain positive relationships with
its customers; otherwise, the Company may be unable to generate new business for its
caregivers, which could have a material adverse effect on the Company.

Risks Related to Medicaid
Retroactive Adjustments and Recoupments.

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New
England, as a Connecticut Medicaid provider, is subject to retroactive adjustments due to
prior year audits, reviews and investigations, government fraud and abuse initiatives and
other similar actions. Federal regulations also provide for withholding payments to recoup
amounts payable under the Medicaid program. While the Company believes it is in material
compliance with applicable Medicaid reimbursement regulations, there can be no assurance
that the Company, pursuant to such audits, reviews and investigations, among other things,
will be found to be in compliance in all respects with such reimbursement regulations. A
determination that the Company is in violation of any such reimbursement regulations could
result in retroactive adjustments and recoupments and have a material adverse effect on
the Company. As a Medicaid provider, the Company is also subject to routine, unscheduled
audits, which may have an adverse impact on the Companys results of operations. For
information on a recent audit performed by the Connecticut Department of Social Services,
Office of Quality Assurance, see Government Regulation and Licensing 
Audit.

Risks Related to Federal
and State Regulations.

The
Company is subject to substantial and frequently changing federal, state and local
regulations. The Company must also comply with state licensing along with federal and
state eligibility standards for certification as a Medicare and Medicaid provider. In
addition, new laws and regulations are adopted periodically to regulate new and existing
services in the health care industry. Changes in laws or regulations or new
interpretations of existing laws or regulations can have a dramatic effect on operating
methods, costs and reimbursement amounts provided by government and other third-party
payers. Federal laws governing the Companys activities include regulation of
Medicare reimbursement and certification and certain financial relationships with health
care providers (collectively, the fraud and abuse laws). Although the Company
intends to comply with all applicable federal and state fraud and abuse laws, these laws
are not always clear and may be subject to a range of potential interpretations. (For
further discussion on such fraud and abuse laws, see Government Regulation and
Licensing  Medicare Fraud and Abuse.) There can be no assurance that
administrative or judicial clarification or interpretation of existing laws or
regulations, or legislative enactment of new laws or regulations, will not have a material
adverse effect on the Company. In addition, the Balanced Budget Act of 1997, as amended
(the Balanced Budget Act), introduced several government initiatives causing
changes to Medicare reimbursement. These changes have resulted in the Company experiencing
a decline in revenue from its Medicare certified subsidiary in Connecticut. (For further
discussion on the Balanced Budget Act, see Government Regulation and Licensing
 Medicare.)

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. There can be no assurance that federal, state or local
governments will not change existing standards or impose additional standards. Any failure
to comply with existing or future standards could have a material adverse effect on the
Company. For information as to surveys of New England conducted by DPH, see
Government Regulation and Licensing  Surveys. A failure by New England
to retain Medicare certification would result in New Englands termination from
participating in the Medicare and Medicaid programs. Revenues derived from New
Englands participation in these programs for the fiscal year ended July 31, 2006
were 30% of the Companys total revenues.

Risks Related to the
Companys Exposure to Professional Liabilities.

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Provision
of home health care services entails an inherent risk of liability. Certain participants
in the home health care industry may be subject to lawsuits that may involve large claims
and significant defense costs. It is expected that the Company periodically will be
subject to such suits as a result of the nature of its business. The Company currently
maintains professional liability insurance intended to cover such claims in amounts which
management believes are in accordance with industry standards. There can be no assurance
that the Company will be able to obtain liability insurance coverage in the future on
acceptable terms, if at all. There can be no assurance that claims in excess of the
Companys insurance coverage or claims not covered by the Companys insurance
coverage will not arise. A successful claim against the Company in excess of the
Companys insurance coverage could have a material adverse effect on the Company.
Claims against the Company, regardless of their merit or eventual outcome, may also have a
material adverse effect on the Companys ability to attract customers or to expand
its business. In addition, one of the Companys subsidiaries is self-insured for its
workers compensation and is at risk for claims up to certain levels.

Risks Related to Third
Party Payers.

For
the twelve months ended July 31, 2006, 2005 and 2004, the percentage of the Companys
revenues derived from Medicare and Medicaid was 51%, 51% and 48%, respectively. The
revenues and profitability of the Company are affected by the continuing efforts of all
third-party payers to contain or reduce the costs of health care by lowering reimbursement
rates, narrowing the scope of covered services, increasing case management review of
services and negotiating reduced contract pricing. Any changes in reimbursement levels
under Medicare, Medicaid or other payer sources and any changes in applicable government
regulations could have a material adverse effect on the Company. See Item 7 
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Certain Trends Expected to Impact Future Results of Operations.
Changes in the mix of the Companys patients among Medicare, Medicaid and other payer
sources may also affect the Companys revenues and profitability.

Risks Related to the
Companys Acquisition Strategy.

In
recent years, the Companys strategic focus has been on the acquisition of small to
medium sized home health care agencies, or of certain of their assets, in targeted
markets. These acquisitions involve significant risks and uncertainties, including
difficulties integrating acquired personnel and other corporate cultures into the
Companys business, the potential loss of key employees or customers of acquired
companies, the assumption of liabilities and exposure to unforeseen liabilities of
acquired companies and the diversion of management attention from existing operations. The
Company may not be able to fully integrate the operations of the acquired businesses with
its own in an efficient and cost-effective manner. The failure to effectively integrate
any of these businesses could have a material adverse effect on the Company. In addition,
the Companys growth over the last several years has principally resulted from
acquisitions and penetration of markets abandoned by competitors. There can be no
assurance that the Company will be able to identify suitable acquisitions or available
market share in the future nor that any such opportunities, if identified, will be
consummated on terms favorable to the Company, if at all. In the absence of such
successful transactions, there can be no assurance that the Company will experience
further growth, nor that such transactions, if consummated, will result in further growth.

-13-



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In
addition, although the Company attempted in its acquisitions to determine the nature and
extent of any pre-existing liabilities, and has obtained indemnification rights from the
previous owners for acts or omissions arising prior to the date of the acquisition,
resolving issues of liability between the parties could involve a significant amount of
time, manpower and expense on the part of the Company. If the Company or any of its
subsidiaries were to be unsuccessful in a claim for indemnity from a seller, the liability
imposed on the Company or its subsidiary could have a material adverse effect on the
Company.

The
Company has grown significantly over the past few years. This growth, which has resulted
primarily from acquisitions and which management intends to continue to pursue, poses a
number of difficulties and risks for the Company. As the Company has grown and may
continue to grow (as to which there can be no assurance) in both revenue and geographical
scope, such growth stretches the various resources of the Company, including management,
information systems, regulatory compliance, logistics and other controls. There can be no
assurance that such resources will keep pace with such growth. If the Company does not
maintain such pace, then its prospects would be materially adversely affected.

Risks Related to the
Companys Dependence on Senior Management.

The
Company believes that the success of its business strategy and its ability to operate
profitably depends on the continued employment of its senior management team. If any
member of the Companys senior management team becomes unable or unwilling to
continue in his present position, the Companys business and financial results could
be materially adversely affected.

# Item 1B. Unresolved
Staff Comments.

None.

# Item 2. Properties.

The
Company, directly or through certain subsidiaries, leases various office facilities under
lease agreements with various expiration dates through fiscal 2010. The following sets
forth the location, approximate square footage and use of each office, and the expiration
date of each lease:

|Location         | ApproximateSquare Feet | Use                    | Expiration Date of Lease
|---------------- | ---------------------- | ---------------------- | ------------------------
|Scarsdale, NY    | 2,679                  | Corporate headquarters | October 31, 2008        
|Queens, NY       | 12,300                 | Administrative office  | July 31, 2008           
|Hempstead, NY    | 2,500                  | Branch office          | April 30, 2009          
|Mount Vernon, NY | 650                    | Branch office          | April 30, 2009          
|Brooklyn, NY     | 1,083                  | Satellite office       | December 31, 2006       
|Bronx, NY        | 648                    | Satellite office       | Month-to-Month          
|Cromwell, CT     | 18,044                 | Administrative office  | June 30, 2008           

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|Location            | ApproximateSquare Feet | Use                   | Expiration Date of Lease          
|------------------- | ---------------------- | --------------------- | ----------------------------------
|Milford, CT         | 9,000                  | Branch office         | Month-to-Month                    
|Waterbury, CT       | 3,986                  | Branch office         | May 31, 2007                      
|West Hartford, CT   | 4,455                  | Branch office         | January 31, 2009                  
|Shelton, CT         | 1,826                  | Branch office         | August 31, 2009                   
|Norwich, CT         | 700                    | Satellite office      | Month-to-Month                    
|Hackensack, NJ      | 4,281                  | Administrative office | September 30, 2008                
|Union City, NJ      | 700                    | Satellite office      | Month-to-Month                    
|Elizabeth, NJ       | 700                    | Satellite office      | January 31, 2007                  
|East Orange, NJ     | 3,000                  | Branch office         | Month-to-Month (new lease pending)
|Jersey City, NJ     | 442                    | Satellite office      | April 30, 2007                    
|Toms River, NJ      | 1,740                  | Branch office         | June 30, 2007                     
|Paterson, NJ        | 1,250                  | Satellite office      | November 30, 2006                 
|Whiting, NJ         | 730                    | Satellite office      | December 31, 2006                 
|Newton, MA          | 3,838                  | Administrative office | August 31, 2007                   
|Bellingham, MA      | 260                    | Satellite office      | Month-to-Month                    
|North Andover, MA   | 220                    | Satellite office      | July 31, 2007                     
|Framingham, MA      | 525                    | Satellite office      | Month-to-Month                    
|Boston, MA          | 780                    | Satellite office      | April 30, 2008                    
|Lynn, MA            | 412                    | Satellite office      | Month-to-Month                    
|North Dartmouth, MA | 964                    | Satellite office      | January 31, 2008                  
|Chicopee, MA        | 1,340                  | Satellite office      | November 30, 2006                 
|North Easton, MA    | 550                    | Satellite office      | Month-to-Month                    
|Leominster, MA      | 1,000                  | Satellite office      | Month-to-Month                    

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|Location      | ApproximateSquare Feet | Use           | Expiration Date of Lease
|------------- | ---------------------- | ------------- | ------------------------
|Worcester, MA | 1,510                  | Branch office | October 31, 2006        

The
Company believes that its office facilities are adequate for the conduct of its existing
operations. The Company regularly evaluates the suitability and the overall adequacy of
its various offices. The Company believes that it will be able to either (i) renew any
leases that will expire during the current fiscal year or (ii) find adequate leases in
lieu of any leases that have expired or will expire during the current fiscal year.

# Item 3. 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. In this lawsuit, the plaintiff seeks to certify a class of
regular full-time hourly employees employed by Allen Health Care located and 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, the parties in the matter of
Lerai Jones, et al. v. National Home Health Care, 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.

On
October 3, 2006, Allen Health Care received an Information Subpoena with Restraining
Notice by certified mail in connection with a Judgment obtained by Ida Faulkner against
Allen Health Care in the amount of $2,149,180.00 entered on default on January 4, 2005 in
the Supreme Court of New York, Bronx County. Allen Health Care 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 sent to Allen Health Care at this incorrect address
and were not received by Allen Health Care. The Verified Complaint asserted causes of
action for negligence and breach of contract and alleged that Ms. Faulkner suffered
unspecified personal injuries. The Verified Complaint sought damages in the amount of
$20,000,000. On October 6, 2006, Allen Health Care 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 Allen
Health Cares motion to vacate the default for October 30, 2006. The Order to Show
Cause contains a temporary restraining order enjoining Ms. Faulkner from taking any

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further steps to enforce the Judgment
or the Information Subpoena with Restraining Notice pending the hearing on October 30,
2006.

# Item 4. Submission of
Matters to a Vote of Security Holders.

No
matters were submitted to a vote of stockholders of the Company during the fourth quarter
of the fiscal year ended July 31, 2006.

# PART II

# Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
 Securities.

(a) Market Information

The
Companys Common Stock is quoted on the NASDAQ National Market under the symbol NHHC.
The following table presents the quarterly high and low bid quotations in the
over-the-counter market, as reported by the National Association of Securities Dealers for
the two fiscal years ended July 31, 2006 and 2005. These quotations reflect the
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

|                                     | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter
|------------------------------------ | ------------ | ------------- | ------------ | -------------
|2006                                 |              |               |              |              
|High                                 |              |               | $            | 12.78        
|Low                                  |              |               | $            | 9.00         
|2005                                 |              |               |              |              
|High                                 |              |               | $            | 11.23        
|Low                                  |              |               | $            | 9.30         
|                                    
|Dividends per share of common stock: |              |               |              |              
|2006                                 |              |               | $            | 0.075        
|2005                                 |              |               | $            | 0.075        

(b) Holders

There
were approximately 83 holders of record of the Companys Common Stock as of October
25, 2006, excluding certain beneficial holders that own their shares in street name, but
including each firm which holds shares on behalf of such beneficial owners.

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(c)    
          Securities Authorized for Issuance Under Equity Compensation Plans.

|Plan Category                | Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights | Weighted-Average Exercise
Price of Outstanding
Options, Warrants and
Rights | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
|---------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|                             | (a)                                                                                         | (b)                                                                         | (c)                                                                                                                                        
|                            
|Equity compensation plans   
|approved by security holders | 278,533                                                                                     | $9.52                                                                       | 137,707                                                                                                                                    
|                            
|Equity compensation plans   
|not approved by security    
|holders                      | N/A                                                                                         | N/A                                                                         | N/A                                                                                                                                        
|                            
|                             |                                                                                             |                                                                             |                                                                                                                                            
|                            
|TOTAL                        | 278,533                                                                                     | $9.52                                                                       | 137,707                                                                                                                                    
|                            

# Item 6. Selected
Financial Data.

|                                             | Fiscal Years Ended July 31,
|-------------------------------------------- | ---------------------------
|
|STATEMENT OF OPERATIONS DATA:                |                            
|Revenue                                      |                            
|Operating expenses                           |                            
|Income from operations                       |                            
|Other income:                                |                            
|Interest income                              |                            
|Income before income taxes                   |                            
|Provision for income taxes                   |                            
|Net income                                   |                            
|Primary net income per share of common stock |                            
|Diluted net income per share of common stock |                            
|Dividends declared per share                 |                            

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|                     | At July 31,
|-------------------- | -----------
|
|BALANCE SHEET DATA:  |            
|Total assets         |            
|Working capital      |            
|Retained earnings    |            
|Stockholders' equity |            

# ITEM 7.
          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 should be read in conjunction with the
consolidated financial statements and notes appearing elsewhere herein.

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.

As
a Medicaid provider in Connecticut, the Company is subject to routine, unscheduled audits.
These audits may result in the application of a statistically-derived adjustment factor to
the Companys revenues, which may have an adverse impact on the Companys
results of operations. In August 2005, the Companys operations in Connecticut for
the period of April 1, 2003 through March 31, 2005 were audited. During the audit period,
the Company received approximately $53,000,000 in reimbursement. The audit resulted in a
claim being made by the Connecticut Department of Social Services (DSS) in the
amount of approximately $247,000. The Company has recorded a liability of the claim
asserted by DSS in the accompanying financial statements. There can be no assurance that
future Medicaid audits will not have a material adverse impact on the Company.

# The Impact of the
Balanced Budget Act

The
Balanced Budget 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
affecting the Company was a 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.

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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,
2001, under the prospective payment system, Medicare now 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 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 impact
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 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.

# Recent Acquisitions

The
following acquisitions were made through one of the Companys wholly owned
subsidiaries. These acquisitions complemented the existing business of the Company in the
geographical area in which the entity whose assets were acquired provided services. Each
of the acquisitions described below was accounted for utilizing purchase accounting
principles. At the time of its acquisition, the revenues of each acquired business
constituted less than ten percent of the consolidated revenues of the Company.

On
May 22, 2005, the Company acquired through Accredited certain assets of Helping Hands, a
licensed home health care company in the state of New Jersey that provided home health
aide services in Bergen, Hudson, Passaic, Essex, Morris, Union, Middlesex, Somerset and
Ocean Counties, New Jersey.

On
October 6, 2004, the Company acquired through New England certain assets of On Duty
Metropolitan Connecticut, LLC (On Duty), a Medicare certified and State
licensed home health care company that provided nursing and home health care services in
New Haven and Fairfield Counties, Connecticut.

# Critical Accounting
Policies

The
Company believes that the most critical accounting policies used in the preparation of its
consolidated financial statements are those policies relating to recognizing net patient
revenue, determining the value of accounts receivable, and assessing the value of goodwill
and other long-lived assets.

Net
Patient Revenue. The Company recognizes net patient revenue generally on the date
services are provided to patients. Net patient revenue is recorded at amounts the Company
expects to receive under reimbursement arrangements with third-party payers, including
private insurers, private payers,

-20-



---

subcontractors, Medicaid and
Medicare. Because the Companys business depends upon third-party payers whose
reimbursement rates and payment policies are complex and subject to possible change from
time to time, the Company must make estimates with respect to certain amounts it records
as the net realizable value of net patient revenue and accounts receivable. Because of the
potential for changes in these third-party reimbursement rates and payment policies, and
as a result of the complexity of certain of these policies, the estimated amounts
originally recorded as net patient revenue and accounts receivable may be subject to
revision as additional information becomes known.

Accounts
Receivable. Accounts receivable are reduced by an allowance for possible losses that
provides a reserve with respect to those accounts for which net patient revenue was
recognized but with respect to which management subsequently determines that payment is
not expected to be received. The Company analyzes the balances of accounts receivable to
ensure that the recorded amounts properly reflect the amounts expected to be collected.
This analysis involves the application of varying percentages to each accounts receivable
category based on the age and the collectibility of the receivable. The result of this
aging analysis provides the initial estimate of the amount of uncollectible accounts
receivable. The amount ultimately recorded as the reserve is determined after management
also analyzes the collectibility of specific large or problematic accounts on an
individual basis, as well as the overall business climate and other factors. The
Companys estimate of the percentage of uncollectible accounts may change from time
to time and any such change could have a material impact on the Companys financial
condition and results of operations.

Goodwill
and Other Long-Lived Assets. Goodwill arising from the acquisitions of businesses is
recorded as the excess of the purchase price over the estimated fair value of the net
assets of the businesses acquired. Statement of Financial Accounting Standards No. 142
(Goodwill and Other Intangible Assets) provides that goodwill is to be tested
for impairment annually, or more frequently if circumstances indicate potential
impairment. Consistent with this standard, the Company reviews goodwill, as well as other
intangible assets and long-term assets, for impairment annually or more frequently as
warranted, and if circumstances indicate that the recorded value of any such other asset
is impaired, such asset is written down to its proper value. The Company currently does
not believe any impairment of its goodwill or any such other asset existed at July 31,
2006. Nevertheless, future conditions or events could adversely affect the recorded value
of goodwill or such other assets. If any item of goodwill or such other asset is
determined to be impaired, an impairment loss would be recognized equal to the amount by
which the recorded value exceeds the estimated fair market value.

# Results of Operations

|(% of net patient revenue)    | Fiscal year ended July 31,
|----------------------------- | --------------------------
|
|Net patient revenue           |                           
|Cost of revenue               |                           
|General and administrative    |                           
|Allowance for possible losses |                           

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---

|Amortization of intangibles |  |    | .4  |    | .5  |    | .5 
|--------------------------- |  | -- | --- | -- | --- | -- | ---
|                            |  |    |    
|Total operating expenses    |  | 94 | .6  | 94 | .5  | 91 | .9 
|Income from operations      |  | 5  | .4  | 5  | .5  | 8  | .1 
|Interest income             |  |    | .5  |    | .2  |    | .1 
|                            |  |    |    
|Income before income taxes  |  | 5  | .9  | 5  | .7  | 8  | .2 
|Provision for income taxes  |  | 2  | .4  | 2  | .1  | 3  | .2 
|                            |  |    |    
|Net income                  |  | 3  | .5% | 3  | .6% | 5  | .0%
|                            |  |    |    

Certain Factors Expected
to Impact Future Results of Operations

Effective
May 1, 2004, DSS increased the Medicaid rate for certain nursing visits. The rate for a
medication administration visit, defined as administration of oral, intramuscular and/or
subcutaneous medication by a health care agency/professional, was increased from $52 to
$56.50 for initial visits and from $26 to $28.25 for subsequent visits. The increase in
these rates was made retroactive to July 1, 2003, resulting in an increase in net patient
revenue of approximately $916,000 for the period from July 1, 2003 through April 30, 2004,
all of which was recorded in the results of operations for the fiscal year ended July 31,
2004. In May 2003, the rates for these nursing visits had been significantly reduced
from$85 to $52 per visit. DSS analyzed the impact of this rate cut and as a
result, effective May 1, 2004, increased the rates retroactive to July 1, 2003. In October
2005, DSS increased the rates for all home health care services provided to state-aided
persons by 4%.

Allen
Health Care and District Council 1707, American Federation of State, County and Municipal
Employees concluded negotiations on an initial three-year labor contract that became
effective May 1, 2004. This labor contract provided covered home health aides
with some new benefits, consisting of an immediate wage increase, eligibility for paid
time off, an increase in minimum hourly base rates, holiday premium pay and representation
by the Union in procedures and personnel matters. The Company is unable to estimate how
upcoming negotiations will affect the Companys future results of operations or
financial condition.

From
March 1, 2004 through August 23, 2005, the DPH conducted various licensing and
certification inspections of New England. In December 2005, New England and the DPH
entered into a Consent Order for the purpose of resolving the 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 the 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

-22-



---

paying higher base wages and
secondly, overtime in New York is computed at 1.5 times the state minimum wage, thus
increasing costs to the Company.

On
May 13, 2005, Accredited 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 Assessment 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 and will continue to experience a
reduction in the amount of 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.

# Year Ended July 31, 2006
Compared to Year Ended July 31, 2005

Net
Patient Revenue. For the fiscal year ended July 31, 2006 (fiscal
2006), net patientrevenue increased $3,904,000, or 4.0%, to $102,365,000
from $98,461,000 for the fiscal year ended July 31, 2005 (fiscal 2005) This
increase was attributable to (i) an increase of $2,741,000 in New Jersey as a result of
the acquisition of Helping Hands and (ii) an increase of $6,145,000 resulting from the
expansion of operations in Massachusetts and additional hours being subcontracted in New
York. The increase in net patient revenue was offset by a decrease in Connecticut of
$4,982,000, primarily the result of the above-mentioned inspections by the DPH, the
elimination of small margin revenue and the results of the above-mentioned audit by DSS.

Gross
Profit. Gross profit margin decreased to 33.3% for fiscal 2006 from 33.9%
for fiscal 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 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 increased
$1,448,000, or 5.5%, to $27,613,000 in fiscal 2006 from $26,165,000 in fiscal 2005. This
increase is primarily attributable to (i) increases in administrative personnel and
occupancy related costs resulting from the acquisition of Helping Hands in New Jersey,
(ii) increased legal and consulting fees as a result of the above-mentioned inspections in
Connecticut and the union election in New Jersey and (iii) increases in administrative
personnel in Massachusetts and New York resulting from the expansion of operations. As a
percentage of net patient revenue, general and administrative expenses increased to 27.0%
in fiscal 2006 from 26.6% in fiscal 2005.

Allowance
for Possible Losses. The Company recorded an allowance for possible losses
of $559,000 in fiscal 2006 as compared to $1,280,000 in fiscal 2005. The Company had set
up allowances for accounts receivable balances relating to two Medicare certified agencies
in fiscal 2004. Both of these agencies filed for Chapter 11 bankruptcy protection during
fiscal 2005, resulting in the Company recording an allowance of 75% on these two accounts
receivable balances. During fiscal 2006, the Company sold one of these receivables for
60.5% of its accounts receivable balance. The other receivable remains, pending the
outcome of the bankruptcy proceeding.

-23-



---

Amortization
of Intangibles.Amortization of intangibles decreased $176,000, or 30.3%,
to $404,000 in fiscal 2006 from $580,000 in fiscal 2005. This decrease is attributable to
intangibles from previous acquisitions that have now been fully amortized.

Income
from Operations. As a result of the foregoing, income from operations
increased $173,000, or 3.2%, to $5,544,000 in fiscal 2006 from $5,371,000 in fiscal 2005.

Interest
Income. Interest income increased $256,000, or 93.1% to $531,000 in fiscal
2006 from $275,000 in fiscal 2005. This increase is attributable to higher cash balances
of the Company during the fiscal year and higher interest rates.

Income
Taxes. The Companys effective tax rate increased to 39.8% in fiscal
2006 as compared to 36.8% in fiscal 2005. This increase is attributable to a decrease in
work opportunity tax credits in fiscal 2006 and an over accrual of taxes recorded in
fiscal 2004 that reduced income taxes in fiscal 2005.

Net
Income. Net income increased $88,000, or 2.5%, to $3,655,000, or $.64 per
diluted share, in fiscal 2006 from $3,567,000, or $.62 per diluted share, in fiscal 2005.

# Year Ended July 31, 2005
Compared to Year Ended July 31, 2004

Net
Patient Revenue. For the fiscal year ended July 31, 2005, net patientrevenue increased $3,869,000, or 4.0%, to $98,461,000 from $94,592,000 for the fiscal
year ended July 31, 2004 (fiscal 2004). This increase was attributable to an
increase in net patient revenue of $6,726,000 resulting from the Companys expansion
in New Jersey, Connecticut and Massachusetts, offset by (i) a decrease of $1,431,000 as a
result of fewer hours being subcontracted to the Company from other Medicare certified
agencies in New York and the Company terminating operations in Suffolk County, New York in
May 2004, and (ii) a decrease of $1,426,000 in staffing revenue primarily as a result of
the Company terminating its staffing operations in New York and New Jersey during fiscal
2004. The increase in Connecticut was partially attributable to increased Medicaid
reimbursement rates for certain nursing visits effective May 1, 2004 and the acquisition
of On Duty. The increase in New Jersey was partially attributable to the acquisition of
Helping Hands.

Gross
Profit. Gross profit margin decreased to 33.9% for fiscal 2005 from 34.6%
for fiscal 2004. This decrease is attributable to (i) higher wages paid to home health
aides in New York as a result of the union contract that was effective May 1, 2004, (ii)
the increase in the minimum wage in New York that was effective January 1, 2005, (iii) 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, (iv) increases in direct payments
to all caregivers and increased worker compensation costs and (v) the retroactive amount
of $916,000 received in fiscal 2004.

General
and Administrative. General and administrative expenses increased
$2,662,000, or 11.3%, to $26,165,000 in fiscal 2005 from $23,503,000 in fiscal 2004. This
increase is primarily attributable to (i) increased administrative personnel in
Connecticut to cure the deficiencies resulting from the DPH survey, (ii) increased legal
and consulting fees in Connecticut resulting from the DPH survey, (iii) increases in
administrative personnel and occupancy costs resulting from the expansion of operations in
New Jersey and Massachusetts, (iv) the acquisitions of On Duty and Helping Hands and (v)
professional fees incurred resulting from the union activities in New Jersey. As a
percentage of net patient revenue, general and administrative expenses increased to 26.6%
in fiscal 2005 from 24.8% in fiscal 2004.

-24-



---

Allowance
for Possible Losses. The Company recorded an allowance for possible losses
of $1,280,000 in fiscal 2005 as compared to $1,112,000 in fiscal 2004. The Company had set
up allowances for accounts receivable balances relating to two Medicare certified agencies
in fiscal 2004, as the Company anticipated not receiving certain payments in accordance
with contract terms. One of these agencies filed for Chapter 11 bankruptcy protection
during fiscal 2005 and the other agency filed for bankruptcy protection on September 30,
2005. The Company recorded an allowance of 75% on these two accounts receivable balances.

Amortization
of Intangibles.Amortization of intangibles increased $70,000, or 13.7%, to
$580,000 in fiscal 2005 from $510,000 in fiscal 2004. This increase is attributable to the
acquisitions of On Duty and Helping Hands.

Income
from Operations. As a result of the foregoing, income from operations
decreased $2,246,000, or 29.5%, to $5,371,000 in fiscal 2005 from $7,617,000 in fiscal
2004.

Interest
Income. Interest income increased $132,000, or 92.3% to $275,000 in fiscal
2005 from $143,000 in fiscal 2004. This increase is attributable to higher cash balances
of the Company during the fiscal year and increased interest rates.

Income
Taxes. The Companys effective tax rate decreased to 36.80% in fiscal
2005 as compared to 39.2% in fiscal 2004. This decrease is attributable to an increase in
work opportunity tax credits in fiscal 2005 and an over accrual of taxes recorded in
fiscal 2004.

Net
Income. Net income decreased $1,153,000, or 24.4%, to $3,567,000, or $.62
per diluted share, in fiscal 2005 from $4,720,000, or $.83 per diluted share, in fiscal
2004.

# Financial Condition,
Liquidity and Capital Resources

Current
assets increased to $39,389,000 and current liabilities decreased to $4,356,000 at July
31, 2006. These changes resulted in an increase in working capital of $2,304,000 to
$35,033,000 at July 31, 2006 from $32,729,000 at July 31, 2005. Cash and cash equivalents
increased $3,117,000 to $19,301,000 at July 31, 2006 from $16,184,000 at July 31, 2005.
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.

Net
cash provided by operating activities was $5,367,000 in fiscal 2006 as compared with
$2,676,000 in fiscal 2005. The increase in cash provided by operating activities of
$2,691,000, or 100.1%, is attributable to a decrease in operating assets, primarily
accounts receivable, of $3,134,000 and an increase in operating liabilities of $114,000,
offset by a decrease in operating cash flow of $557,000 over fiscal 2005.

Investing
activities in fiscal 2006 used cash of $536,000 as compared to $5,415,000 in fiscal 2005.
The cash used in investing activities in fiscal 2006 consisted of the purchase of
equipment, offset by the proceeds from the sale of investments. The cash used in investing
activities in fiscal 2005 consisted of the purchase of businesses and the purchase of
equipment.

-25-



---

Financing
activities in fiscal 2006 used cash of $1,714,000 as compared to $1,262,000 in fiscal
2005. The cash used in financing activities in fiscal 2006 consisted of the purchase of
treasury shares and the payment of cash dividends. The cash used in financing activities
in fiscal 2005 consisted of the purchase of treasury shares and the payment of cash
dividends, offset by the proceeds from the exercise of stock options.

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 in fiscal 2006, as compared to 75 days in fiscal 2005.

The
Company closed on a new $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 July 31, 2006, there was no outstanding
balance under the credit facility. Borrowings are secured by a pledge of all of the 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 data input capability regarding services rendered
at certain locations. The Company believes that these expenditures 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.

In
the opinion of management, there will be no material impact on the financial statements of
the Company from any recently issued accounting standards.

# Inflation and Seasonality

The
rate of inflation had no material effect on operations for fiscal 2006. The effects of
inflation on personnel costs in the future could have an adverse effect on operations, as
the Company may not be able to increase its charges for services rendered. The
Companys business is not seasonal.

# Contractual Obligations

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

-26-



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|                 | Payments due by period
|---------------- | ----------------------
|
|Operating Leases |                       
|                
|Total            |                       
|                

# Item 7A. Quantitative
and Qualitative Disclosures About Market Risk.

None.

# Item 8. Financial
Statements and Supplementary Data.

The
financial information required by this item is set forth in the Consolidated Financial
Statements on pages F-1 through F-30.

# Item 9.
          Changes in and Disagreements With Accountants On Accounting and Financial
Disclosure.

None.

# Item 9A. Controls and
Procedures.

# Evaluation of Disclosure
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
rules and forms of the Securities and Exchange Commission (the SEC), 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 judgment in assessing the costs and benefits of such controls
and procedures, which, by their nature, can provide only reasonable assurance regarding
managements control objectives. Management believes that there are reasonable
assurances that our 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 July 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

-27-



---

controls and procedures are effective
in timely alerting them to material information relating to the Company (and its
consolidated 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 July 31, 2006
that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

# Item 9B. Other
Information.

None.

# PART III

The
information required by each of the items of Part III (Items 10, 11, 12, 13 and 14) is
omitted from this Report. Pursuant to the General Instruction G(3) to Form 10-K, the
information will be included in the Companys Proxy Statement for its 2006 Annual
Meeting of Stockholders and is incorporated herein by reference. The Company intends to
file such Proxy Statement with the SEC not later than 120 days subsequent to July 31,
2006.

# Item 10. Directors and
Executive Officers of the Registrant.

# Item 11. Executive
Compensation.

# Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

# Item 13. Certain
Relationships and Related Transactions.

# Item 14. Principal
Accountant Fees and Services.

# PART IV

# Item 15. Exhibits and
Financial Statement Schedules.

(a)       
          The following represents a listing of all financial statements, financial
          statement schedules and exhibits filed as part of this Report:

Pages
F-1 through F-30: Financial Statements and Supplemental Material (see index to the
consolidated financial statements).

| | ExhibitNumber |  | Document
| | ------------- |  | --------

| | 3.1 |  | Certificate
of Incorporation.  Incorporated by reference to the Registrant's  Registration
                        Statement on Form S-1 (No. 2-86643) filed September 20, 1983.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-28-



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| | ExhibitNumber |  | Document
| | ------------- |  | --------

| | 3.2 |  | Certificate
 of Amendment to Certificate of  Incorporation.  Incorporated  by reference to
                        the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1992.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 |  | Amended
 By-laws.  Incorporated  by reference to the  Registrant's  Annual  Report on Form
                        10-K for the fiscal year ended July 31, 2004.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1# |  | 1992
Stock Option Plan.  Incorporated  by reference to the  Registrant's  Annual Report on
                        Form 10-K for the fiscal year ended July 31, 1993.
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2# |  | 1999
Stock Option Plan.  Incorporated  by reference to the  Registrant's  Annual Report on
                        Form 10-K for the fiscal year ended July 31, 2000.
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3# |  | Amended
 and  Restated  Employment  Agreement  dated as of  November  1, 2006  between the
                        Registrant  and  Frederick H.  Fialkow.  Incorporated  by
 reference  to the  Registrant's                         Quarterly  Report on Form 10-Q
for the  fiscal  quarter  ended  January  31,  2002 and the
                        Registrant's Current Report on Form 8-K dated August 16, 2006.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4# |  | Employment
 Agreement  dated as of  August 1,  2005  between  the  Registrant  and  Steven
                        Fialkow.  Incorporated  by reference to the  Registrant's  Annual
 Report on Form 10-K for                         the fiscal year ended July 31, 2005.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5# |  | Employment
 Agreement  dated as of August 1, 2005  between  the  Registrant  and Robert P.
                        Heller.  Incorporated by reference to the Registrant's  Annual
Report on Form 10-K for the                         fiscal year ended July 31, 2005.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6 |  | Credit
 Agreement  dated as of April 28,  2006,  by and among  National  HMO (N.Y.)  Inc.,
                        Health Acquisition Corp., New England Home Care, Inc.,
 Accredited Health Services,  Inc.,                         Medical Resources Home Health
Corp., and Connecticut  Staffing Works Corp.  (collectively,                         the
"Subsidiaries"),  as borrowers,  the Company, as guarantor,  and Bank of America, N.A.
                        (the "Bank"), as lender.  Incorporated by reference to the
Registrant's  Current Report on                         Form 8-K dated June 20, 2006.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 |  | Promissory
Note dated April 28, 2006 in the amount of $7,500,000 from the  Subsidiaries to
                        the Bank.  Incorporated by reference to the Registrant's  Current
Report on Form 8-K dated                         June 20, 2006.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 |  | Guarantee
 dated April 28, 2006 from the Company to the Bank.  Incorporated  by  reference
                        to the Registrant's Current Report on Form 8-K dated June 20,
2006.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 |  | Security
 Agreement  dated  as of  April  28,  2006  by and  among  the  Subsidiaries,  as
                        borrowers, the Company, as guarantor,  and the Bank, as lender.
 Incorporated by reference                         to the Registrant's Current Report on
Form 8-K dated June 20, 2006.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-29-



---

| | ExhibitNumber |  | Document
| | ------------- |  | --------

| | 21.1* |  | List
of Subsidiaries.
| | ----- |  | ---------------------

| | 23.1* |  | Consent
of Independent Registered Public Accounting Firm.
| | ----- |  | ---------------------------------------------------------

| | 31.1* |  | Rule
13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
| | ----- |  | ----------------------------------------------------------------------

| | 31.2* |  | Rule
13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
| | ----- |  | ----------------------------------------------------------------------

| | 32.1* |  | Section
1350 Certification of Principal Executive Officer.
| | ----- |  | ----------------------------------------------------------

| | 32.2* |  | Section
1350 Certification of Principal Financial Officer.
| | ----- |  | ----------------------------------------------------------

_________________

|# |  | Management
contract or compensatory plan or arrangement.\
|- |  | ---------------------------------------------------------

|* |  | Filed
herewith.
|- |  | ---------------

-30-



---

SIGNATURES

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

| | NATIONAL HOME HEALTH CARE CORP./s/ Robert P. Heller
By:        Robert P. Heller
              Vice President of Finance
              and Chief Financial Officer
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: October 27, 2006

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|SIGNATURE                | TITLE                                       | DATE            
|------------------------ | ------------------------------------------- | ----------------
|/s/ Frederick H. Fialkow | Chairman of the Board of Directors          | October 27, 2006
|Frederick H. Fialkow     |                                             |                 
|                        
|/s/ Steven Fialkow       | President, Chief Executive Officer,         | October 27, 2006
|                         | Secretary and Director (principal executive |                 
|Steven Fialkow           | officer)                                    |                 
|                        
|/s/ Robert P. Heller     | Vice President of Finance, Chief Financial  | October 27, 2006
|                         | Officer and Treasurer (principal financial  |                 
|Robert P. Heller         | and accounting officer)                     |                 
|                        

-31-

---

|                   
|-------------------
|/s/ Ira Greifer    
|Ira Greifer, M.D   
|                   
|/s/ Bernard Levine 
|Bernard Levine, M.D
|                   
|/s/ Robert Pordy   
|Robert Pordy, M.D  
|                   
|/s/ Harold Shulman 
|Harold Shulman     
|                   

-32-



---

# NATIONAL HOME HEALTH
CARE CORP.AND SUBSIDIARIES



CONSOLIDATED FINANCIAL
STATEMENTSAND
SUPPLEMENTAL MATERIALYEARS ENDED JULY
31, 2006, 2005 AND 2004

---

# National Home Health
Care Corp.and Subsidiaries



# Consolidated Financial
Statements and Supplemental Material  Years Ended July 31,
2006, 2005 and 2004

F-1



---

National Home Health
Care Corp.  and Subsidiaries

Contents

|                                                                       |        
|---------------------------------------------------------------------- | -------
|Report of Independent Registered Public Accounting Firm                | F-3    
|                                                                      
|CONSOLIDATED FINANCIAL STATEMENTS:                                    
|Balance sheets                                                         | F-4    
|Statements of earnings                                                 | F-5    
|Statements of changes in stockholders' equity                          | F-6    
|Statements of cash flows                                               | F-7    
|Summary of accounting policies                                         | F-8-14 
|Notes to consolidated financial statements                             | F-15-28
|                                                                      
|SUPPLEMENTAL MATERIAL:                                                
|Report of Independent Registered Public Accounting Firm on Schedule II | F-29   
|Schedule II - Valuation and Qualifying Accounts                        | F-30   

F-2



---

# Report of Independent
Registered Public Accounting Firm

Board of Directors and
StockholdersNational Home Health Care Corp.Scarsdale, New York

We have audited the accompanying consolidated
balance sheets of National Home Health Care Corp. and Subsidiaries as of July 31, 2006 and
2005 and the related consolidated statements of earnings, changes in stockholders
equity, and cash flows for each of the three years in the period ended July 31, 2006.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of National Home Health Care Corp. and Subsidiaries at July 31, 2006
and 2005, and the results of their operations and their cash flows for each of the three
years in the period ended July 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.

Valhalla, New YorkOctober
17, 2006

F-3



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National Home Health
Care Corp.  and Subsidiaries

Consolidated Balance
Sheets

|                                                                   |  | 
|------------------------------------------------------------------ |  | 
|July 31,                                                           |  | 
|                                                                   |  | 
|Assets                                                             |  | 
|Current:                                                           |  | 
|Cash, (including cash equivalents of $19,289,000 and $12,023,000,  |  | 
|respectively) (Note 7)                                             |  | 
|Investments                                                        |  | 
|Accounts receivable, less allowance for possible losses of         |  | 
|$1,419,000 and $1,866,000, respectively (Note 7)                   |  | 
|Prepaid expenses and other                                         |  | 
|Income taxes receivable                                            |  | 
|Deferred income taxes (Note 6)                                     |  | 
|                                                                   |  | 
|Total Current Assets                                               |  | 
|                                                                   |  | 
|Furniture, Equipment and Leasehold Improvements, Net (Note 1)      |  | 
|Goodwill (Note 2)                                                  |  | 
|Other Intangible Assets, Net (Note 3)                              |  | 
|Deposits and Other Assets                                          |  | 
|                                                                   |  | 
|                                                                   |  | 
|                                                                   |  | 
|Liabilities and Stockholders' Equity                               |  | 
|Current Liabilities:                                               |  | 
|Accounts payable and accrued expenses (Note 4)                     |  | 
|Estimated third-party payer settlements                            |  | 
|Deferred revenue                                                   |  | 
|Dividend payable                                                   |  | 
|Income taxes payable                                               |  | 
|                                                                   |  | 
|Total Current Liabilities                                          |  | 
|                                                                   |  | 
|Commitments and Contingencies (Note 9)                             |  | 
|Stockholders' Equity (Note 8) :                                    |  | 
|Common stock, $.001 par value, shares authorized - 20,000,000;     |  | 
|issued 7,125,544                                                   |  | 
|Additional paid-in capital                                         |  | 
|Retained earnings                                                  |  | 
|                                                                   |  | 
|                                                                   |  | 
|Less treasury stock (1,462,953 and 1,461,360 shares, respectively) |  | 
|- at cost (Note 10)                                                |  | 
|                                                                   |  | 
|Total Stockholders' Equity                                         |  | 
|                                                                   |  | 
|                                                                   |  | 
|                                                                   |  | 

See accompanying
summary of accounting policiesand notes to consolidated financial statements.

F-4



---

National Home Health
Care Corp.  and Subsidiaries

Consolidated Statements
of Earnings

|                                               |  |  |  
|---------------------------------------------- |  |  | -
|Years ended July 31,                           |  |  |  
|                                               |  |  |  
|Net Patient Revenue (Note 7)                   |  |  | $
|                                               |  |  |  
|Operating Expenses:                            |  | 
|Cost of revenue                                |  |  |  
|General and administrative                     |  |  |  
|Allowance for possible losses                  |  |  |  
|Amortization of intangibles                    |  |  |  
|                                               |  |  |  
|Total Operating Expenses                       |  |  |  
|                                               |  |  |  
|Income From Operations                         |  |  |  
|Other Income:                                  |  | 
|Interest                                       |  |  |  
|                                               |  |  |  
|Income Before Income Taxes                     |  |  |  
|Provision for Income Taxes (Note 6)            |  |  |  
|                                               |  |  |  
|Net Income                                     |  |  | $
|                                               |  |  |  
|Net Income Per Common Share:                   |  | 
|Basic                                          |  |  | $
|Diluted                                        |  |  | $
|Weighted Average Number of Shares Outstanding: |  | 
|Basic                                          |  |  |  
|Diluted                                        |  |  |  
|Dividends declared per share                   |  |  | $
|                                               |  |  |  

See accompanying
summary of accounting policiesand notes to consolidated financial statements.

F-5



---

National Home Health
Care Corp.  and Subsidiaries

Consolidated Statements
of Changes in Stockholders Equity

|                                       | Common Stock |  |  | Treasury Stock | 
|-------------------------------------- | ------------ |  |  | -------------- | 
|
|Balance, July 31, 2003                 |              |  |  | 6,903,819      | 
|Net income                             |              |  |  | -              | 
|Exercise of stock options              |              |  |  | 137,569        | 
|Tax benefit of stock options exercised |              |  |  | -              | 
|Acquisition of treasury shares         |              |  |  | -              | 
|                                       |              |  |  |                | 
|Balance, July 31, 2004                 |              |  |  | 7,041,388      | 
|Net income                             |              |  |  | -              | 
|Exercise of stock options              |              |  |  | 84,156         | 
|Tax benefit of stock option exercised  |              |  |  | -              | 
|Acquisition of treasury shares         |              |  |  | -              | 
|Dividends on common stock              |              |  |  | -              | 
|                                       |              |  |  |                | 
|Balance, July 31, 2005                 |              |  |  | 7,125,544      | 
|Net income                             |              |  |  | -              | 
|Acquisition of treasury shares         |              |  |  | -              | 
|Dividends on common stock              |              |  |  | -              | 
|                                       |              |  |  |                | 
|Balance, July 31, 2006                 |              |  |  | 7,125,544      | 
|                                       |              |  |  |                | 

See accompanying
summary of accounting policiesand notes to consolidated financial statements.

F-6



---

National Home Health
Care Corp.  and Subsidiaries

Consolidated Statements
of Cash Flows

|                                                         |  |  |  
|-------------------------------------------------------- |  |  | -
|Years ended July 31,                                     |  |  |  
|                                                         |  |  |  
|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 write-offs         |  |  |  
|Loss on sale of assets                                   |  |  |  
|Gain on investments                                      |  |  |  
|Deferred income taxes                                    |  |  |  
|Tax benefit realized from the exercise of stock          |  |  |  
|options                                                  |  | 
|Changes in assets and liabilities:                       |  | 
|Accounts receivable                                      |  |  |  
|Prepaid expenses and other                               |  |  |  
|Income taxes payable                                     |  |  |  
|Accounts payable and accrued expenses                    |  |  |  
|Estimated third-party payer settlements                  |  |  |  
|Deferred revenue                                         |  |  |  
|                                                         |  |  |  
|Net cash provided by operating activities                |  |  |  
|                                                         |  |  |  
|Cash Flows From Investing Activities:                    |  | 
|Purchase of property, plant and equipment                |  |  |  
|Proceeds from sale of investments                        |  |  |  
|Purchase of assets of businesses                         |  |  |  
|                                                         |  |  |  
|Net cash used in investing activities                    |  |  |  
|                                                         |  |  |  
|Cash Flows From Financing Activities:                    |  | 
|Purchase of treasury shares                              |  |  |  
|Proceeds from exercise of stock options                  |  |  |  
|Payment of dividends                                     |  |  |  
|                                                         |  |  |  
|Net cash provided by (used in) financing activities      |  |  |  
|                                                         |  |  |  
|Net increase (decrease) in cash and cash equivalents     |  |  |  
|Cash and cash equivalents, beginning of year             |  |  |  
|                                                         |  |  |  
|Cash and cash equivalents, end of year                   |  |  | $
|                                                         |  |  |  
|Supplemental disclosure of cash flow information:        |  | 
|Cash paid for:                                           |  | 
|Interest                                                 |  |  | $
|Income taxes                                             |  |  | $
|                                                         |  |  |  
|Dividends declared and not paid                          |  |  | $
|                                                         |  |  |  

See accompanying
summary of accounting policiesand notes to consolidated financial statements.

F-7



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National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|Business | National Home Health Care Corp. and subsidiaries (the Company)
is a provider of home health care services, including nursing care, personal care,
supplemental staffing and other specialized health services in the North Eastern part of
the United States.
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Principles
 of Consolidation | The consolidated financial statements include the accounts of
National Home Health Care Corp. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the consolidated financial
statements.
|---------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Revenue
 Recognition and Allowance for Possible Losses | Net patient revenues are recorded
at estimated net realizable amounts from patients, third-party payers and others for
services rendered. An allowance  for
possible losses is recorded based upon managements evaluation of current industry
conditions, historical collection experience and other relevant factors which, in the
opinion of management, require recognition in estimating the allowance.
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
Medicaid, Medicare and other reimbursement programs, the Company is reimbursed for
services rendered to covered program patients as determined by reimbursement formulas and
regulations. Laws and regulations governing these programs are complex and subject to
interpretation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is reimbursed by Medicare based on episodes of care. An episode of care is
defined as a length of care up to sixty days with multiple continuous episodes allowed.
Deferred revenue represents the unearned cash received from an episode of care.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Approximately
51%, 51% and 48% of net patient revenue for the fiscal years ended July 31, 2006, 2005
and 2004, respectively, were derived under federal and state third-party reimbursement
programs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8



---

National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|Cash
 and Cash Equivalents | For the purposes of the statements of cash flows, the
Company considers all highly liquid investment instruments purchased with a maturity of
three months or less to be cash equivalents.
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Furniture,
Equipment and Leasehold Improvements | Furniture, equipment and leasehold improvements are stated at
cost. Depreciation is being provided on the straight-line method over
the estimated  useful
lives of the assets (generally five to ten years). Amortization of leasehold improvements
is being provided on the straight-line method over the various lease terms or estimated
useful lives, if shorter.
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Goodwill | The Company follows Statement of Financial  Accounting
 Standards  ("SFAS") No.                                       141,  "Business
 Combinations" and No. 142,  "Goodwill and Intangible  Assets."
                                      SFAS  No.  141  requires  the use of the  purchase
 method  of  accounting  and                                       prohibits the use of
the  pooling-of-interests  method of accounting.  SFAS No.
                                      141 also requires that the Company recognize
 acquired  intangible assets apart                                       from goodwill if
the acquired intangible assets meet certain criteria.
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 142 requires, among other things, that companies no longer amortize goodwill, but
instead test goodwill for impairment at least annually. In addition, SFAS No. 142
requires that the Company identify reporting units for the purpose of assessing potential
future impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets and cease amortization of intangible assets with an indefinite useful
life.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net
 Income Per Common Share | Basic net income per common share is computed by
dividing net income available to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per common share reflect, in periods in which
they have a dilutive effect, the impact of common shares issuable upon exercise of stock
options.
|---------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9



---

National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|Net
Income Per Common Share (continued) | The reconciliation for the years ended July 31, 2006, 2005
and 2004 is as follows:
|--------------------------------------- | ----------------------------------------------------------------------------------

|                                       |  |  | 
|-------------------------------------- |  |  | 
|Years ended July 31,                   |  |  | 
|                                       |  |  | 
|                                       |  |  | 
|                                       |  |  | 
|Average number of shares outstanding   |  |  | 
|Effect of dilutive securities - common |  | 
|stock options                          |  |  | 
|                                       |  |  | 
|Diluted shares outstanding             |  |  | 
|                                       |  |  | 

| | The
number of options that were anti-dilutive and excluded from the computation was 152,250
for the year ended July 31, 2006, 157,500 for the year ended July 31, 2005 and 168,000
for the year ended July 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fair
 Value of Financial Instruments | The carrying amounts reported in the
consolidated balance sheets for cash and accounts receivable approximate fair value
because of the immediate or short-term maturity of the financial instruments.
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Estimated
Third-PartyPayer Settlement | The amount represents overpayments from certain third-party payers.
The Company anticipates that the third-party payers will recoup these
funds in subsequent
periods.
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Use
 of Estimates | The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such estimates relate
primarily to valuation reserves for accounts receivable.
|----------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10



---

National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|WorkersCompensation | The
Company self-insures up to specified limits certain risks related to workers compensation
liability. The estimated costs of existing and expected future claims under the insurance
program are accrued based upon historical loss trends and may be subsequently revised
based on developments relating to such claims.
|-------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Income
 Taxes | The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the Companys
financial statements or tax returns. The effect on deferred tax assets and liabilities of
changes in tax rates will be recognized as income or expense in the period that includes
the enactment date. The Company files a consolidated Federal income tax return with its
subsidiaries.
|------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Long-Lived
 Assets | Long-lived assets, such as intangible assets, furniture, equipment and
leasehold improvements, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable
through estimated undiscounted future cash flows from the use of these assets. When any
such impairment exists, the related assets will be written down to fair value.
|------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11



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National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|Stock-Based
Compensation | In December of 2004, the Financial Accounting Standards Board
issued SFAS No. 123 (revised), Share Based Payment. SFAS No. 123R provides
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The Company adopted SFAS No.
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 No. 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 No. 123R,
applying the modified prospective method, as elected by the Company, requires
the Company to value stock options prior to its adoption of SFAS No. 123R under the fair
value method and expense these amounts over the remaining vesting period of the stock
options. SFAS No. 123R requires that the Company estimate forfeitures for stock options
and reduce compensation expense accordingly. The adoption of SFAS No. 123R did not have
any impact on the Companys overall results of operations for the twelve months
ended, or financial position as of July 31, 2006. Prior to the adoption of SFAS No. 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
|------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12



---

National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|Stock-Based
Compensation(continued) | stock options equaled the market price of the underlying stock on the
date of grant, no compensation expense was recognized.
|----------------------------------- | ----------------------------------------------------------------------------------------------------------------------------

|                        |  |  |     
|----------------------- |  |  | ----
|Years ended July 31,    |  |  | 2006
|                        |  |  |     
|Assumptions             |  | 
|Dividend Yield          |  |  | -   
|Volatility              |  |  | -   
|Risk free interest rate |  |  | -   
|Expected lives          |  |  | -   
|                        |  |  |     

| | Under
the accounting  provisions of SFAS No. 123R, the Company's net income and
                                      net  income  per share  would  have  been  adjusted
 to the pro  forma  amounts                                       indicated below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |  | 
|-------------------------------- |  | 
|Years ended July 31,             |  | 
|                                 |  | 
|Pro forma results                |  | 
|Net income:                      |  | 
|As reported                      |  | 
|Pro forma                        |  | 
|Income per common share-basic:   |  | 
|As reported                      |  | 
|Pro forma                        |  | 
|Income per common share-diluted: |  | 
|As reported                      |  | 
|Pro forma                        |  | 
|                                 |  | 

| | (a)
No pro forma since options were not granted and no options vested during
                                     the period.
| | -----------------------------------------------------------------------------------------------------------------------------

|Segments | The
Companys management considers its business to be a single segment  Home
Healthcare Services. Home Healthcare Services net patient revenue is provided by health
care personnel, and the Companys customers are similar for all sources of net
patient revenue. Management evaluates its operating results on an integrated basis.
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13



---

National Home Health
Care Corp.  and Subsidiaries

Summary of Accounting
Policies

|Recent
 Accounting Pronouncements | In the opinion of management, there will be no
material impact on the financial statements of the Company from any recently issued
accounting standards.
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|Reclassifications | Certain
reclassifications have been made in prior years financial statements to conform to
classifications used in the current year.
|----------------- | -------------------------------------------------------------------------------------------------------------------------------------

F-14



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|1. | Furniture,
Equipment and Leasehold Improvements |  | Furniture, equipment and
leasehold improvements are                stated at cost and are summarized as follows:
|-- | ----------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------

|                                  |  | 
|--------------------------------- |  | 
|July 31,                          |  | 
|                                  |  | 
|Furniture and equipment           |  | 
|Leasehold improvements            |  | 
|                                  |  | 
|                                  |  | 
|Less accumulated depreciation and |  | 
|amortization                      |  | 
|                                  |  | 
|                                  |  | 
|                                  |  | 

| | Depreciation
expense in 2006, 2005 and 2004 was $550,000, $406,000 and $337,000, respectively.
| | ----------------------------------------------------------------------------------------------

|2. | Goodwill |  | Changes
in goodwill are as follows:
|-- | -------- |  | -----------------------------------

|                           |  | 
|-------------------------- |  | 
|July 31,                   |  | 
|                           |  | 
|Balance, beginning of year |  | 
|Additions (Note 5)         |  | 
|                           |  | 
|Balance, end of year       |  | 
|                           |  | 

F-15



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|3. | Other
Intangible Assets |  | Other intangible assets are as follows:
|-- | ----------------------- |  | ---------------------------------------

|                          |  | 
|------------------------- |  | 
|July 31,                  |  | 
|                          |  | 
|Gross Carrying Amount:    |  | 
|Covenants not to compete  |  | 
|Patient and other files   |  | 
|Contracts                 |  | 
|                          |  | 
|                          |  | 
|                          |  | 
|Accumulated amortization: |  | 
|Covenants not to compete  |  | 
|Patient and other files   |  | 
|Contracts                 |  | 
|                          |  | 
|                          |  | 
|                          |  | 
|Balance, end of year      |  | 
|                          |  | 

| | The
aggregated amortization expense for the years ended July 31, 2006, 2005 and 2004 was
$404,000, $580,000 and $510,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Estimated
amortization expense is as follows:
| | ---------------------------------------------

|                      |  | 
|--------------------- |  | 
|Years ending July 31, |  | 
|                      |  | 
|2007                  |  | 
|2008                  |  | 
|2009                  |  | 
|2010                  |  | 
|2011                  |  | 
|                      |  | 
|                      |  | 
|                      |  | 

F-16



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|3. | Other
Intangible Assets (continued) |  | The
remaining weighted average amortization period is as follows:
|-- | ----------------------------------- |  | -----------------------------------------------------------------

|                         | 
|------------------------ | 
|Year ended July 31, 2006 | 
|                         | 
|Covenants not to compete | 
|Patient and other files  | 
|Contracts                | 
|                         | 
|                         | 
|                         | 

| | Other
intangible assets are being amortized using the straight-line method over a period of
three to ten years.
| | ---------------------------------------------------------------------------------------------------------------

|4. | Accounts
Payable and Accrued
Expenses |  | Accounts payable and accrued expenses are as
follows:
|-- | ------------------------------------- |  | -----------------------------------------------------

|                          |  | 
|------------------------- |  | 
|July 31,                  |  | 
|                          |  | 
|Trade accounts payable    |  | 
|Accrued employee          |  | 
|compensation and benefits |  | 
|Accrued expenses          |  | 
|Other                     |  | 
|                          |  | 
|                          |  | 
|                          |  | 

F-17



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|5. | Acquisitions |  | On
October 6, 2004, the Company acquired certain assets of                On Duty
Metropolitan Connecticut, LLC for $1,078,000 in cash, including
               acquisition costs of $103,000. The assets purchased consisted of furniture
and                equipment of $10,000, a covenant not to compete of $75,000 and
goodwill of                $993,000.
|-- | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 22, 2005, the Company acquired certain assets of Helping Hands Health Care for
$3,171,000 in cash, including acquisition costs of $152,000. The assets purchased
consisted of furniture and equipment of $10,000, deferred and other assets of $19,000, a
covenant not to compete of $300,000 and goodwill of $2,842,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
above acquisitions have been recorded using the purchase method of accounting.
Accordingly, the results of these operations have been included in the accompanying
consolidated financial statements since the dates of acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effects of each of the above acquisitions on the consolidated results of operations were
not significant.
| | -------------------------------------------------------------------------------------------------------------

F-18



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

| | The
 provision for income taxes is summarized as follows:
| | ---------------------------------------------------------

|                     |  |  |  
|-------------------- |  |  | -
|Years ended July 31, |  |  |  
|                     |  |  |  
|Current:             |  | 
|Federal              |  |  | $
|State                |  |  |  
|                     |  |  |  
|                     |  |  |  
|Deferred             |  |  |  
|                     |  |  |  
|                     |  |  | $
|                     |  |  |  

| | The
deferred tax asset consists of the following:
| | -------------------------------------------------

|                                 |  | 
|-------------------------------- |  | 
|July 31,                         |  | 
|                                 |  | 
|Current:                         |  | 
|Accrued liabilities and reserves |  | 
|Fixed assets and intangibles     |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 

| | The
reconciliation of the statutory tax rate to the effective tax rate is as follows:
| | -------------------------------------------------------------------------------------

|                            |  |  | 
|--------------------------- |  |  | 
|Years ending July 31,       |  |  | 
|                            |  |  | 
|Statutory rate              |  |  | 
|State and local taxes       |  | 
|(net of federal tax effect) |  |  | 
|Federal tax credit          |  |  | 
|Other                       |  |  | 
|                            |  |  | 
|Effective rate              |  |  | 
|                            |  |  | 

F-19



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|7. | Concentrations
of Credit Risk and Major Customers |  | The Companys business is with customers who are in the
healthcare industry or with governmental agencies.The
Company provides temporary health care personnel to in-home patients and facilities in
the New York City metropolitan area, Connecticut, New Jersey and Massachusetts. Credit
losses relating to customers have been within managements expectations.
|-- | ------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
July 31, 2006, the Company maintained approximately 51% of its cash and cash equivalents
with one financial institution.
| | ---------------------------------------------------------------------------------------------------------------------------

| | Under certain federal and state third-party reimbursement programs, the Company received net
patient revenue of approximately $52,472,000, $50,522,000 and $45,159,000 for the years
ended July 31, 2006, 2005 and 2004, respectively. At July 31, 2006 and 2005, the Company
had aggregate outstanding receivables from federal and state agencies of $5,741,000 and
$6,643,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | Stock
Options |  | In 1992, the Company adopted an Employee Stock Option Plan
               (the Plan) designed to provide incentives to key employees and
to                non-employee directors of the Company. The Plan expired in July of
2002. Options                granted under the Plan expire not more than ten years from
the date of grant and                vested immediately.
|-- | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20



---

|8. | Stock Options
(Continued) |  | In 1999,  the Company  adopted a second  Employee  Stock Option
Plan (the "1999                Plan").  The  1999  Plan  was  also  designed  to  provide
 incentives  to  key  employees (including directors and officers who are key
employees) and to non-employee directors of the Company. The Plan authorizes the granting
of both incentive and non-qualified stock options to purchase up to 551,250 shares of the
Companys common stock. As of July 31, 2006, 361,116 shares of the Companys
common stock have been reserved for future issuance. Unless sooner terminated, the 1999
Plan will expire in October 2009. Options granted under the 1999 Plan expire not more
than ten years from the date of grant and vest immediately.
|-- | ------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Companys stock option plans as of July 31, 2006, 2005
and 2004 and changes for the years ended on those dates is presented below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     |                  |                 |                                
|------------------------------------ | ---------------- | --------------- | -------------------------------
|                                     | Number of shares | Expiration date | Weighted average exercise price
|                                     |                  |                 |                                
|                                     |                  |                 |                                
|Options outstanding at July 31, 2004 | 378,439          | 2004-2011       | $       8.51                   
|Options exercised                    | (84,156)         | 2004-2009       | 4.22                           
|Options forfeited                    | (10,500)         | 2011            | 13.58                          
|                                     |                  |                 |                                
|Options outstanding at July 31, 2005 | 283,783          | 2007-2011       | $       9.60                   
|Options exercised                    | -                | -               | -                              
|Options forfeited                    | (5,250)          | 2011            | $     13.58                    
|Options outstanding at July 31, 2006 | 278,533          | 2007-2011       | $       9.52                   
|                                     |                  |                 |                                

|                        |                                    |                                             |                                
|----------------------- | ---------------------------------- | ------------------------------------------- | -------------------------------
|Range of exercise price | Number outstanding and exercisable | Weighted average remaining contractual life | Weighted average exercise price
|                        |                                    |                                             |                                
|$             3.66      | 11,024                             | 3.25 years                                  | $       3.66                   
|$             3.84      | 71,159                             | 3.42 years                                  | $       3.84                   
|$             4.34      | 44,100                             | 1.42 years                                  | $       4.34                   
|$13.58-14.94            | 152,250                            | 1.76 years                                  | $     14.10                    
|                        |                                    |                                             |                                

F-21



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|8. | Stock Options(continued) |  | Data
summarizing year-end options exercisable and weighted average fair value of
options granted during the years ended July 31, 2006, 2005 and 2004 is shown below:
|-- | ------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                |               |               |              
|------------------------------- | ------------- | ------------- | -------------
|Options Exercisable             | 2006          | 2005          | 2004         
|                                |               |               |              
|Options exercisable at year-end | 278,533       | 283,783       | 378,439      
|Weighted average exercise price | $        9.52 | $        9.60 | $        8.51
|Weighted average fair value of 
|options granted during the year | -             | -             | -            
|Weighted average remaining     
|contractual life                | 3.16 YEARS    | 3.48 years    | 5.07 years   
|                                |               |               |              

|9. | Commitments
and Contingencies |  | Employee Savings and Stock Investment PlanEffective January 1,
2006, the Company amended and restated its Employee Savings and Stock Investment Plan
organized under Section 401(k) of the Internal Revenue Code. Under the amended plan,
employees may contribute up to 100% of their salary, limited to the maximum amount
allowable under federal tax regulations. The Company will match 100% of the first 3% of
employees contributions and 50% of the next 2% of employeescontributions,
provided that the matching contribution on behalf of any employee does not exceed 4% of
the employees compensation. The Company may also make additional contributions at
its discretion. An employee may invest in Company stock and several mutual funds. The
Companys matching contributions for the years ended July 31, 2006, 2005 and 2004
were $876,000, $785,000 and $676,000, respectively.
|-- | ----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|9. | Commitments
and Contingencies (continued) |  | Commitments and Employment AgreementsThe Company
has employment agreements with four executives, which expire through July 31, 2010. The
aggregate commitment for future salary, excluding bonuses, is $3,228,000. One agreement
also provides for increases based on increases in the consumer price index and additional
annual compensation based on 4% of pre-tax income, as defined, in excess of $3,000,000.
Two other agreements provide for additional compensation based on 4% and 1% of income
from operations, as defined, in excess of $5,000,000.
|-- | ----------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Leases
| | ------

| | The
Company rents various office facilities through 2009 under the terms of several lease
agreements that include escalation clauses.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | At
July 31, 2006, minimum annual rental commitments under noncancellable operating leases
are as follows:
| | ---------------------------------------------------------------------------------------------------------

|                      |           
|--------------------- | ----------
|Years ending July 31, |           
|                      |           
|2007                  | $1,019,000
|2008                  | 824,000   
|2009                  | 176,000   
|2010                  | 3,000     
|                      |           
|                      | $2,022,000
|                      |           

| | Rent
expense for the years ended July 31, 2006, 2005 and 2004 was approximately $1,353,000,
$1,229,000, and $1,187,000, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | One
lease agreement is with a company controlled by the Companys Chairman of the Board.
Net rent expense under such lease agreement approximates $213,000 per year for all years
presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|9. | Commitments
and Contingencies (continued) |  | LitigationOn 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.
|-- | ----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2003, the Companys Connecticut Home Care subsidiary received a subpoena
from the United States Attorneys Office in New Haven, Connecticut. The subpoena
sought production of documents in connection with an investigation into possible
violations of certain federal health care laws. The records
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|9. | Commitments
and Contingencies (continued) |  | sought by the subpoena related to the subsidiarys psychiatric nurses. In
          April 2006, the Company was notified that the investigation has been closed.
In
August 2005, the Connecticut Department of Social Services, Office of Quality Assurance
(the Department) performed an audit of Medical Assistance claims paid to the
Companys Connecticut Home Care subsidiary covering the period April 1, 2003 through
March 31, 2005. The audit included a review of relevant claim information maintained by
the Department and a review of the appropriate medical and administrative records
maintained by the subsidiary. The subsidiary received approximately $53,000,000 in
reimbursement during the audit period. The Company, in October 2006, received the results
of the audit that resulted in a liability of $247,000 to the Department. This amount was
charged to operations in the fourth quarter of fiscal 2006. The Company has recorded a
liability in the financial statements to reflect the audit findings.
|-- | ----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-25



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|9. | Commitments
and Contingencies (continued) |  | Show Cause setting oral argument on the Companys motion to vacate the
          default for October 30, 2006. 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 on October 30, 2006. The Company believes that the
Judgment is without merit and intends to vigorously defend it.
|-- | ----------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Credit
Facility
| | ---------------

| | The
Company has a $7,500,000 revolving credit facility (the credit facility) with
its bank. The credit facility allows the Company 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 July 31, 2006 there was no
outstanding balance under the credit facility. Borrowings are secured by a pledge of all
of the assets of the Company and its subsidiaries and guaranteed by the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | Treasury
Stock |  | In April 2003, the Board of Directors increased its                program to
repurchase its Common Stock to $3,000,000. Purchases would be made                from
time to time in the open market and through privately negotiated
               transactions, subject to general market and other conditions.
|--- | -------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-26



---

National Home Health
Care Corp.  and Subsidiaries

Notes to Consolidated
Financial Statements

|11. | Summarized
QuarterlyData (unaudited) |  | Presented below is a summary of the unaudited                consolidated
quarterly financial information for the                years
ended July 31, 2006 and 2005 (in thousands, except per
share data). In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
|--- | ------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | 2006 | 
|---------------------------- | ---- | 
|
|Net patient revenue          |      | 
|                             |      | 
|Cost of revenue              |      | 
|General and administrative   |      | 
|expenses                     |      | 
|Amortization of intangibles  |      | 
|Allowance for possible losse |      | 
|                             |      | 
|Total operating expenses     |      | 
|                             |      | 
|Income from operations       |      | 
|Interest income              |      | 
|                             |      | 
|Income before income taxes   |      | 
|Provision for income taxes   |      | 
|                             |      | 
|Net income                   |      | 
|                             |      | 
|Net income per common  share |      | 
|Basic                        |      | 
|Diluted                      |      | 
|                             |      | 

|                              | 2005 | 
|----------------------------- | ---- | 
|
|Net patient revenue           |      | 
|                              |      | 
|Cost of revenue               |      | 
|General and administrative    |      | 
|expenses                      |      | 
|Amortization of intangibles   |      | 
|Allowance for possible losses |      | 
|                              |      | 
|Total operating expenses      |      | 
|                              |      | 
|Income from operations        |      | 
|Interest income               |      | 
|                              |      | 
|Income before income taxes    |      | 
|Provision for income taxes    |      | 
|                              |      | 
|Net income                    |      | 
|                              |      | 
|Net income per common  share: |      | 
|Basic                         |      | 
|Diluted                       |      | 
|                              |      | 

| | (a)includes $712,000 of additional provision for possible losses.
| | -----------------------------------------------------------------

F-27



---

|12. | Subsequent
Event |  | On September 19, 2006, the Companys Board of                Directors
declared a cash dividend of $.075 per share on its common stock,                payable
on November 6, 2006 to holders of record of its outstanding common stock
               on October 19, 2006.
|--- | ---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-28



---

# Supplemental Material

---

# Report of Independent
Registered Public Accounting Firmon Schedule II

The audits referred to in our report
dated October 17, 2006 relating to the consolidated financial statements of National Home
Health Care Corp. and Subsidiaries, which is contained in Item 8 of this Form 10-K,
included the audits of the financial statement Schedule II. This financial statement
schedule is the responsibility of the Companys management. Our responsibility is to
express an opinion on this financial statement schedule based upon our audits.

In our opinion such financial
statement schedule presents fairly, in all material respects, the information set forth
therein.

BDO Seidman, LLP

Valhalla, New York
October 17, 2006

F-29



---

National Home Health
Care Corp.and Subsidiaries

Schedule II Valuation
and Qualifying Accounts

|Column A                               | Column B | Column C | Column D | Column E  | 
|-------------------------------------- | -------- | -------- | -------- | --------- | 
|
|
|Year ended July 31, 2006               |          |          |          |           | 
|Allowance deducted from asset account: |          |          |          |           | 
|Allowance for possible losses          |          |          | $        | 1,866,000 | 
|                                       |          |          |          |           | 
|Year ended July 31, 2005               |          |         
|Allowance deducted from asset account: |          |          |          |           | 
|Allowance for possible losses          |          |          | $        | 1,122,000 | 
|                                       |          |          |          |           | 
|Year ended July 31, 2004               |          |         
|Allowance deducted from asset account: |          |          |          |           | 
|Allowance for possible losses          |          |          | $        | 622,000   | 
|                                       |          |          |          |           | 

(a) Represents actual
write-offs.

See accompanying
independent accountants reporton supplemental material.

F-30