UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
                     For the fiscal year ended June 30, 2002

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

For the transition period from _______ to  __________

                        Commission file number 000-26749

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

             Delaware                                   11-2841799
(State or other jurisdiction of         (I.R.S. Employee Identification No.)
  incorporation or organization)

                              26 Harbor Park Drive
                               Port Washington, NY
                    (Address of principal executive offices)
                                      11050
                                   (Zip Code)

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

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

         Securities registered under Section 12(g) of the Exchange Act:
                          Common Stock, $.001 par value
                                (Title of class)

     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 X 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. [ ]

     The  aggregate  market  value  of the  registrant's  voting  stock  held by
non-affiliates  of the  registrant,  computed by reference to the closing  sales
price as  quoted  on the  NASDAQ  National  Market  on  September  20,  2002 was
approximately $39,133,656.


(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)

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

     (APPLICABLE  ONLY TO CORPORATE  REGISTRANTS)

     Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date:  7,594,753 shares outstanding as of September
20, 2002.

     DOCUMENTS  INCORPORATED  BY  REFERENCE:  Portions of the  definitive  Proxy
Statement to be delivered to  shareholders in connection with the annual meeting
of shareholders to be held in 2002 are  incorporated  into Part III of this Form
10-K.

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                                      INDEX
                                                                                         Page No.

Forward Looking Statements

                                     PART I

Item 1.     Description of Business

Item 2.     Description of Property

Item 3.     Legal Proceedings

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

                                     PART II

Item 5.     Market for Common Equity and Related Stockholder Matters

Item 6.     Selected Financial Data

Item 7.     Management's Discussion and Analysis of Financial Condition and
             Results of Operations

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Item 8.     Financial Statements and Supplementary Data

Item 9.     Changes in and Disagreements on Accounting And Financial Disclosure

                                    PART III

Item 10.    Directors and Executive Officers of Registrant
             Compliance with Section 16(a) of the Exchange Act

Item 11.    Executive Compensation

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Item 13.    Certain Relationships and Related Transactions

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Signatures

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                             INTRODUCTORY STATEMENTS

Forward Looking Statements

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

                                     PART I

Item 1.    DESCRIPTION OF BUSINESS.

General

     Health Card is an independent company, incorporated in New York in 1981 and
reincorporated  in Delaware in February  of 2002,  that  provides  comprehensive
pharmacy  benefit  management  services  under the name  NMHCRX.  Health  Card's
executive  offices are in Port Washington,  New York. The mission of Health Card
is to improve  our  clients'  members'  health  through  the timely  delivery of
effective pharmaceutical care and health information management systems.

Recent Acquisitions

     On July 20,  2000  (the  "Effective  Date"),  pursuant  to the  terms of an
Agreement and Plan of Merger,  dated as of June 27, 2000 (the  "Agreement"),  by
and among Health Card,  PAI  Acquisition  Corp.,  a wholly owned  subsidiary  of
Health Card ("Acquisition"), Pharmacy Associates, Inc. ("Pharmacy Associates" or
"PAI") and the shareholders of Pharmacy Associates,  Health Card acquired PAI by
virtue of  Acquisition  merging with and into PAI. PAI,  located in Little Rock,
Arkansas,  is a  regional  pharmacy  benefit  management  company  operating  in
Arkansas, Louisiana and Mississippi.

     Pursuant to the Agreement, the shareholders of PAI received an aggregate of
$6,000,000  in cash and 400,000  shares of  unregistered  common stock of Health
Card. PAI stockholders were also entitled to receive additional consideration of
up to $2  million,  payable in a  combination  of cash and  unregistered  Common
Stock,  over a  two-year  period if certain  financial  targets of PAI were met,
which will be accounted for as an addition to goodwill.  The  financial  targets
were achieved for both years; therefore, $750,000 in cash and $250,000 in Common
Stock  (62,500  shares valued at $4.00 per share) was paid and issued in August,
2001, and $750,000 in cash and $250,000 in Common Stock (41,668 shares valued at
$6.00 per share) was paid and issued in August of 2002.

     Additionally,  200,000  shares of Health  Card common  stock  issued to the
shareholders of PAI that were held in escrow as security for the indemnification
obligations of the PAI shareholders were released to them on July 20, 2002.

     Pursuant to the Agreement, all of the PAI shareholders agreed not to become
involved,  in any manner or capacity  whatsoever,  with any entity or individual
that engages or proposes to engage in pharmacy benefit management, except Health
Card  or  Pharmacy   Associates,   until  June  27,   2003,   and  entered  into
non-solicitation agreements that expire on July 20, 2003.

     On March 5, 2001, PMP Acquisition Corp. (the  "Purchaser"),  a wholly owned
subsidiary of the Company, acquired substantially all of the assets, and certain
of the liabilities, of Provider Medical Pharmaceutical, LLC ("PMP"), an Oklahoma
limited  liability  company,  pursuant to an Asset Purchase  Agreement among the
Company, the Purchaser, PMP and the members of PMP. The assets acquired from PMP
included,  among  other  things,  PMP's  accounts  receivable  and  intellectual
property,  PMP's rights under various  contracts and the goodwill value of PMP's
business. The purchase price for the assets consisted of (i) $4,000,000 in cash,
(ii) the satisfaction by the Company of PMP's bank indebtedness of approximately
$1,255,000, and (iii) cancellation of the $1,500,000 promissory note from PMP to
Health Card, dated January 16, 2001.

     Part of the cash  portion  of the  purchase  price  was put into an  escrow
account to provide security for PMP's indemnification obligations. Approximately
$722,000 of the escrowed portion of the purchase price remains.  Health Card has
asserted two claims against this escrow. The total of the two claims exceeds the
amount remaining in escrow,  and there can be no assurance as to how much of the
remaining  escrow  amount will be recovered,  or when.  Although an agreement in
principle has been reached it has not been reduced to writing.  The Company will
be required to pay up to $1,000,000 of additional cash  consideration if certain
financial  targets  relating to PMP's  business are met over the next two years,
which will be  accounted  as an addition  to  goodwill.  The targets  which were
related to retaining  specific contracts were not achieved in the first year and
consequently no additional consideration was paid for that period.

     The cash  portion  of the  purchase  price  was  obtained  by a loan to the
Company  from The Chase  Manhattan  Bank  pursuant  to a Master Grid Note in the
principal amount of $4,000,000 (the "Note").  The amount borrowed under the Note
was repaid to the bank on March 9,  2001,  and the Note was  cancelled  upon the
consummation of the HFG Financing described below.

     The Company  entered into an Asset Purchase  Agreement (the "Asset Purchase
Agreement"),  dated January 29, 2002, with Health Solutions,  Ltd. ("HSL"),  HSL
Acquisition  Corp., a wholly-owned  subsidiary of the Company  ("Sub"),  and the
security  holders of HSL,  pursuant to which the Company acquired certain assets
of HSL relating to the PBM business it conducts  under the name  "Centrus"  (the
"Centrus Acquisition").

     The purchase price for the Centrus  Acquisition was $40 million in cash, of
which $3 million is held in escrow to secure certain indemnification obligations
($2  million  has  been  released  as  of  July  2002).   The  Company  acquired
approximately  $1.4  million of HSL's  assets  and  assumed  approximately  $1.4
million of HSL's liabilities relating to the Centrus business. The excess of the
acquisition  cost over the fair value of  identifiable  net assets  acquired was
approximately $40.7 million.  In addition,  the Company has agreed to pay HSL as
additional  purchase  price up to $4  million  over a  period  of 3 years if the
Centrus  business  achieves  certain  financial  performance  targets during the
two-year period following the  consummation of the transaction.  HSL may also be
entitled to an additional  incentive payment based on the financial  performance
of the Centrus business during the one-year period following the purchase.

     In connection with the Acquisition,  several members of Centrus' management
team have  joined the Company as  employees  or as a  consultant,  and have been
granted  stock  options to purchase  an  aggregate  of 375,000  shares of Common
Stock,  under the  Company's  1999 Stock  Option Plan,  as amended.  The Company
intends to continue to use the assets  acquired in the Centrus  Acquisition  for
the delivery of cost-effective, integrated PBM services.

     In part to finance  the  Centrus  Acquisition,  on January  29,  2002,  the
Company  and certain of its  subsidiaries  entered  into a $40  million  secured
revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate
of Healthcare  Finance Group, Inc. In connection with the Facility,  the Company
and certain of its subsidiaries have agreed to sell, on an on-going basis, their
accounts  receivable  to NMHC  Funding,  LLC  ("Funding"),  a limited  liability
company of which the Company and such subsidiaries are members. Funding utilizes
these  receivables as collateral to secure  borrowings  under the Facility.  The
Facility has a three year term,  provides for borrowing up to $40 million at the
London  InterBank  Offered Rate (LIBOR) plus 2.4%, and is secured by receivables
and other assets of the Company and certain of its  subsidiaries.  Borrowings of
$28.4 million under the Facility were used to finance part of the purchase price
of the Centrus  Acquisition.  The Facility  will also be used by the Company for
working capital purposes and future acquisitions.

     On January 22, 2002 the Company  completed a convertible note offering (the
"Note Offering") in the aggregate principal amount of $11.6 million. Pursuant to
the Note  Offering,  subscribers  received a  promissory  note  paying  interest
quarterly  on the unpaid  principal  balance  at the rate of 12% per annum.  The
Notes had a term of one year, unless otherwise extended pursuant to the terms of
the Note. The Notes were  convertible at any time at the election of the holders
into shares of the Company's Common Stock ("Conversion  Shares") at a conversion
price of $12.00 per share,  the fair  value of the Common  Stock on January  22,
2002.  Proceeds from the Note Offering were used to finance part of the purchase
price of the Centrus  Acquisition.  The aggregate  principal  amount of, and all
accrued  interest on, the Notes was paid in full, and the Notes were  cancelled,
on June 30, 2002.

Industry Background

     In response to escalating  health care costs,  cost containment  efforts in
the health  care  industry  have led to rapid  growth in managed  care and other
containment  efforts.  Despite  these  efforts,  continued  advances  in medical
technology,  new drug  development and increasing drug  utilization  have led to
significant  increases  in health care  costs.  This has created a need for more
efficient,  cost-effective drug delivery mechanisms. Pharmacy benefit management
companies  ("PBMs")  evolved to address this need.  PBM's  provide the means for
plan sponsors to deliver  prescription  drug benefits to their plan members in a
cost-effective manner.


General

     Sponsors  of  pharmacy  benefit  plans  managed by Health  Card are located
throughout  the United States,  and include  managed care  organizations,  local
governments,  unions,  corporations,  HMO's and  third  party  health  care plan
administrators.  Sponsors  retain Health Card to manage the  prescription  plans
that they  maintain  for the  benefit of their plan  participants.  Health  Card
consults with sponsors to assist them in customizing their prescription plans to
meet the  particular  sponsor's  needs.  Heath  Card has also  developed  and is
continuing to expand its consulting and disease information services to meet (i)
the growing needs of sponsors to address cost management pressures, and (ii) the
increasing  needs of plan  participants,  particularly  those  requiring  costly
long-term and recurring therapies.

     Health Card's on-line claims management system manages the cost of the plan
at the point of service by confirming that:

o       the submitted claim is in conformity with plan terms and conditions,
o       the plan participant is eligible for benefits, and pays any applicable
        deductible and/or co-payment amounts, and
o       only the negotiated discounts on prescription items will be paid to
        participating pharmacies.

     The data collected  during the claims  management  process provides a basis
for  reporting  and analyses  upon which  recommendations  are made to sponsors.
These  recommendations  are intended to assist sponsors in lowering the costs of
their plans while  improving  quality and service.  See "Services - Data Access,
Reporting and Information  Analysis," and  "Government  Regulation - Regulations
Regarding Privacy and Confidentiality."

Health Card's Services

         Health Card provides a wide variety of services including:

o        Claims Management
o        Pharmacy Network
o        Benefit Design Consultation
o        Drug Review & Analysis
o        Formulary Design and Disease Information Services
o        Data Access, Reporting & Information Analysis
o        Physician Profiling
o        Specialty Pharmacy
o        Mail Order

Claims Management

     Claims Processing.  Each sponsor's plan participant is issued a health card
which identifies the plan participant and the sponsor.  The card may be utilized
at any one of the pharmacies participating in Health Card's multi-state pharmacy
network and the  sponsor's  plan.  Health Card  allows the plan  participant  to
purchase approved prescription drugs and the other  physician-prescribed  items,
with the plan participant  paying a deductible and/or co-payment amount, if any,
to the pharmacy.

     Plan  participants  present  their health card  together with a physician's
prescription  to  a  participating  pharmacy.  The  pharmacist,  using  standard
industry software,  enters each claim on the pharmacy's  computer;  the claim is
electronically  communicated to Health Card for on-line real time processing and
resolution.  In the ordinary case where the prescription is for a drug listed on
the sponsor's formulary, the pharmacist is advised of the appropriate co-payment
and  deductible,  if any, to be collected from the plan  participant  and of the
payment the pharmacy will receive from Health Card. Health Card's on-line claims
management  system sends  appropriate  messages  regarding  preferred  drugs and
contraindications,  based upon plan  participants'  existing claims history with
Health Card.  The  prescription  is then dispensed by the pharmacist to the plan
participant,  who pays the appropriate  co-payment  and/or deductible amount and
signs  a  signature  log  maintained  by  the   participating   pharmacy.   Plan
participants  are provided  with a list of  pharmacies  participating  in Health
Card's pharmacy  network.  Plan  participants may  alternatively  choose to fill
prescriptions at a non-participating pharmacy. Occasionally a plan participant's
claim is rejected or a prior authorization is required based on plan parameters,
in which case the participant may be referred to the plan's sponsor or to Health
Card's customer service department.

     Invoicing and Payments.  Often, sponsors are charged an agreed fee for each
prescription  filled plus an  administrative  and/or dispensing fee for managing
each claim. Previously,  some sponsors were charged an adjustable monthly fee or
projected  maximum  fee based on the number of plan  participants,  utilization,
costs of drugs or other criteria.  Health Card provides flexibility of invoicing
for its  sponsors.  Sponsors pay Health Card;  Health Card pays an  individually
negotiated  amount to its participating  independent and chain pharmacies.  Plan
participants  filing for direct  payment  receive an allowable  payment which is
usually specified by the sponsor. See "Services - Pharmacy Network",  and Note 1
to the Consolidated Financial Statements comprising Item 8 hereof.

     Rebate  Administration.  Drug manufacturers may issue rebates in connection
with the use of certain  prescription  drugs.  Health  Card  submits  claims for
rebates  for  specified  sponsors  pursuant  to an  agreement  with  its  rebate
administrator (the  "Administrator")  effective as of July 1, 2001. Based on the
agreement,  the payment of rebates is  contingent  upon Health Card adopting the
Administrator's  formulary for Health  Card's  specified  sponsors.  Health Card
submits  the  claims  for  its  specified  sponsors  to the  Administrator.  The
Administrator  submits Health Card's rebate  claims,  and may submit such claims
along  with  rebate  claims of others,  to the  appropriate  drug  manufacturer,
pursuant to the agreements  the  Administrator  has  negotiated  with these drug
manufacturers.  Health Card's agreement with the Administrator  provides that it
is  obligated to pay Health Card a per claim fee,  within a specified  period of
time  after  each  quarter.  The  Administrator  retains a portion  of the total
rebates as an administrative fee. The agreement may be terminated at any time by
either party for any reason after the initial term of the Agreement,  which ends
on June 30,  2004;  termination  prior to such date  requires  the payment of an
early termination fee by the terminating party.

     Pursuant to a verbal agreement  between Health Card and Specialty  Pharmacy
Care, Inc. ("Specialty"),  a wholly owned subsidiary of Health Card, Health Card
submits  claims for rebates to Specialty for certain of Health Card's  sponsors.
Specialty  performs the services of a rebate  administrator for which it is paid
an administrative fee. Health Card has entered into approximately forty separate
agreements with drug  manufacturers.  While the terms of each agreement  between
Health  Card and the drug  manufacturers  are unique,  the basic  concept is the
same. Such agreements generally provide that Health Card must list the specified
products of each of the drug manufacturers on Health Card's approved formularies
with the  specified  sponsors.  Health Card may not prefer,  either  directly or
indirectly,  any  competing  products  over the  specified  drug  manufacturer's
products except for reasons of medical  appropriateness.  The drug manufacturers
are obligated to pay rebates within a specified period of time after Health Card
submits its claims,  based on agreed upon specified  percentages  which can vary
based on certain contractual  criteria.  The manufacturers  establish a baseline
rebate  based  on  Health  Card's  initial  claims  and  are  obligated  to  pay
incremental rebates based on increases beyond the baseline.  Similarly,  Centrus
has entered into separate  agreements  with drug  manufacturers  which have been
assumed by Health Card. The Company is in the process of evaluating both sets of
contracts and will submit claims under those contracts which are most beneficial
for the Company and its sponsors.

     Upon  receipt  of  rebates  from  the  drug  manufacturers  or  the  rebate
administrators, Health Card shares certain amounts with its sponsors. All, part,
or none of the  rebates  received  by Health  Card may be remitted to certain of
Health Card's  sponsors,  depending  upon the terms of Health Card's  agreements
with each sponsor. See Item 7 hereof.

Pharmacy Network

     Health Card maintains a pharmacy network that includes both retail and mail
options. Health Card's agreements with many pharmacies do not require it to make
payments within a specified period.  However,  Health Card knows from experience
that timely payment is a significant  consideration  of the  pharmacies.  Health
Card endeavors to process  claims  promptly and obtain funds from sponsors prior
to making payments to participating pharmacies;  still there can be no assurance
that sponsors will pay Health Card in a timely fashion.  The Company assumes the
legal responsibility and financial risk of paying for dispensed  pharmaceuticals
whether or not it is paid by its sponsors.  The loss of a substantial portion of
the pharmacies in the pharmacy  network would have a material  adverse effect on
Health Card's business,  operating results and financial  condition.  See Item 7
hereof.

     Retail Pharmacy Network  Management.  Health Card maintains a comprehensive
multi-state network of participating pharmacies.  Both the retail and mail order
components of the pharmacy  network are managed by Health Card's  on-line claims
management  system.  Certain of Health Card's  sponsors  require  Health Card to
maintain a pharmacy  network with  specified  numbers of  pharmacies  in various
locations to serve plan  participants.  Health  Card's retail  pharmacy  network
consists of over  53,000  pharmacies,  with the result that cards  issued by the
Company are recognized in over 97% of pharmacies in the U.S.


Benefit Design Consultation

     Health   Card   assists   sponsors   in  defining   their   financial   and
employee-benefit  objectives  for their  prescription  drug benefit plans and in
developing a program to meet such objectives.  Health Card's consulting services
also enable  sponsors to enhance  the quality of plan  participants'  care while
reducing  related  costs.  In  addition,  Health Card staff  analyze and provide
recommendations  to sponsors  regarding  how to improve  their plan  performance
based upon their objectives. General areas of focus include:

        o   Participant cost - sharing levels (i.e., deductibles and co - pays)
        o   Covered and excluded drugs
        o   Clinical management strategies
        o   Alternate programs and services

     The clinical services staff, with occasional assistance from the operations
staff,   produces  customized  periodic  reports,   and  disseminates   publicly
available,  peer  reviewed,  nationally  recommended  treatment  data  regarding
generic substitution guidelines and other therapies that are aimed at treating a
disease in a cost-effective manner. Once a plan design has been implemented, the
clinical and account  management  staff monitors plan  performance  for customer
satisfaction and cost effectiveness,  and may periodically  recommend changes to
the plan.

Drug Review and Analysis

     Health Card's drug review and analysis services include prospective reviews
of  potential  claims and  concurrent  and  retrospective  reviews of  submitted
claims.  These  include a series of on-line  reviews  which  permit a pharmacist
filling a prescription to examine the plan participant's claims history for:

         o        drug interactions
         o        premature refills of prescriptions
         o        duration and duplication of therapy
         o        pregnancy and breast feeding precautions
         o        geriatric or pediatric precautions
         o        compliance with prescriptions
         o        other contraindications

     Health Card  transmits such  information  to the dispensing  pharmacist for
information  purposes only - not to replace the  prescribing  physician's or the
dispensing   pharmacist's   professional  judgment.   Health  Card's  consulting
department  retrospectively  analyzes  the  drug  utilization  patterns  of plan
participants  for each sponsor.  Health Card may then  recommend  changes in the
sponsor's  plan  design,  preferred  drug  management,  and disease  information
systems initiatives to contain costs or to better serve the plan participants.

Formulary Design and Disease Information Services


     Formulary  Design.  Health Card has established a Pharmacy and Therapeutics
Committee  (the  "P&T   Committee")   currently   comprised  of  physicians  and
pharmacists,  with independent provider  representation from across the country.
The P&T Committee's primary  responsibility is to assist sponsors in designing a
well managed, therapeutically appropriate, cost-effective preferred drug listing
or "formulary."  The goal of the P&T Committee is to enable sponsors to optimize
plan  participant  care through drug policy  development and education.  The P&T
Committee typically meets quarterly and performs the following functions:

     o provides information to sponsors to ensure that the covered drugs of each
plan reflect the current standard of medical practice and pharmacology,

     o evaluates drugs for inclusion in a plan as a preferred drug,

     o analyzes current literature for safety,  efficacy and  cost-effectiveness
of covered drugs,

     o provides recommendations on drug therapy and utilization,

     o evaluates  drug review and analysis  programs and criteria,

     o determines  those  drugs  which  require  prior  authorization  from the
sponsor, and

     o reviews the associated guidelines for those drugs' proper use.

     The committee  currently  consists of seven  members plus the chairman.  In
addition,  consultants  to this core are called upon to participate on an ad hoc
basis.  Health Card believes that the P&T Committee is organized and operates in
a manner that ensures the objectivity  and  credibility of its  recommendations.
P&T  Committee  members are required to submit  Conflict of Interest  Statements
identifying any significant  investment,  interest,  association or relationship
that might  interfere  with their  independent  judgment or  recommendations  as
committee  members.  None  of  the  current  members  have  disclosed  any  such
interests.  All current  members  have active  practice  responsibilities  which
include:

     o Chairman, Martin Edelstein, M.D.: Specialties/ Areas of Expertise: Family
       Practice, Geriatrics, Academia

     o Henry Simmons,  M.D., PH.D.:  Specialties/ Areas of Expertise:  Emergency
       Medicine, Toxicology, Family Medicine, Medical Review.

     o Bruce Johnson,  MD:  Specialties/ Areas of Expertise:  Gastroenterology

     o Eric Schneider,  Pharm.D.,  Specialties/  Areas of Expertise:  Ambulatory
       Care Practice, Academia

     o Richard Handler M.D., Specialties/ Areas of Expertise: Internal Medicine,
       Rheumatology

     o David Grossman M.D., Specialties/ Areas of Expertise:  Cardiology

     o James Tan M.D.,  Specialties/  Areas of Expertise:  Pediatrics

     o Jennifer Cerulli, Pharm.D.,  Specialties/ Areas of Expertise:  Ambulatory
       Care Practice, Academia

     Health Card strives to provide plan sponsors with a formulary that promotes
the most clinically  appropriate and cost effective medications in drug therapy,
independent of manufacturer bias.

     Disease Information  Services.  Through its disease  information  services,
Health Card provides  information to sponsors that is intended to enable them to
enhance  their  prescription  benefit plans and to improve the treatment of plan
participants with certain medical  conditions.  In providing disease information
services, based upon recommended drug and treatment guidelines, Health Card:

        o   reviews and analyzes drugs prescribed and prescriptions dispensed,
        o   recommends plan guidelines, and
        o   conducts plan participant and physician profiling.

     By analyzing plan  participants'  pharmacy claims patterns,  Heath Card can
provide  information  to sponsors  and health care  providers,  assisting in the
early identification of patients whose care might be improved through additional
or  alternative  medication  treatments.   Health  Card  has  developed  disease
information  systems covering  cardiovascular and  gastrointestinal  conditions,
behavioral health, migraines, diabetes and asthma, among others.

     Health Card's disease information services utilize the recommended drug and
treatment  guidelines,  changes in the drug and  treatment  guidelines,  current
medical  literature  and its  own  assessments  to  identify  plan  participants
"at-risk" for a particular disease. If the disease information services identify
participants  "at-risk"  for  particular  diseases,  Health Card may provide the
recommended drug and treatment  guidelines to sponsors,  treating physicians and
plan  participants.  If  requested  by  the  sponsor,  Health  Card  monitors  a
participant's  compliance  with the recommended  drug and treatment  guidelines,
including  prescription usage. If it appears,  based upon Health Card's analysis
of the  participant's  claims history,  that the recommended  drug and treatment
guidelines are not being applied,  Health Card may, if requested by the sponsor,
contact the physician,  via either  telephone or letter,  suggesting  additional
options.  Physician  performance  and  adherence  to the  recommended  drug  and
treatment guidelines are monitored by using Health Card's information systems.

Data Access, Reporting and Information Analysis

     Health Card's  on-line  claims  management  system  enables  Health Card to
efficiently provide sponsors with:

     o On-line  system access whereby the sponsor is able to update and maintain
certain plan areas such as participant eligibility

     o  Periodic   utilization   and  financial   reports,   which  Health  Card
representatives  utilize  to assist  sponsors  regarding  benefit  design,  cost
containment initiatives,  disease information  initiatives,  generic equivalents
programs and  formulary  management

     o Plan  performance  indicators and ad hoc reporting  through Health Card's
proprietary decision support tool, known as INFO.

Physician Profiling

     Health  Card  will,  at the  request  of either a  physician  or a sponsor,
analyze  (i.e.,  profile) a  physician's  prescription  history and consult with
either the physician or the sponsor about the physician's  prescribing  pattern.
Health Card might,  for example,  discuss  alternatives  to  therapies  that the
physician regularly prescribes based on the drug and treatment guidelines.  This
practice is designed to enhance the  therapeutic  benefits  received by the plan
participant and, where possible, to achieve cost savings. It is also designed to
promote  conformity  with plan benefits and the  recommended  drug and treatment
guidelines.

Specialty Pharmacy

     Health Card's specialty  pharmacy  program manages high cost  self-injected
medications  for some of its sponsors.  Recently,  this class of medications has
become a significant percentage of Health Card's sponsors' pharmacy budget. This
growth is a function  of  increased  utilization  as well as an  increase in the
number of available treatment agents.

     The specialty  pharmacy services manage  utilization of these agents on two
levels:  first, at a macro level, by identifying trends in utilization patterns,
recommending  protocols based on nationally accepted guidelines,  and monitoring
compliance; second, on a micro level, by Health Card working with the dispensing
pharmacy to assure that guidelines are followed,  patient follow up is occurring
and outcomes are measured.

     Diseases  treated  by  specialty  pharmacy  medication  include:  HIV/AIDS,
Hepatitis HCV, Multiple Sclerosis,  Hemophilia, Gaucher's Disease, Chronic Renal
Failure,  Infertility,  Arthritis (OARA),  Crohn's Disease, Human Growth Hormone
Deficiency, Cystic Fibrosis, and Respiratory Syncytial Virus (RSV).

Mail Order

     Mail  pharmacy  service is generally  used by plan  participants  as a cost
effective means of minimizing the inconvenience resulting from repeated trips to
retail pharmacies to fill  prescriptions;  this is especially common when a plan
participant  with a  chronic  condition  receives  long-term  drug  therapy.  In
addition,  the plan participant generally saves money through a reduction in the
number of  co-payments  he would  have paid had the  prescriptions  been  filled
repeatedly  at a retail  pharmacy.  Further,  with mail  pharmacy  service,  the
sponsor is charged a lower dispensing fee for prescription  ingredients compared
to those charged by a retail pharmacy.

     Health Card presently has a non-exclusive  relationship  with Eckerd Health
Services d/b/a Express Pharmacy Services ("Express  Pharmacy") pursuant to which
Express  Pharmacy acts as a  participating  pharmacy and dispenses drugs to plan
participants by mail. The agreement between Health Card and Express Pharmacy was
renewed as of June 30, 2002 for an additional  1-year term. Either party has the
right to terminate the agreement at the end of any renewal term, in each case on
90 days' prior  written  notice.  The agreement  provides that Express  Pharmacy
will:

        o    provide the covered drugs by mail to participants
        o    collect the appropriate co-payment and
        o    if required by the plan, collect any additional payment if a brand
             drug is dispensed when a generic drug is available.

     Claims  submitted by mail order  pharmacies are managed using Health Card's
on-line  claims  management  system  and are  subject  to the  same  review  and
verification as those claims submitted by retail pharmacies.


Sponsors

     Health Card's Sponsors are located  throughout the United States.  Sponsors
include managed care  organizations,  local governments,  unions,  corporations,
HMO's and third  party  health care plan  administrators  of  prescription  drug
programs.  Health Card's sponsors are typically asked to sign a standard form of
managerial  agreement that governs Health Card's relationship with that sponsor.
Pursuant to this standard agreement, Health Card pays claims and furnishes other
related  services  through a network of  pharmacies.  The sponsor  provides  the
details of the plan to be managed, along with a list of all covered participants
and  eligibility  updates.  The  sponsor is liable for all  charges  incurred by
unauthorized people unless Health Card was notified in writing or electronically
of ineligibility.  Health Card is obligated to ensure that an adequate number of
member  pharmacies  are  available,  furnish  a  description  of the plan to the
pharmacies,   require  such  pharmacies  to  comply  with  the  member  pharmacy
agreement,  process  claims and determine  whether  claims  qualify for payment.
Health Card is also obligated to furnish the sponsor with a semi-monthly account
statement which includes a summary of claims costs in the preceding period,  and
a description of the drugs which are included and excluded from the plan.

     Pursuant to the standard agreement,  the sponsor is obligated to pay Health
Card the cost of  claims  to  Health  Card  (less  any  cash  advances  paid) as
semi-monthly  statements are received by the sponsor. The account statement will
also include an amount due to Health Card for the auditing, approval and payment
of claims processed during the preceding period. The contracting party typically
agrees to make all payments  within a specified  period after the billing cycle,
except that any additional charges, for which a separate fee is agreed to by the
parties,  will be remitted by the contracting party within 30 days after receipt
of billing from Health Card.  Health Card agrees to establish  the cost of drugs
to each  sponsor.  The sponsor can review  these  records.  While most of Health
Card's  larger  sponsors  negotiate  other  agreements  with Health  Card,  many
sponsors sign the standard form or a modified  version of the standard form. The
specific   terms  of  each   managerial   agreement,   including  any  incentive
arrangements,  are  negotiated  by Health  Card on a case by case  basis.  While
Health  Card  may  take  into  account  factors  such  as  the  number  of  plan
participants,  margins and economies of scale,  among others, in determining the
terms of its arrangements with sponsors,  Health Card generally does not use set
guidelines when determining these terms. See Item 7 hereof.

     In October 1998, the Company acquired IPA, which is an independent practice
association  under the laws of New York.  The Company  acquired  PSCNY IPA, Inc.
("PSCNY")  as  part  of the  Centrus  acquisition  (see  Note 2 to  Consolidated
Financial Statements comprising Item 8 hereof). Health Card's IPA was dissolved.
PSCNY was used by Centrus to contract with Health  Maintenance  Organizations or
providers containing financial risk-sharing provisions, which represents some of
Centrus' largest  sponsors.  PSCNY's name was changed to National Medical Health
Card IPA, Inc. in September 2002. IPA is subject to the regulatory  authority of
the  Department  of Health and the laws,  rules and  regulations  applicable  to
independent practice associations in New York.

Significant Sponsors

     For the fiscal year ended June 30,  2002,  Vytra  Health Plans Long Island,
Inc., Vytra Health Plans Managed Systems,  Inc. and Vytra Health Services,  Inc.
(individually  and  collectively,  "Vytra") and MVP Healthcare  ("MVP") were the
only sponsors that accounted for 10% or more of Health Card's  revenues.  Health
Card has been providing services to Vytra since 1990; the business  relationship
with Vytra was  terminated  as of June 30,  2002.  Health  Card's  wholly  owned
subsidiary,  HSL Acquisition Corp., acquired the company that has been providing
services to MVP, a former Centrus Sponsor.

     Although Vytra was a significant sponsor, Health Card's management does not
believe that the loss of Vytra as a sponsor will have a material  adverse effect
on Health Card.

     MVP has  been a client  of  Centrus  since  1990.  The term of the  current
agreement  commenced on January 1, 2000 and terminates on December 31, 2002. The
contract was  assigned to Health Card  effective  March 1, 2002.  Health Card is
currently  negotiating  with MVP to  extend  the  contract.  It is  management's
expectation  that a new  multi-year  contract  will  be put in  place  effective
January 1, 2003. For the year ended June 30, 2002, revenues from MVP represented
15% of Health Card's gross revenues.

     MVP covers over 450,000 lives in various lines of business  including  HMO,
ASO, and Indemnity programs. MVP has experienced strong growth over the past two
years.  Revenues  have grown over 60%. MVP  continues to expand its service area
while increasing penetration in existing markets.

Sales and Marketing

     Health Card markets its services  through a sales and marketing  department
led by a direct sales force of Regional Sales  Directors and external  brokerage
and consultant  relationships.  Health Card's sales  executives  target sponsors
throughout  the United States.  In addition,  Health Card contracts with brokers
and consultants who are retained to market Health Card's services to prospective
sponsors for agreed upon fees based on the number of plan participants  enrolled
in a Health Card supported  plan,  and/or the number of claims  processed  under
such plan.  Health Card also attends numerous trade shows and uses  advertising,
public relations and marketing literature for sales support.

     Health  Card  continues  to  make  significant  investments  in  sales  and
marketing   initiatives.   These  efforts  are  expected  to  yield   continuous
improvements  to our  relationships  with existing  clients as well as to create
access to new customers in our major marketing areas.

     Furthermore,   Health   Card   continues   to  expand   its  web   presence
(www.nmhcrx.com)  as both a  functional  tool for  clients to  conduct  the many
value-added  services provided by Health Card, and as a portal for eligible plan
members to make inquiries and place orders. The web site offers a page dedicated
to online services which allows plan  participants to fill out customer  service
surveys and to obtain  direct  payment  claim forms,  and to access the pharmacy
network  listings.  In  addition,  Health  Card  uses its web  presence  to make
available  specific  resources  to clients  who have unique  reporting  and data
management  requests.  All member  information  is subject to the most stringent
security measures available in the industry,  protecting patient confidentiality
and meeting HIPAA compliance standards.


Competition

     Health Card  competes  with  numerous  companies  which provide the same or
similar services.  Some of Health Card's  competitors have been in existence for
longer periods of time and are better established than Health Card. Some of them
also  have  broader  public  recognition,   financial  and  marketing  resources
substantially  greater than Health Card,  and more  experienced  management.  In
addition,  some of Health  Card's  sponsors and  potential  sponsors may find it
desirable to perform for themselves  those services now being rendered by Health
Card.  Furthermore,  there is a  distinct  possibility  that  consolidation  and
alliances within the industry will adversely impact the operations and prospects
for independent pharmacy benefit management companies such as Health Card.

     Health  Card's  ability to attract  and retain  sponsors  is  substantially
dependent on its capability to provide efficient and accurate claims management,
utilization  review  services and related  reporting,  auditing  and  consulting
services.  Health Card  believes  that the  following  factors  help Health Card
successfully compete:

        o  a broad base of experience in the information technology and pharmacy
           benefit management industries,
        o  flexible and sophisticated on-line information systems, which
           integrate all of the data input, reporting, analysis, and access
           functions provided by Health Card, and
        o  a focus on customer service.

Employees

     As of  September  13,  2002,  Health  Card  and  its  subsidiaries  had 201
employees.  Of the 201 total employees,  189 are full-time and 12 are part-time.
Health Card is not a party to any collective  bargaining  agreement,  and Health
Card considers its relations with its employees to be satisfactory.

Information Systems

     Health Card's  on-line  claims  management  system depends in large part on
software  licensed from an  unaffiliated  party.  By a license  agreement  dated
February 18, 1998, Health Card was granted a non-exclusive  and  nontransferable
perpetual license to use this party's claims  adjudication  software system. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  --  Liquidity  and  Capital  Resources"  in Item 7 hereof and Note 9
("Commitments  and  Contingencies")  to the  Consolidated  Financial  Statements
comprising Item 8 hereof.

     Health Card employees provide the required services to maintain and enhance
the  Company's  information  systems  infrastructure.   Occasionally,   outside,
unaffiliated  consultants are retained for additional  expertise.  Historically,
Health Card had received data processing services and technology  infrastructure
consulting   services  from  Sandata   Technology  Inc.  and  its   subsidiaries
("Sandata").  Sandata  is a public  company  (NASDAQ:  SAND)  of  which  Bert E.
Brodsky,  Health Card's Chairman of the Board, is also Chairman,  CEO, Treasurer
and a principal stockholder. Health Card has evaluated the services that Sandata
has  performed  for it in the past,  and is in the process of  bringing  most of
those services in-house by hiring employees with the needed skills.  This should
eventually eliminate the Company's expenses payable to Sandata.


Government Regulation

     The  activities  of PBM's such as Health Card are subject to  regulation at
the federal and state  levels.  Health Card  believes  that its  operations,  as
currently conducted, substantially comply with the laws and regulations material
to the  operation of its  business.  Existing laws that may affect Health Card's
operations  and  relationships  include,  but are not limited to, the  following
federal laws: the Anti-Kickback  Statute,  the Health Insurance  Portability and
Accountability Act ("HIPAA"),  the Food, Drug and Cosmetic Act (the "FDCA"), and
the Employee  Retirement  Income  Security Act of 1974  ("ERISA").  In addition,
various laws of individual states are applicable to Health Card's businesses.

     Regulatory  authorities have very broad discretion to interpret and enforce
these laws and to promulgate corresponding rules and regulations.  Violations of
these  laws and  regulations  may  result in  criminal  and/or  civil  fines and
penalties, injunctive relief to prevent future violations, other sanctions, loss
of professional  licensure and exclusion from participation in federal and state
health care programs, including Medicare and Medicaid.

     The  interpretation  and  applicability of some of the laws and regulations
applicable  to Health  Card's  business  are  unclear.  Health  Card's  business
activities and relationships with sponsors,  pharmacies,  rebate administrators,
plan  participants,  and  brokers  have  not  been  the  subject  of  regulatory
investigation  or review on either the state or the federal  level.  Health Card
has not  obtained  or applied  for any  opinion of any  regulatory  or  judicial
authority that its business  operations or those relationships are in compliance
with applicable laws and regulations. There can be no assurance that Health Card
has  interpreted  the  applicable  laws  and  regulations  in  the  same  way as
regulatory or judicial authorities,  or that the laws and regulations and/or the
interpretation thereof will not change.

     A more  detailed  analysis of certain laws and  regulations  affecting  the
business, operations and relationships of Health Card is set forth below.

Anti-Kickback Statute

     The  Anti-Kickback   Statute   prohibits   knowingly  paying  or  receiving
remuneration in return for referring an individual for the furnishing of an item
or  service,  or for the  purchasing,  ordering  or  arranging  for any  item or
service,  for  which  payment  may be made in whole or in part  under a  federal
health care program,  including Medicare or Medicaid. The term "remuneration" in
the statute expressly includes any kickback,  bribe or rebate. Violation of this
law is a  felony,  punishable  by  fines  of up to  $25,000  per  violation  and
imprisonment  for up to five  years.  Violation  may  also  give  rise to  civil
penalties of up to $50,000 per  violation  and  exclusion  from the Medicare and
Medicaid  programs.  Many  states,  including  several in which Health Card does
business,  have adopted laws similar in scope to the Anti-Kickback  Statute, and
these state laws often are  applicable to services for which payment may be made
by anyone,  including  commercial  insurers and private pay  patients,  not just
payments made under a federal health care program.

     Regulations have been adopted under the federal Anti-Kickback Statute which
provide safe harbors for certain remuneration  arrangements that might otherwise
violate the statute,  such as properly  reported  discounts  (including  certain
rebates) received from vendors and properly  disclosed  payments made by vendors
to group purchasing organizations. The failure to fall within a safe harbor does
not mean that an arrangement is in violation of the law,  although it may result
in heightened scrutiny or challenge.

     The Anti-Kickback  Statute has been broadly  interpreted by the courts, the
Office of Inspector  General (the "OIG") of the  Department  of Health and Human
Services ("HHS"), and pertinent  administrative bodies. Courts have ruled that a
violation of the statute exists if one purpose of the remuneration was to induce
patient  referrals  or  purchases.  Also,  the OIG has  identified  as  possibly
improper under the statute so-called "product conversion" programs,  pursuant to
which  pharmaceutical   manufacturers   provide  incentives  to  physicians  and
pharmacies  to  change  a  prescription  to a drug  made  by the  pharmaceutical
manufacturer,  or  recommend  such a  change.  Health  Card is not  aware of any
instance in which the  Anti-Kickback  Statute  has been  applied (i) to prohibit
independent  PBMs,  such as  Health  Card,  from  receiving  rebates  from  drug
manufacturers based on drug sales by pharmacies to plan participants,  formulary
management  programs  or  therapeutic  substitution  programs,  or  (ii)  to the
contractual  relationships  between  independent  PBMs and  their  sponsors  and
participating  pharmacies.  In June 1998, however,  the United States Attorney's
Office for the Eastern  District of  Pennsylvania  began an  investigation  into
whether rebates and other payments made by pharmaceutical manufacturers to PBMs,
and  payments  made by PBMs to  retail  pharmacies,  violate  the  Anti-Kickback
Statute and other federal laws.  Health Card  understands  that several PBMs and
pharmaceutical  manufacturers  have received  subpoenas in connection  with this
investigation, but is unaware of any related prosecutions or settlements. Health
Card does not  believe  that it is a subject of this  investigation,  nor has it
received any subpoenas or been  requested to produce any documents in connection
therewith.

     Health  Card  believes  that it is in  compliance  with  the  Anti-Kickback
Statute and existing  regulations  thereunder,  and with the similar  state laws
enacted  in the  states  where  it does  business.  There  can be no  assurance,
however, that Health Card will not be subject to challenge or a proceeding under
the Anti-Kickback Statute, the regulations thereunder or any similar state laws.
Any such challenge or proceeding  could have a material adverse effect on Health
Card's  business,  results of operations or financial  condition,  regardless of
whether Health Card is found to have violated such statutes or regulations.

Regulations Regarding Privacy and Confidentiality

     Most states, and the federal government, regulate the dissemination and use
of personally  identifiable health information about a patient.  This is an area
of  increasing  focus by  several  states,  including  New  York.  To  date,  no
legislation has been enacted that materially  restricts Health Card's ability to
provide  its  services;  however,  it is possible  that new laws or  regulations
further  restricting  the  dissemination  or use of such  information  could  be
adopted,  or that existing laws and  regulations  will be  interpreted in such a
manner  as  to  further  restrict  Health  Card's  ability  to  obtain  and  use
information about its plan participants.  Such new laws or interpretations could
have a material adverse effect on Health Card's business,  results of operations
or financial condition.

     In December 2000, HHS issued final regulations  under HIPAA,  regarding the
privacy of individually  identifiable  health information (the "Privacy Rules").
The Privacy  Rules,  which  become  effective  in April 2003,  impose  extensive
requirements relating to the disclosure and use of protected health information.
HHS has also issued a final rule on standards for  electronic  transactions  and
code sets to be used by  health  plans,  healthcare  providers,  and  healthcare
clearinghouses  in  those  transactions  (the  "Transaction  Standards  and Code
Sets").  HHS has  also  issued  draft  regulations  governing  the  security  of
protected health  information which impose detailed  requirements on health care
providers,   health  plans,  healthcare   clearinghouses,   and  their  business
associates  relating to the storage,  utilization,  and  transmission  of health
information (the "Security Rules").  Organizations subject to the Privacy Rules,
the Transaction Standards and Code Sets, and the Security Rules will be required
to revise the way in which they use,  store,  and disseminate  protected  health
information.

     Health  Card  has  formed  a  HIPAA  Compliance   Committee   comprised  of
representatives  from  each of  Health  Card's  departments.  The  goals  of the
Committee  are to (i)  ensure  compliance  with HIPAA  including,  to the extent
applicable to it, the Privacy Rules,  the  Transaction  Standards and Code Sets,
and the Security Rules; (ii) focus internal resources on the  standardization of
electronic  communication,  wherever  appropriate;  (iii) implement practices to
support the principles of patient  privacy;  (iv) implement  practices to ensure
the security of electronic  transmissions;  and (v)  implement  the  Transaction
Standards and Code Sets.

     In addition, Health Card has adopted the standards of communication for the
PBM industry set by the National  Council for  Prescription  Drug Programs,  and
performs   risk   assessments,   employee   training  with  respect  to  patient
confidentiality,  and evaluations of business  practices in order to continue to
support patient privacy.

     Health Card cannot predict accurately what effect the HIPAA regulations may
have on its operations,  including the costs of compliance,  and there can be no
assurance that the  restrictions  and duties imposed by the regulations (and the
various state laws and regulations  regarding  patient  privacy) will not have a
material  adverse  effect on Health  Card's  business,  results of operations or
financial condition.

FDA Regulation

     The United  States Food and Drug  Administration  (the "FDA") has authority
under the FDCA to regulate promotional materials about drugs that are issued "by
or on  behalf"  of a  pharmaceutical  manufacturer.  In  January  1998,  the FDA
published a draft  Guidance for Industry  (the  "Guidance")  concerning  certain
promotional   practices   performed   by  PBMs  on  behalf   of   pharmaceutical
manufacturers (referred to in the Guidance as "sponsors"). The FDA was concerned
that  sponsors  might attempt to avoid FDA  regulation  in  connection  with the
promotion of their drugs by utilizing  PBMs to conduct the  marketing  activity.
The  advertising  materials of PBMs are ordinarily not subject to FDA authority.
In the Guidance,  the FDA asserted that it would hold sponsors  responsible  for
the promotional activities of certain PBMs if such activities violated the FDCA.
For a PBM that is not a subsidiary of the sponsor, the FDA would look to several
factors  to  determine  whether  the  sponsor  should  be  responsible  for  the
promotional  activities of the PBM,  including,  among others,  the relationship
between  the  sponsor  and the PBM,  and  whether  the sponsor has control of or
influence  over  the  activities  of the  PBM or the  content  of the  violative
material disseminated by the PBM.

     The FDA received many comments  questioning,  among other things, the FDA's
authority  to  regulate  the  communications  of PBMs that were not owned by the
sponsors.  The FDA effectively withdrew the Guidance in the fall of 1998. Health
Card is not owned or controlled by a  pharmaceutical  manufacturer,  but it does
have contractual  relationships with them, and, had the Guidance been finalized,
the FDA could potentially have considered these pharmaceutical  manufacturers to
be  responsible  for certain  aspects of Health  Card's  business.  Although the
Guidance has effectively been withdrawn,  there can be no assurance that the FDA
will not again  attempt  to assert  jurisdiction  over  certain  aspects  of the
business of PBMs in the future,  and in such event,  the impact could materially
adversely affect Health Card's operations.

ERISA

     Some of Health Card's  sponsors are self-funded  health plans.  These plans
are  subject  to  ERISA,  which  imposes  certain  obligations  on those  deemed
fiduciaries of the health plans. Health Card believes that its activities do not
subject  it to any ERISA  fiduciary  obligations  with  respect to the plans for
which it provides PBM  services.  In  addition,  Health  Card's  current form of
agreement  with plan  sponsors  specifically  provides that Health Card is not a
fiduciary of the plan.  Although  courts have declined to extend ERISA fiduciary
obligations to managed care  companies,  there can be no assurance that the U.S.
Department  of Labor  (which  enforces  ERISA) or a court will not  assert  that
Health Card (or some other PBM) has a fiduciary  obligation in  connection  with
its activities on behalf of its self-funded  sponsors.  If Health Card is deemed
to be a fiduciary,  it could  potentially be subject to claims regarding benefit
denials and breach of  fiduciary  duties in  connection  with its  provision  of
services.

Medicare Prescription Drug Benefits

     Medicare  reimbursement  and  coverage of  prescription  drugs could change
significantly  in the near  future.  Medicare  presently  covers  only a limited
number of outpatient  prescription drugs, but legislative  initiatives are being
considered to expand Medicare  coverage of drugs, in some instances as part of a
broad reform of the Medicare  program.  Some proposals have included  provisions
for  incorporating the services of pharmacy benefit managers into the program to
control costs.  Health Card cannot assess at this stage whether such legislation
will be approved or how it would address drug coverage or costs or impact Health
Card's business. Enactment of legislation to expand Medicare drug coverage could
create broader markets for pharmacy benefit  managers.  Alternatively,  it could
regulate or limit the services of pharmacy  benefit managers and have an adverse
impact upon Health Card's business.

Regulations Applicable to Health Care Professionals

     All states regulate the practice of medicine,  nursing, pharmacy, and other
licensed health professions. Activities deemed by a state's regulatory authority
to constitute the practice of medicine, nursing, pharmacy, or any other licensed
health  profession  without the proper  license  would  subject the actor to the
penalties provided under such state's laws.

     In the course of its  business,  Health Card provides  disease  information
services,  drug usage monitoring  programs,  preferred drug management services,
and consulting  services.  Health Card does not believe that these or any of its
other  activities  as a  pharmacy  benefit  management  company  constitute  the
practice  of  medicine,   nursing,   pharmacy,  or  any  other  licensed  health
profession.  Health Card is licensed as a pharmacy in New York, although it does
not  believe  that it is  required  to be so  licensed  in New York or any other
jurisdiction.  Health Card cannot assure that a regulatory  authority in a state
in which it  engages  in any of the  foregoing  activities  would  not  assert a
contrary  position and subject it to sanctions for the unauthorized  practice of
medicine, nursing, pharmacy or other licensed health profession.

Third Party Administrator and Utilization Review Laws

     Many states have  licensure or  registration  laws  regulating  third party
administrators ("TPAs") and utilization review companies. These laws differ from
state to state, and their application to PBMs is often unclear.  Health Card has
registered or become  licensed as a TPA or  utilization  review company in those
states  in which  it has  concluded  that  such  registration  or  licensure  is
required. Prior to September 1998, however, Health Card conducted its activities
without  obtaining any TPA licenses.  There can be no assurance that Health Card
will not be subject to fines and other  penalties if it is determined  that such
licensure was required prior to Health Card  obtaining a license,  and that such
fines and other  penalties  would not have a material  adverse  effect on Health
Card's business, results of operations or financial condition.

Network Access Limitations

     Many states have adopted  legislation  restricting  the ability of a PBM to
limit  participation  in its pharmacy  provider  network or to remove a provider
from the network.  These laws may require  Health Card or its sponsors to accept
for  participation  in the  network  any  retail  pharmacy  willing  to meet the
applicable  plan's price and other terms, and may restrict the ability of Health
Card and its sponsors to remove a pharmacy from the network without certain "due
process" protections. None of these laws are expected to have a material adverse
effect on Health Card's business, however.

Proposed Regulation of PBMs

     Although neither the federal government,  nor any state, currently directly
regulates  the  activities of PBMs,  several  states,  including New York,  have
introduced  legislation  in recent  years  which,  if  enacted,  would  directly
regulate the  activities  of PBMs.  In  addition,  several  influential  bodies,
including  the National  Association  of Insurance  Commissioners,  the National
Association  of  Boards of  Pharmacy,  and the  National  Committee  on  Quality
Assurance,  are  considering  proposals  to  regulate  PBMs and certain of their
activities,  such as formulary  and  utilization  management.  If these or other
similar  bodies adopt model acts which would  regulate the  activities  of PBMs,
states may be influenced to incorporate  such model acts in their  statutes.  If
laws  directly  regulating  PBMs are passed in states in which  Health Card does
business, such laws could materially affect Health Card's operations.

     Health Card has not retained counsel, or obtained any advisory opinion from
any state  administrative or regulatory agency,  regarding the laws of any other
state.  Health Card cannot be sure that its  activities in such other states are
in compliance with all applicable laws and regulations of such states, and thus,
its  activities in those other states may subject it to judicial and  regulatory
review and such sanctions  and/or  punishments as may be provided under the laws
and regulations of such states.

Item 2.  DESCRIPTION OF PROPERTY.

     The Company currently occupies  approximately  26,500 square feet of office
space  located at 26 Harbor Park  Drive,  Port  Washington,  New York 11050 (the
"Leased  Premises").  The Company subleases the Leased Premises from BFS Realty,
LLC, an affiliate of the  Company's  Chairman (the  "Affiliate").  The Affiliate
leases the Leased Premises from the Nassau County Industrial  Development Agency
("NCIDA")  pursuant to a lease that was entered into by NCIDA and the  Affiliate
in July 1994, which expires in March 2005. The Affiliate has the right to become
the owner of the Leased  Premises upon  expiration of that lease.  The Affiliate
subleases a portion of the Leased  Premises to the Company (the "Lease").  As of
November 1, 2001,  the Company and the  Affiliate  amended the Lease.  The Lease
provides that,  effective  August 1, 2001, the rent payable to the Company shall
be an  aggregate  annual rent of  $308,305.  While  formerly  the  Company  made
estimated monthly real estate tax, utilities and maintenance-expense payments to
the  Affiliate,  the Lease now  provides  that the Company will pay its pro-rata
share of such expenses  directly,  to the entities to whom payment must be made.
The Company  estimates that such monthly  expenses will approximate an aggregate
of $336,000  per year.  The annual rent will  increase by 5% per year during the
term of the Lease.  The annual expenses are also expected to increase,  although
the Company cannot  estimate by how much.  The Lease expires in July,  2010. The
Company  believes  that the Leased  Premises are adequate for current  purposes.
Leasehold  improvements made to this space during the fiscal year ended June 30,
2002, were approximately $60,000.

     Pursuant to a lease dated  August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington,  New York, which is used as a pharmacy.  The landlord for these
premises is 61 Manorhaven Boulevard, LLC, of which the Company's Chairman is the
sole member.  The monthly rent is $1,654 per month through  August 31, 2002. The
annual rent  increases by 5% per year.  Additional  rent, in the form of certain
expenses, is also payable.

     Additionally,  the Company leases office space through its  subsidiaries in
Little Rock,  Arkansas,  Tulsa,  Oklahoma and Latham,  New York.  The  aggregate
annual  rental  payments  for  leased  space in  Little  Rock are  approximately
$169,000;  for leased space in Tulsa are approximately  $48,000; and for Latham,
approximately $700,000. In Latham, the subsidiary currently occupies two floors;
the Company  anticipates  that the amount of space  leased by the Company  (and,
concomitantly,  the amount of rent paid)  will be  significantly  reduced in the
near future.

     In addition,  Health Card rents a two family house in Port Washington,  New
York (near the Company's offices) from P.W. Capital,  LLC, (a company affiliated
with  Health  Card's  Chairman  of the  Board)  which  is used  for  out-of-town
employees.  Health Card evaluated the cost of hotels for these  individuals  and
determined  it was more cost  efficient  to rent the house at a monthly  rate of
$5,500.  During the  fiscal  year ended  June 30,  2002,  Health  Card paid P.W.
Capital,  LLC, $66,000 in rent for this facility.  For the same reasons,  Health
Card rents two houses  from Living In Style,  LLC,  an entity  owned by three of
Health Card's executive officers.  The leases provide for annual rental payments
of a total of $126,000 for the first year, increasing by 5% each year.

Item 3.  LEGAL PROCEEDINGS.

     Health Card is  involved  in various  legal  proceedings,  including  those
described  in  the  following  paragraphs,  incidental  to  the  conduct  of its
business. While there can be no assurance,  Health Card does not expect that any
such proceedings will have a material adverse effect on its business, operations
or financial condition.

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plans Inc.  ("MHP") in the United States  District  Court for the Eastern
District of  Michigan.  The  complaint  alleges,  among other  things,  that the
parties entered into a contract dated July 1999 (the  "Agreement"),  and further
alleges  that  the  Company  has  overcharged  MHP  for  the  administration  of
prescription  benefit  services in  contravention to the terms of the Agreement.
MHP is seeking $3 million  dollars in damages.  The Company  filed an answer and
counterclaim on June 12, 2002. In the counterclaim,  the Company claimed damages
in excess of $2.8 million based on Midwest's failure to pay under a contract. In
late June  2002,  Midwest  agreed to make two  payments  in the  amount of $1.34
million and $1.36  million to  partially  settle the  Company's  claims  against
Midwest.  As a part of  that  payment,  Midwest  dropped  one of its two  claims
against the Company that had sought to setoff or recoup  alleged  overcharges by
the Company. The Company continues to have counterclaims  totaling over $200,000
against  Midwest for  Midwest's  failure to pay the amounts it had agreed to pay
Health Card for goods and services.  Trial  currently is scheduled for September
22, 2003.  Factual  discovery cut-off is February 28, 2003. The Company believes
the claims  alleged in the complaint are without merit and intends to vigorously
defend the action.


Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          N/A

                                     PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS.

Market Information

     Health  Card's Common Stock is traded on the Nasdaq  National  Market under
the symbol "NMHC" on the National  Association of Securities  Dealers  Automated
Quotation System ("NASDAQ"). The table below sets forth high and low sale prices
of the Common Stock, as furnished by NASDAQ.



                                        Fiscal Years ended June 30,
                                   2001                        2002
                                   ----                        ----
                                High     Low              High      Low

First Quarter                  $3.25   $1.88              $4.82   $1.45
Second Quarter                  2.25    1.16             10.40     2.65
Third Quarter                   3.13    1.31             15.61     9.10
Fourth Quarter                  3.49    2.90             12.90     7.90

Holders

     Health  Card has been  advised by its  transfer  agent  (Continental  Stock
Transfer & Trust Company) that the  approximate  number of record holders of its
common stock as of September 13, 2002 was 46.

Dividend Policy

     Health Card has not declared or paid any cash dividends in the past. Health
Card  is  prohibited,   under  the  terms  of  the  Facility,  from  making  any
distributions to shareholders or declaring or paying any dividend.  Even if such
prohibition  were not in effect,  Health Card  intends to retain any earnings to
finance its growth.  Any future  payments of dividends will be at the discretion
of the Board of  Directors  and will  depend  upon such  factors as the Board of
Directors deems relevant.

Recent Sales of Unregistered Securities

     Pursuant  to the terms of the PAI  Agreement,  the Company  issued  400,000
shares of unregistered  Common Stock of the Company to certain PAI  stockholders
at the time of the  acquisition.  The stock issued to the PAI  Stockholders  was
valued  at  $849,920.  In August  2001,  the  Company  issued  62,500  shares of
unregistered  Common Stock of the Company to the PAI  stockholders as additional
consideration.  These  shares  were  valued at  $250,000.  In August of 2002 the
Company  issued  an  additional  41,668  shares  of  Common  Stock  to  the  PAI
shareholders, again valued at $250,000. Information concerning the PAI Agreement
is provided in Item 1 ("Description of Business") of this Form 10-K, and in Note
2 of the  Notes to  Consolidated  Financial  Statements  in Item 8  hereof.  The
Company  was  advised   that  the  issuance  of  such  shares  was  exempt  from
registration under the Securities Act by virtue of Section 4(1) thereof.

     On January 22, 2002 the Company  completed a convertible note offering (the
"Note Offering") in the aggregate principal amount of $11.6 million. Pursuant to
the Note Offering,  the  subscribers,  two of whom are directors of the Company,
each received a promissory note (each a "Note") paying interest quarterly on the
unpaid  principal  balance at the rate of 12% per annum. The Notes had a term of
one year, unless otherwise extended pursuant to the terms of the Note. The Notes
were  convertible  at any time at the election of the holders into shares of the
common  stock of the Company  ("Conversion  Shares") at a  conversion  price per
share equal to $12.00,  the fair value of the common  stock on January 22, 2002.
The Note holders were also granted certain  registration  rights with respect to
the Conversion Shares pursuant to a Registration  Rights Agreement.  The Company
was  advised  that the Notes  Offering  was exempt from  registration  under the
Securities  Act of 1933  pursuant to Section  4(2) of that Act and  Regulation D
promulgated thereunder.

     The  entire  $11.6  million  principal  amount of the Notes,  plus  accrued
interest, was retired on June 30, 2002.

Item 6.   SELECTED FINANCIAL DATA.

     The following tables summarize certain selected  financial  information for
each of the  years in the five  year  period  ended  June 30,  2002 and  provide
certain  supplemental data. The selected  consolidated income statement data for
the years ended June 30,  2000,  2001,  and 2002 and the  selected  consolidated
balance  sheet  data as of June 30,  2001 and 2002  have been  derived  from the
audited  consolidated  financial  statements  of Health Card  included in Item 8
hereof. The selected consolidated income statement data for the years ended June
30, 1998 and 1999 and the selected  consolidated  balance  sheet data as of June
30, 1998,  1999 and 2000 have been derived from audited  consolidated  financial
statements  of  Health  Card  that  are not  included  in this  Form  10-K.  The
information  contained in this table should be read in  conjunction  with Health
Card's consolidated  financial  statements and notes thereto,  and "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included  in Item 7 hereof.  All  amounts  are in  thousands,  except  per share
amounts.


<PAGE>

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

                                           Year Ended June 30,

                                          1998             1999              2000              2001              2002
Income Statement Data: (1)
Revenues......................        $  95,473          $ 128,262        $  167,676       $  272,119         $ 459,832
Cost of claims................           86,715            115,768           153,377          249,572           424,733
                                         ------            -------           -------          -------           -------
Gross profit...................           8,758             12,494            14,299           22,547            35,099
Selling, general and                      7,192             10,171            12,358           21,423            27,230
                                          -----             ------            ------           ------            ------
  administrative expenses*
Operating income                          1,566              2,323             1,941            1,124             7,869
Other income (expense)                     (181)               592               922              877              (502)
                                          -----              -----             -----            -----             -----
Income before provision for               1,385              2,915             2,863            2,001             7,367
  income taxes
Provision for income taxes                  569                976             1,247              843             2,900
                                            ---                ---             -----              ---             -----
Net income...................         $     816          $   1,939        $    1,616            1,158         $   4,467
                                            ===              =====             =====            =====             =====

Earnings per common share:
   Basic..........................    $     0.16         $   0.37         $     0.24       $     0.16         $    0.62
   Diluted........................    $     0.16         $   0.37         $     0.24       $     0.16         $    0.56

Weighted average number of
shares outstanding:
  Basic...........................         4,967            5,205              6,720           7,101               7,213
  Diluted........................          4,969            5,205              6,720           7,200               7,909
*Includes amounts charged by
  affiliates aggregating.........     $    4,905         $  2,817         $    2,986      $    4,081         $     1,889
Balance Sheet Data:
Cash and cash equivalents             $    1,306         $  1,978         $   14,595      $   10,877         $     1,768
Working capital (deficit)                 (8,658)          (6,681)             6,030          (7,091)            (42,653)
Total assets                              18,344           30,846             44,363          79,110             149,895
Long term debt including                      10                2              2,332           1,875              16,065
  current portion
Total stockholders' equity (deficit)      (2,006)           1,998             13,425          15,472              21,277
Supplemental Data (2)
Retail pharmacy claims processed           2,406            3,066              4,059           7,403              14,371
Mail pharmacy claims processed               132              171                255             487                 767
Estimated plan participants                  401              521                505           1,500               2,500
  (at period end)

</TABLE>


     (1) Reference is made to Item 1 hereof (Description of Business) and Item 7
hereof  (Management's  Discussion & Analysis)  for  descriptions  of the various
acquisitions  that have been  consummated in the last 3 years, and the financing
arrangements  that have  been set in place;  such  acquisitions  and  financings
affect the comparability of the information provided in the foregoing tables for
fiscal years 2001 and 2002.

     (2) This data has not been audited. See Items 1 and 7 hereof.

<PAGE>


Item 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     The audited  Consolidated  Financial  Statements  include  the  accounts of
Health Card and its wholly  owned  subsidiaries,  PAI,  PMP,  Centrus,  National
Medical  Health Card IPA, Inc.  ("IPA")  (which was formerly known as PSCNY IPA,
Inc.), Specialty,  NMHCRX Contracts, Inc. ("Contracts") and PBM Technology, Inc.
("PBM  Tech").  Also  included are the  accounts of Funding.  Unless the context
otherwise requires, references herein to the "Company" or "Health Card" refer to
the  Company  and its  subsidiaries  on a  consolidated  basis.  The  results of
operations and balance sheet of PAI have been included in the  consolidation  as
of July 20, 2000, the effective date that the Company  acquired PAI. The results
of operations  and balance sheet of PMP have been included in the  consolidation
as of March 5, 2001,  the  effective  date that the Company  acquired  PMP.  The
results of  operations  and  balance  sheet of  Centrus  and  Funding  have been
included in the  consolidation  as of January 29, 2002,  the effective date that
the  Company  acquired   Centrus.   All  material   intercompany   balances  and
transactions have been eliminated in the consolidation.

     Health  Card  derives  its  revenue  from the  provision  of  comprehensive
pharmacy benefit management services to sponsors of prescription  benefit plans.
Substantially  all of the  services  Health Card  provides to its  sponsors  are
related to pharmacy benefit  programs and services.  Health Card also recognizes
administrative fees and earns rebates at the time of claims adjudication.

     Revenue is earned and recognized as follows: administrative fees are agreed
upon with the sponsor on either a per claim charge or a per plan participant per
month charge.  Per claim fees are billed to sponsors for the claims  adjudicated
during the period.  Per plan  participant per month fees are generally billed to
sponsors at the  beginning  of the month.  The amount of revenue  related to the
drugs dispensed by pharmacies participating in Health Card's pharmacy network is
recognized  at the time of  dispensing  the drug as the  cost is  incurred.  The
amount of revenue  recognized  is reduced by the amount of rebates  that  Health
Card shares with its sponsors.  The specific  terms of the contracts that Health
Card enters into with its sponsors will determine whether Health Card recognizes
the gross revenue related to the cost of the  prescriptions  filled.  In certain
limited cases,  the Company has not recognized the gross revenue or cost related
to  prescriptions  filled  for a  specific  sponsor.  This has no  impact on the
Company's  gross  profit  since  neither the revenue nor the related cost of the
prescriptions is recorded.

     The  following  table sets forth the  breakdown of Health  Card's  revenues
relating to pharmaceuticals dispensed and administrative fees ($ in thousands):


<PAGE>


                                                 Years Ended June 30,
                                            2000            2001          2002
Revenues relating to
Pharmaceuticals                             $165,171     $266,959      $447,862
Administrative fees and other                  2,505        5,160        11,970
                                          ----------     --------     ---------

         Total Revenues                     $167,676     $272,119      $459,832
                                            --------     --------      --------

     Health  Card  does  not  take   possession   or  legal   ownership  of  the
pharmaceuticals  dispensed by the pharmacy network, although Health Card assumes
the  legal   responsibility   and   financial   risk  of  paying  for  dispensed
pharmaceuticals whether or not Health Card is paid by its sponsors.

     Health Card utilizes its comprehensive pharmacy benefit database to perform
outcome  studies and to develop disease  information  programs which are used to
reduce overall healthcare costs. These programs currently produce a small amount
of revenue.  Health Card  believes  that these  value  added  information  based
services are becoming a more important  component of managed care, and therefore
these  services may provide an  increasing  source of revenue for Health Card in
the future.

     Cost of claims includes the amounts paid to network  pharmacies,  including
mail service  pharmacies,  for pharmaceutical  claims, and reductions  resulting
from the gross  rebates  received  from drug  manufacturers.  Cost of claims are
recognized  as follows:  the  contractual  obligation  of Health Card to pay for
these drugs is recorded as cost of claims at the time of  dispensing of the drug
by the  pharmacy  network.  Cost of claims is reduced by the rebates that Health
Card  receives.  Rebates  are  earned  from  drug  manufacturers  based on drugs
utilized by plan  participants at the time of dispensing.  Health Card's portion
of these rebates,  which varies by sponsor,  is recorded  monthly based upon the
claims adjudicated in that month.

     Health  Card  processes  its  rebate  claims  either  direct  with the drug
manufacturers,  through its  wholly-owned  subsidiary,  Specialty,  for which it
receives  administrative  fees,  or through a third party rebate  administrator.
Effective  July 1, 2001,  Health Card has  entered  into an  agreement  with the
Administrator to handle all of its consolidated  rebate claims which it does not
otherwise submit direct to the drug manufacturers.

     The amount of rebates recognized as reductions to revenue or cost of claims
is based on estimates tied to actual claims data. The third party  administrator
provides estimates to Health Card based on its analysis of the amount of rebates
that Health Card's claims should generate. These estimates are prepared based on
estimates  of how Health  Card's  claims might  influence  the market share of a
particular  drug covered  under an agreement  with a drug  manufacturer.  Market
share is generally defined as the percentage of utilization of a certain drug or
drugs within its  therapeutic  class.  Under  Health  Card's  contract  with the
Administrator, Health Card receives a specified amount per claim. Therefore once
the total  number of claims is known,  then the total  amount of  rebates  to be
received  will be known.  These  amounts are  contractually  required to be paid
within 150 days after the end of a quarter.

     Health  Card  computes  the  amount of  rebates  due  direct  from the drug
manufacturers based on the actual claims data, the criteria  established in each
individual contract, and the specified payment schedules. The drug manufacturers
are  obligated to reimburse  Health Card for earned  rebates  within a specified
period of time.

     Certain  of Health  Card's  sponsors  are  entitled  to all or a portion of
rebates received by Health Card, which portion varies  contractually by sponsor.
The  manufacturer  rebates  retained by Health Card,  after the sponsors receive
their contractual amounts,  have historically had a significant impact on Health
Card's financial performance. For the fiscal years ended June 30, 2000, 2001 and
2002  the  rebates  retained  by  Health  Card  has  equaled  27%,  19% and 19%,
respectively, of the Company's total gross profit. Due to the expected continued
growth and  diversification  of Health  Card's  business,  Health  Card  expects
rebates to continue to account for a significant,  but declining,  percentage of
its total gross profit.

     If such rebate  programs were to be  discontinued  or adversely  altered by
drug manufacturers, or if the terms of Health Card's rebate sharing arrangements
with its sponsors were adversely altered when these arrangements  expire,  there
could be a material adverse effect on Health Card's business,  operating results
and financial condition.

     Credit risk relating to the rebates  receivable  is evaluated  based on the
financial  strength  of the  rebate  administrator  and the drug  manufacturers.
Health  Card  believes  that  most of the drug  manufacturers  are  Fortune  500
companies. Health Card does not believe a credit risk reserve is necessary.

     The  pharmacy  benefit  management   industry  is  intensely   competitive,
generally  resulting in  continuous  pressure on Health Card's gross profit as a
percentage  of total  revenue.  In  recent  years,  industry  consolidation  and
dramatic  growth  in  managed  healthcare  have led to  increasingly  aggressive
pricing of  pharmacy  benefit  management  services.  Given the  pressure on all
parties  to reduce  healthcare  costs,  Health  Card  expects  this  competitive
environment to continue for the foreseeable future.

     Health  Card  plans  to  continue  its  organic  growth  through  increased
marketing  of its  services  and by  expanding  the range of  services  offered,
particularly to include value added  consulting and  information-based  services
which  Health  Card  believes  to be in growing  demand  within  the  healthcare
industry. In addition,  Health Card intends to continue to pursue an acquisition
program  to  supplement  its  organic  growth  by making  acquisitions  of other
pharmacy  benefit  management  service  providers,  as well as related  services
providers.

Public Offering

     On August 2, 1999,  Health Card  completed the sale of 1,600,000  shares of
its common stock in an  underwritten  public  offering (the "Public  Offering").
Pursuant  to  the  Public  Offering,   Health  Card  received  net  proceeds  of
approximately $9,538,037. Concurrently, the Bert E. Brodsky Revocable Trust (the
"Brodsky  Trust")  sold  400,000  shares  of common  stock of Health  Card in an
underwritten  offering.  Of the proceeds  received by the Brodsky Trust, it used
approximately  $1,992,900 to partly repay certain  indebtedness  owed by certain
affiliates of the Brodsky Trust to Health Card.

Results of Operations

Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001

     Revenues  increased  $187.7  million,  or  approximately  69%,  from $272.1
million  for the fiscal  year ended June 30,  2001,  to $459.8  million  for the
fiscal year ended June 30, 2002. Of the increase, $127.1 million, or 68% was due
to the inclusion of revenues from Centrus,  subsequent to January 29, 2002.  PMP
accounted  for another $19.2  million,  or 10.2%,  of the increase  since it was
acquired on March 5, 2001 and  included a full  fiscal year in 2002  compared to
less than four  months in the fiscal  year ended June 30,  2001.  Another  $39.6
million of the  increase  was due to  revenues  related to new  sponsors  or new
services  offered  during  fiscal  2002.  The  majority  of the  balance  of the
year-over-year  increase  was due  primarily to  increased  revenues  from other
existing  sponsors  as a result of  several  factors  including  higher  charges
relating to  increased  cost of  pharmaceuticals,  new drugs,  plan  participant
growth,  and an increase in the average  number of claims per plan  participant.
Two other factors affecting the year-over-year increase were: rebates payable to
the Company's  sponsors  increased by $10.2 for the twelve months ended June 30,
2002 as compared to the twelve  months ended June 30, 2001.  Since these rebates
are treated as a  reduction  in revenues  this led to  reduction  in the overall
year-over-year revenue increase.  Secondly,  there were certain contracts during
fiscal year 2002 that the Company  recognized on a net revenue basis. There were
no  contracts  during the twelve  months  ended June 30,  2001 that the  Company
recognized on the net revenue  basis.  The specific  terms of the contracts that
Health Card enters into with its sponsors  will  determine  whether  Health Card
recognizes the gross revenue related to the cost of the prescriptions filled. In
certain limited cases,  the Company has not recognized the gross revenue or cost
related to prescriptions  filled for a specific  sponsor.  This has no impact on
the Company's gross profit since neither the revenue nor the related cost of the
prescriptions  is recorded.  Finally,  revenues for the twelve months ended June
30, 2001 were  negatively  impacted by a reduction in revenues of $733,000  that
arose when the Company  settled certain fees due from a major sponsor related to
a capitation arrangement for calendar year 1999.

     Cost of claims increased $175.1 million,  or approximately 70%, from $249.6
million  for the fiscal  year ended June 30,  2001,  to $424.7  million  for the
fiscal year ended June 30, 2002. Centrus accounted for $122.9 million, or 70% of
the increase.  PMP accounted for another $17.3 million,  or 10% of the increase.
The balance of the  increase is related to the  increased  revenue as  described
above.  An  increase  of $12.4  million,  $9.1  million  of which is  related to
Centrus,  in gross rebates received,  which is treated as a reduction in cost of
claims,  for the fiscal  year ended June 30, 2002 as compared to the fiscal year
ended June 30,  2001 led to a reduction  in the  year-over-year  increase.  As a
percentage  of revenues,  cost of claims  increased  from 91.7% to 92.4% for the
fiscal years ended June 30, 2001 and June 30, 2002,  respectively.  The increase
relates  primarily to the higher cost of claims on the Centrus book of business,
which serves managed care clients primarily. Industry-wide, managed care clients
have a greater cost of claims, and consequently a lower gross margin, than other
types of business in the PBM  industry.  Centrus'  cost of claims for the fiscal
year ended June 30, 2002 ran about 3 - 6 percentage points greater than the rest
of the Company's business,  and since Centrus accounted for 28% of the Company's
revenue in the fiscal year, this impacted the overall cost of claims percentage.

     Gross profit  increased  from $22.5  million for the fiscal year ended June
30,  2001 to $35.1  million  for the fiscal  year ended June 30,  2002;  a $12.6
million, or 56%, increase. In addition, to the revenue volume increase,  Centrus
accounted for $4.2 million,  or 33%, of the increase.  PMP accounted for another
$1.9  million,  or 15%, of the  increase.  The  increase in rebates  (and admin-
istrative fees related to the  collection of rebates)  after  accounting for the
amount of rebates  that are shared with  sponsors,  accounted  for another  $4.6
million, or 37%. Gross profit, as a percentage of revenue, declined from 8.3% to
7.6% for the fiscal years ended June 30, 2001 and June 30,  2002,  respectively.
The decrease  year-over-year is again  principally  related to the lower margins
achieved by Centrus.  The Company has also seen a decline in profit  margins due
to competitive pressures.

     Selling,  general,  and  administrative  expenses,  which  include  amounts
charged by affiliates,  increased $5.8 million, or approximately 27%, from $21.4
million for the fiscal year ended June 30, 2001 to $27.2  million for the fiscal
year ended June 30, 2002.  Approximately  67% of the increase,  or $3.9 million,
was  related to the  acquisition  of  Centrus.  There  were also  year-over-year
increases in the following  areas:  (i) an  approximate  $1,202,000  increase in
expenditures  related to  increases  in  compensation  and  benefits,  primarily
associated with new employees  including senior management;  (ii) an approximate
$709,000 increase in depreciation and amortization expenses related to increased
hardware  procurement  and  software  development  in  prior  periods;  (iii) an
approximate  $1,189,000 increase in the use of outside consultants  primarily to
update  the  Company's  information  technology  infrastructure;   and  (iv)  an
approximate  $360,000 increase in commission  expense related to the increase in
new  revenues  not  related  to the  acquisitions.  Partially  offsetting  these
increases were: (i) a reduction of  approximately  $1,376,000  related to actual
payments  made  and/or  reserves  accrued  during the fiscal year ended June 30,
2001,  but not the  fiscal  year ended June 30,  2002  related to the  following
matters:  (A) the settlement of the West Contra Costa lawsuit (see Note 9 to the
Consolidated  Financial  Statements  that  comprise  Item  8  hereof);  (B)  the
reconciliation and settlement of amounts due to a former major sponsor (See Note
7 to the Consolidated Financial Statements), and (C) the settlement, in April of
2001,  of a certain  patent  infringement  litigation  involving  the use by the
Company of certain PBM  information  technology  systems;  (ii) the reduction in
general and administrative  expenses charged by affiliates  described below, and
(iii) an approximate  $396,000  decrease in intangible  amortization  due to the
adoption of SFAS 142. Per SFAS 142, the Company no longer amortizes  goodwill as
of July 1, 2001 (see Note 1 to the Consolidated  Financial Statements Comprising
Item 8 hereof).

     General  and  administrative   expenses  charged  by  affiliates  decreased
approximately  $2.2 million,  or 54%,  year-over-year  from $4.1 million to $1.9
million  for  the  fiscal   years  ended  June  30,  2001  and  June  30,  2002,
respectively.  The Company has eliminated most of the related party transactions
effective  January 1, 2002.  The  majority  of the  decrease  related to reduced
information  technology services and management and consulting services procured
from  affiliated  companies.  The hiring of full time  employees  and the use of
outside  consultants  replaced  the use of  affiliated  companies  to update the
information technology infrastructure.

     Selling,  general,  and  administrative  expenses  as a percent  of revenue
improved  from 7.9% for the  fiscal  year  ended  June 30,  2001 to 5.9% for the
fiscal  year ended June 30,  2002.  This  improvement  stems from the  continued
growth of the Company due to improving efficiencies with scale.

     For the fiscal  year ended June 30,  2001,  the  Company  recognized  other
income, net, of approximately $877,000. For the fiscal year ended June 30, 2002,
the  Company  incurred  other  expense,  net,  of  approximately  $502,000.  The
components  of the  approximate  $1,379,000  increase  in net  expense  were  an
approximate  $889,000  increase in interest  expense,  an  approximate  $591,000
decrease in interest  income,  and an  approximate  $101,000 gain on sold assets
during the fiscal  year ended June 30,  2002.  The  primary  reasons for the net
increase  in  expense  were  the  interest  expense  incurred  on the  Company's
revolving  credit facility and on the Note Offering during the fiscal year ended
June 30, 2002 to finance the acquisition of Centrus (see Item 1, "Description of
Business-Recent  Acquisitions",   and  Note  2  to  the  Consolidated  Financial
Statements  comprising  Item 8 hereof).  Partially  offsetting  the  increase in
interest  expense was the approximate  $101,000  deferred gain during the fiscal
year  ended  June 30,  2002 on the sale of assets  related  to a  sale-leaseback
transaction.  (See Note 9 to the Consolidated  Financial  Statements  comprising
Item 8 hereof.)

     Income before the provision for income taxes increased  approximately  $5.4
million,  or 268%, from  approximately  $2.0 million,  for the fiscal year ended
June 30, 2001, to approximately  $7.4 million for the fiscal year ended June 30,
2002.  The primary reason for the increase was the improving  efficiencies  that
come with scale. For the fiscal year ended June 30, 2002 revenues  increased 69%
over  the  fiscal  year  ended  June  30,  2001,  while  selling,  general,  and
administrative  expenses  increased  only 27%. In  addition,  while gross margin
percentages declined year-over-year due to the acquisition of Centrus, the gross
profit  dollars  increased  by 56%.  These  factors  contributed  to the  marked
improvement - 268% - in profitability.

     EBITDA  (earnings before interest,  taxes,  depreciation and  amortization)
increased  by  approximately  $7.4  million or 199%,  from $3.7  million for the
fiscal year ended June 30, 2001 to $11.1  million for the fiscal year ended June
30, 2002. The primary factor for the increase was the  approximate  $6.7 million
increase  in  operating  income  described  above.  In  addition,  there  was an
approximate  $870,000  increase  in  depreciation  and  amortization,  including
Centrus.  This increase was partially offset by an approximate $202,000 decrease
in goodwill and other intangibles amortization.

     The effective tax rate  decreased from 42.1% for the fiscal year ended June
30, 2001 to 39.4% for the fiscal year ended June 30, 2002. The decrease  stemmed
primarily from a reduction in non-deductible goodwill amortization.

     Net income for the fiscal year ended June 30, 2002 was  approximately  $4.5
million as compared to approximately $1.2 million for the fiscal year ended June
30, 2001; a 285%  increase.  Earnings per diluted share  increased by $0.40,  to
$0.56 for the fiscal year ended June 30, 2002.

Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000

     Revenues  increased  $104.4  million,  or  approximately  62%,  from $167.7
million  for the fiscal  year ended June 30,  2000,  to $272.1  million  for the
fiscal year ended June 30, 2001. Of the increase,  $75.7 million, or 72% was due
to the  inclusion of revenues from PAI,  subsequent  to July 20, 2000,  and PMP,
subsequent  to March 5, 2001.  $15.6 million of the increase was due to revenues
related to new sponsors or new services offered.  The majority of the balance of
the year-over-year  increase,  or approximately $13.1 million, was due primarily
to  increased  revenues  from  other  existing  sponsors  as a result of several
factors including higher charges relating to increased cost of  pharmaceuticals,
new drugs,  plan  participant  growth,  and an increase in the average number of
claims per plan  participant.  Both  periods were  negatively  impacted by a net
reduction in revenues that arose when the Company  settled certain fees due from
a major sponsor  related to a capitation  arrangement  for calendar years 1997 -
1999.  The net reduction in revenues was $821,000 for the fiscal year ended June
30, 2000,  and  $733,000  for the fiscal year ended June 30, 2001.  The calendar
year  2000 and  2001  contract  with  this  sponsor  is no  longer a  capitation
arrangement.

     Revenues  for both the fiscal  years  were  adjusted  based on EITF  00-14,
Accounting for Certain Sales  Incentives - Coupons,  Rebates and Discounts.  The
financial  impact of this is to reduce  revenues  by the amount of rebates to be
paid to  sponsors  and  reduce  cost of claims by the  gross  amount of  rebates
received by the Company.  Previously the net difference between the gross amount
received  by the  Company  and the  amount  paid to  sponsors  was  treated as a
reduction in cost of claims with no change to revenue. The impact of this change
was to reduce  revenue and cost of claims by $4.6  million and $5.9  million for
the fiscal years ended June 30, 2000 and 2001, respectively.

     Cost of claims increased $96.2 million,  or approximately  63%, from $153.4
million  for the fiscal  year ended June 30,  2000,  to $249.6  million  for the
fiscal year ended June 30, 2001. PAI and PMP accounted for $67.8 million, or 70%
of the increase.  As a percentage  of revenues,  cost of claims  increased  from
91.5% to 91.7% for the  fiscal  years  ended  June 30,  2000 and June 30,  2001,
respectively.  The  percentage  for the  fiscal  year  ended  June 30,  2000 was
favorably  impacted by a $736,000  reduction in rebates  payable,  which reduced
cost of claims,  which arose when the Company  reevaluated  its liabilities to a
plan  sponsor.  The effect of this  reduction is  unrelated to the  reduction in
revenues and cost of claims described in the preceding paragraph.

     Gross profit  increased  from $14.3  million for the fiscal year ended June
30,  2000 to $22.5  million  for the fiscal  year ended June 30,  2001;  an $8.2
million,  or 58%, increase.  PAI and PMP accounted for $7.9 million,  or 96%, of
the increase. Gross profit as a percentage of revenue declined from 8.5% to 8.3%
for the fiscal  years ended June 30, 2000 and June 30, 2001,  respectively.  The
decline is  partially  attributable  to the impact of the  one-time  adjustment,
described in the  explanation  for the $736,000  change in cost of claims above.
The  Company  has also  seen a  decline  in profit  margins  due to  competitive
pressures.

     Selling,  general,  and  administrative  expenses,  which  include  amounts
charged by affiliates,  increased $9.0 million, or approximately 73%, from $12.4
million for the fiscal year ended June 30, 2000 to $21.4  million for the fiscal
year ended June 30, 2001.  Approximately  46% of the increase,  or $4.2 million,
was related to the  inclusion of PAI and PMP in the  consolidated  numbers.  The
balance of the growth in these expenses was  principally  related to five areas:
(i) an approximate  $1,533,000 increase in expenditures  related to increases in
compensation  and benefits,  primarily  associated with new employees  including
senior  management;  (ii) an approximate  $635,000  increase in depreciation and
amortization  expenses  related to increased  hardware  procurement and software
development;  (iii) an approximate  $430,000 increase in data processing charges
related to  increased  information  technology  services;  (iv) an  aggregate of
approximately $1,353,000 related to actual payments made and/or reserves accrued
related to the following  matters:  (A) the  settlement of the West Contra Costa
lawsuit (see Note 9 to the Consolidated  Financial Statements  comprising Item 8
hereof);  (B) the reconciliation and settlement of amounts due to a former major
sponsor  (See  Note 7 to the  Consolidated  Financial  Statements),  and (C) the
settlement of a certain patent infringement  litigation involving the use by the
Company of certain PBM  information  technology  systems and (v) an  approximate
$283,000  increase in legal fees  related  primarily to the defense of the items
discussed in (iv) above.

     General  and  administrative   expenses  charged  by  affiliates  increased
approximately  $1,095,000,  or 37%, year-over-year from $2,986,000 to $4,081,000
for the fiscal year ended June 30,  2000 and June 30,  2001,  respectively.  The
majority of the increase  related to additional rent related to additional space
taken in fiscal  year  2001,  increased  information  technology  services,  and
additional administrative support services and supplies to support the continued
expansion of the business.

     Other income, net, declined by approximately  $45,000, or 5%, from $922,000
in the fiscal  year ended June 30,  2000,  to  $877,000 in the fiscal year ended
June 30,  2001.  The main  factor in the  decline  was an  approximate  $155,000
increase in  interest  expense,  primarily  related to the fact that the Company
entered  into a capital  lease  agreement  with  Hewlett  Packard  for  computer
hardware and related  software that went into effect in March 2000. The increase
in interest expense was partially offset by an approximate  $111,000 increase in
interest  income related to increased cash flow due to the inclusion of PAI, PMP
and SPC.

     Income before income taxes declined  approximately  $862,000,  or 30%, from
approximately  $2,863,000,   for  the  fiscal  year  ended  June  30,  2000,  to
approximately  $2,001,000  for the fiscal year ended June 30, 2001.  The primary
reasons for the  decline  were the one time  adjustments  noted  above:  (i) the
$733,000  revenue  reduction  in the fiscal year ended June 30,  2001;  (ii) the
$1,353,000  payments/accrued  reserve for  settlements  in the fiscal year ended
June 30, 2001; and (iii) the $736,000 reduction in rebates payable in the fiscal
year  ended  June  30,  2000.   While  income  before   income  taxes   declined
year-over-year,  EBITDA  (earnings  before  interest,  taxes,  depreciation  and
amortization)  for  these  same  periods  actually  increased  by  approximately
$478,000,  or 15%,  from  $3,241,000  for the fiscal year ended June 30, 2000 to
$3,719,000  for the  fiscal  year  ended  June  30,  2001.  This  was due to the
inclusion of approximately  $568,000 of goodwill amortization related to the PAI
and PMP acquisitions in the period ended June 30, 2001, approximately $93,000 of
depreciation  of PAI's and  PMP's  assets  during  this  same  year,  as well as
approximately  $635,000 of  incremental  depreciation  and  amortization  of new
assets  procured  and  capitalized  during the year ended June 30,  2001.  These
increases   offset  the  approximate   $818,000   decline  in  operating  income
year-over-year.

     There were a total of four negative adjustments  reflected in the Company's
financial  performance  during the fiscal year ended June 30,  2001,  related to
settlements  with  sponsors  and/or  lawsuits.  These  settlements,   which  are
described  above and in Note 9 to the  Consolidated  Financial  Statements  that
comprise Item 8 hereof,  reduced  income  before  income taxes by  approximately
$2,086,000.  Of this total,  $773,000  was  actually  paid out during the fiscal
year,  with the balance to be paid  during the fiscal year ended June 30,  2002.
The Company is not  currently  aware of any other  issues  that might  require a
settlement. The Company believes its bad debt reserves and other reserves should
be sufficient based on current information.

     The effective tax rate  decreased from 43.6% for the fiscal year ended June
30, 2000 to 42.1% for the fiscal year ended June 30, 2001. The decrease  stemmed
primarily from a lower effective state tax rate net of federal taxes.

Liquidity and Capital Resources

     The Company's  primary cash  requirements are for capital  expenditures and
operating  expenses,  including cost of  pharmaceuticals,  software and hardware
upgrades and the funding of accounts receivable.  The Company also requires cash
for potential  acquisitions of other pharmacy benefit management companies or of
companies  providing  related  services.  As of June 30, 2002, the Company had a
working  capital  deficit of $42.7  million  as  compared  to a working  capital
deficit of $7.1 million as of June 30, 2001.  The primary reason for the decline
in working  capital was the acquisition of Centrus for $40 million in cash. This
decline was  partially  offset by the increased  profitability  generated by the
Company during the fiscal year ended June 30, 2002. The Company has now acquired
three  companies  since July 2000  utilizing  primarily  cash.  This has had the
effect of increasing the Company's  working  capital  deficits until  sufficient
profitability is generated to pay back the cost of the acquisitions.

     Net cash  provided  by  operating  activities  was $12.1  million and $20.4
million for the fiscal years ended June 30, 2001 and 2002, respectively.  Of the
$8.3 million increase, $3.3 million is related to increased net income generated
during the fiscal year ended June 30,  2002.  For the fiscal year ended June 30,
2002,  accounts payable increased by $49.7 million primarily related to Centrus'
claims and rebates payables being added. At the same time,  accounts and rebates
receivables increased by $37.7 million,  again primarily due to Centrus. The net
effect of these two items was $12 million of net cash  provided  by  operations.
For the  fiscal  year ended  June 30,  2001  accounts  and  rebates  receivables
increased by $11.5 million and accounts  payable  increased by $19.5 million,  a
net provision of cash of $8 million,  a difference of $4 million  during the two
periods.

     Historically,  the timing of the Company's accounts receivable and accounts
payable has generally been a net source of cash from operating activities.  This
is the result of the terms of trade in place with plan sponsors on the one hand,
and the Company's pharmacy network on the other hand. These terms generally lead
to the  Company's  payments to  participating  pharmacies  being slower than its
corresponding  collections  from plan sponsors.  The Company  believes that this
situation is not unusual in the pharmacy benefit management industry and expects
to operate on similar terms for the foreseeable future. However, there can be no
assurance that such terms of trade will continue in the future and, if they were
to change  materially,  the Company could  require  additional  working  capital
financing.  The Company has put in place a $40 million revolving credit facility
for acquisitions and working capital financing.  However, if such terms of trade
were  to  change  materially,  and/or  if the  Company  were  unable  to  obtain
additional working capital  financing,  there could be a material adverse effect
on the Company's business, financial condition, or results of operations.

     Net cash used in investing activities was $15.1 million for the fiscal year
ended June 30, 2001 as compared to $42.9  million for the fiscal year ended June
30,  2002.  The primary  differences  in the two periods  were the  acquisitions
completed.  The fiscal year ended June 30, 2001 included the acquisitions of PAI
and PMP which used net cash of $11.3  million.  The  fiscal  year ended June 30,
2002  included the  acquisition  of Centrus which used $40.3 million of net cash
and $1.0 million of additional  consideration  paid to the PAI shareholders (see
Note 2 to  Consolidated  Financial  Statements  comprising  Item 8 hereof).  The
difference in the amount of net cash required for these three  acquisitions  was
$30.0 million. The net cash outlay for PAI as of June 30, 2002 was $5.5 million,
representing  the initial  payment of $6.0  million plus $0.2 million of related
expenses, plus the $1.0 in additional consideration,  less PAI's cash balance at
July 20, 2000 of $1.7  million.  The net cash  outlay for PMP was $6.7  million,
representing  the initial  payment of $6.8  million plus $0.2 million of related
expenses, less PMP's cash balance at March 5, 2001 of $0.3 million. The net cash
outlay for Centrus was $40.3 million,  representing the initial payment of $40.0
million  plus $0.3 of  related  expenses.  None of  Centrus'  existing  cash was
acquired.  Partially  offsetting  the increase in cash used over the two periods
was the $1.3 million  gross  proceeds  from the  sale-leaseback  transaction  in
October 2001. (See Note 9 to Consolidated Financial Statements comprising Item 8
hereof.)

     During  fiscal year 2000,  the Company  entered  into three  capital  lease
transactions  for hardware and  software.  The purchase  price of these  capital
assets  was  $2,537,730.  One  hardware  lease is for a term of 57  months  with
monthly  payments of $40,322.  Another hardware lease is for a term of 60 months
with monthly  payments of $3,245.  The software lease is for a term of 33 months
with monthly payments of $13,662.  With the acquisition of Centrus,  the Company
assumed five capital leases for computer and telephone equipment.  The principal
balance of these assets at the time of the acquisition was $139,447.  The leases
have various terms and payments.  Three of those leases have  subsequently  been
paid off in full.  The principal  balance of all remaining  capital leases as of
June 30, 2002 was approximately $1,365,000.

     The Company has entered into various real estate operating leases with both
related and unrelated  parties.  The Company has entered into various  operating
leases with  unrelated  third  parties for office  equipment.  These leases have
different  payment terms and expirations  dates. The Company also entered into a
sale-leaseback  operating  lease of certain fixed assets  (principally  computer
hardware and externally  developed  software) with an affiliate of the Company's
Vice Chairman.  See Note 9 to the Consolidated  Financial Statements  comprising
Item 8 hereof for a further description of these various leases.

     On January 29,  2002,  the  Company  entered  into a $40 million  revolving
credit facility, details of which are set forth in Item 1 above and in Note 9 to
the  Consolidated  Financial  Statements.  Borrowings of $28.7 million under the
Facility  were  used to  finance  part of the  purchase  price of the  Company's
acquisition of Centrus.  The Facility  contains  various  covenants that,  among
other  things,  require the Company to maintain  certain  financial  ratios,  as
defined in the  agreements  governing  the  Facility.  As of September 13, 2002,
approximately $24.5 million was outstanding under the Facility,  and the Company
was in compliance with its financial-ratios covenants.

 The total future payments under these contractual obligations as of
June 30, 2002 is as follows:




<TABLE>
<S>                                                                          <C>            <C>
                                       Payments Due by Period
Contractual Obligations                    ($ in thousands)

                                          Less than                                               After 5
                           Total           1 year             1-3 years         4-5 years          years
                           -----          ---------           ---------         ---------         -------

Long Term Debt            $13,882           $13,856            $   26               --               --

Capital Lease Obligations   1,525               653               872               --               --

Operating Leases           10,342             1,612             2,671            $2,127          $3,932

Sale-leaseback              1,034               443               591               --              --
                          -------           -------            ------            ------          ------
Total Contractual
Cash Obligations          $26,783           $16,564            $4,160            $2,127          $3,932
                          =======           =======            ======            ======          ======
</TABLE>


     PAI  stockholders  were  eligible to receive up to $2,000,000 in additional
consideration  payable  in  combination  of cash and  common  stock  if  certain
financial  targets of PAI were met for the fiscal  years ended June 30, 2001 and
2002.  These targets have been  achieved and the $2 million has been earned.  At
the end of August  2001,  $750,000  in cash was paid,  and 62,500  shares of the
Company's  Common  Stock  valued  at $4.00  per  share  were  issued  to the PAI
stockholders.  At the end of August 2002,  $750,000 in cash was paid, and 41,668
shares of the  Company's  Common  Stock valued at $6.00 per share were issued to
the PAI stockholders.

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

     The   shareholders   of  Centrus  are   eligible   to  receive   additional
consideration  of up  to  $4,000,000,  payable  over  three  years,  if  certain
financial targets are met over the next two years.

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

     The  Company  anticipates  that  current  cash  positions,  after its three
acquisitions  and the  repayment  of certain  affiliate  and  shareholder  debt,
together  with  anticipated  cash flow from  operations,  will be  sufficient to
satisfy the Company's  contemplated  cash  requirements  for at least 24 months.
This is based  upon  current  levels of  capital  expenditures  and  anticipated
operating  results for the next 24 months.  However,  it is one of the Company's
stated goals to acquire other pharmacy benefit management  companies,  evidenced
by the three acquired  since July 2000.  This will require cash and depending on
the  Company's  evaluation  of  future  acquisitions,  additional  cash  may  be
required.  In the event that the Company's plans change or its assumptions prove
to be inaccurate,  or the proceeds from the Facility prove to be insufficient to
fund  operations  and  acquisitions,  the  Company  could  be  required  to seek
additional  financing  sooner than  anticipated.  There can be no assurance that
such financing could be obtained at rates or on terms acceptable to the Company,
if at all.

Other Matters

Inflation

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

Subsequent Events

     On August 20, 2002,  the Company  announced  that it has signed a letter of
intent to acquire Wellpartner Inc., a home-delivery  pharmacy based in Portland,
Oregon.   Wellpartner  offers  personal  pharmacy   convenience   through  mail,
telephone,  facsimile,  or online  shopping  to  members  throughout  the United
States. If this acquisition is consummated, the Company believes it will enhance
its ability to offer integrated,  full-service,  mail order pharmacy services to
its customers.

Critical Accounting Policies and Estimates

General

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

     The Company believes that of its significant  accounting policies (see Note
1 to the  Consolidated  Financial  Statements  comprising  Item 8  hereof),  the
following may involve a higher degree of judgment and complexity than others:

Revenue Recognition

     The Company has historically entered into two types of arrangements for the
payment  of  administrative  fees:  fee for  service  (per  claim  charges)  and
capitation  (per  member  per  month   charges).   Under  the  fee  for  service
arrangement, the Company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims  adjudicated plus a fixed transaction
fee.  Under  the  capitation  arrangement,  the fee is  based on the  number  of
participants per month;  the Company pays for the cost of  prescriptions  filled
and thus shares the risk of  operating  profit or loss with these  plans.  Since
January 1, 2000,  all  services  have been  provided on a fee for service  basis
only.

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

     The specific  terms of the contracts  that Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related
to the cost of the  prescriptions  filled. In certain limited cases, the Company
has not recognized the gross revenue or cost related to prescriptions filled for
a specific  sponsor.  This has no impact on the  Company's  gross  profit  since
neither the revenue nor the related cost of the prescriptions is recorded.

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

Bad Debt

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

Deferred Taxes

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

Goodwill and Intangible Impairment

     In  assessing  the  recoverability  of the  Company's  goodwill  and  other
intangibles,  the Company must make assumptions  regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related  assumptions  change in the future, the Company
may be required to record  impairment  charges for these  assets not  previously
recorded.  On July 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible  Assets," and will be required
to analyze its goodwill for impairment  issues on a periodic  basis  thereafter.
During the year ended June 30, 2002,  the Company did not record any  impairment
losses related to goodwill and other intangible assets.


Capitalized Software

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
         MARKET RISK.

          Not applicable.



Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The audited  financial  statements of Health Card as of June 30, 2002, 2001
and 2000,  and the related  Schedules,  are included in this Form 10-K following
Item 14 hereof.


Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE.


     Reference  is made to the Current  Report on Form 8-K dated July 19,  2002,
and to the  Current  Report on Form 8-K dated June 15,  2001,  regarding  Health
Card's dismissals of its independent auditors.

<PAGE>
                                    PART III


Item 10. Directors and Executive Officers of the Registrant

     The information  required is incorporated herein by reference to the fiscal
year 2002 definitive Proxy Statement under the caption  "Election of Directors",
which the Company anticipates will be filed by October 28, 2002.

Item 11. Executive Compensation

     The information  required by this item is incorporated  herein by reference
to the fiscal 2002  Definitive  Proxy  Statement  under the  caption  "Executive
Compensation", which the Company anticipates will be filed by October 28, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information  required by this item is incorporated  herein by reference
to the fiscal 2002  Definitive  Proxy  Statement  under the  captions  "Security
Ownership of Certain  Beneficial  Owners" and Security Ownership of Management",
which the Company anticipates will be filed by October 28, 2002.

Item 13. Certain Relationships and Related Transaction

     The information  required by this item is incorporated  herein by reference
to the  fiscal  2002  Definitive  Proxy  Statement  under the  caption  "Certain
Relationships and Related  Transactions",  which the Company anticipates will by
filed by October 28, 2002.


<PAGE>


                                     PART IV
<TABLE>
<S>                                                                             <C>       <C>

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                  FORM 8-K.

(a)  1.   Financial Statements

 The following Consolidated Financial Statements of Health Card are
included herein:

     Independent Auditors' Reports                                                    F-2 - F-4

     Consolidated Balance Sheet as of June 30, 2001 and 2002                             F-5

     Consolidated Statement of Income for each of the years ended
      June 30, 2000, 2001 and 2002                                                       F-6

     Consolidated Statement of Stockholders' Equity  for each
      of the years ended June 30, 2000, 2001 and 2002                                    F-7

     Consolidated Statement of Cash Flows for each of the years ended
      June 30, 2000, 2001 and 2002                                                       F-8

     Notes to Consolidated Financial Statements                                          F-9 - F-34

     2.     Financial Statement Schedules

           Schedule II:  Valuation and Qualifying Accounts                               S-1
</TABLE>

     3.    Exhibits

Exhibit
Number    Description of Exhibit

 3.1     Certificate of Incorporation of Health Card (7)
 3.4     By-Laws of Health Card (7)
 4.1     Form of Specimen Common Stock Certificate (9)
 4.2     Form of Warrant Agreement, including form of Representatives'
         Warrants (1)
10.1     Mail Service Provider Agreement, dated July 1, 1996, between Health
         Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.2     Amendment to Mail Service Provider Agreement, dated January 1, 1997,
         between Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy
         Services (1)
10.3     Software License Agreement and Professional Service Agreement,
         dated February 18, 1998, between Health Card and Prospective
         Health, Inc. (1)
10.4     1999 Stock Option Plan (1)
10.5     Employee Covenant Agreement, dated June 15, 1998, between Health Card
         and Mary Casale (1)
10.6     Employee Covenant Agreement, dated June 16, 1998, between Health Card
         and Ken Hammond (1)
10.7     Stock Option Agreement, dated August 3, 1999, between Health Card and
         Ken Hammond (4)
10.8     Employment Agreement, dated March 27, 2000, between Health Card and
         David Gershen (4)
10.9     Stock Option Agreement, dated May 1, 2000, between Health Card and
         David Gershen (4)
10.10    Employment Agreement, dated May 3, 2000, between Health Card and James
         Bigl (4)
10.11    Stock Option Agreement, dated June 12, 2000, between Health Card and
         James Bigl (4)
10.12    Stock Option Agreement, dated August 3, 1999, between Health Card and
         Kenneth J. Daley (4)
10.13    Stock Option Agreement, dated August 3, 1999, between Health Card and
         Gerald Angowitz (4)
10.14    Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
         LLC (1)
10.15    Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and
         Health Card (1)
10.16    Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17    Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18    Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor
         of Health Card (1)
10.19    Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC
         to the order of Health Card, in the amount of $3,890,940 (4)
10.20    Letter, dated  June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21    Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22    Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to
         Health Card (1)
10.23    Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky
         Revocable Trust and Health Card (1)
10.24    Employment Agreement, dated July 1, 1999, between Health Card and
         Bert E. Brodsky (1)
10.25    Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26    Form of Lock-Up Agreement (1)
10.27    Acquisition and Merger Agreement, dated as of June 27, 2000, between
         Health Card and Pharmacy Associates, Inc. (3)
10.28    Lease Agreement, dated March 4, 1996, between Pharmacy Associates,
         Inc. and Executive Park Partnership (4)
10.29    Amendment to Lease, dated November 2, 1998, between Pharmacy
         Associates, Inc. and Executive Park Partnership (4)
10.30    Amendment to Lease, dated November 19, 1998, between Pharmacy
         Associates, Inc. and Executive Park Partnership (4)
10.31    Lease Agreement, dated July 8, 1999, between Pharmacy Associates,
         Inc. and Executive Park Partnership (4)
10.32    Asset Purchase Agreement dated as of March 5, 2001 among National
         Medical Health Card Systems, Inc., PMP Acquisition Corp., Provider
         Medical Pharmaceutical, LLC and members of PMP (5)
10.33    Employment Agreement, dated June 4, 2001, between National Medical
         Health Card Systems, Inc. and Tery Baskin (6)
10.34    Stock Option Agreement, dated June 4, 2001, between National Medical
         Health Card Systems, Inc. and Tery Baskin (6)
10.35    Stock Option Agreement, dated June 12, 2001, between National Medical
         Health Card Systems, Inc. and James Bigl (6)
10.36    Asset Purchase Agreement dated January 29, 2002 by and among the
         Company, Health Solutions Limited ("HSL"), HSL Acquisition Corp., a
         wholly-owned subsidiary of the Company, and the security holders of
         HSL (8)
10.37    Receivables  Purchase and Transfer  Agreement dated January 29, 2002
         by and among the Company and certain of its  subsidiaries and
         and NMHC Funding, LLC (8)
10.38    Loan and Security Agreement dated January 29, 2002 by and between
         NMHC Funding,  LLC and HFC Healthco-4,  LLC, an affiliate of
         Healthcare Finance Group, Inc. (8)
10.39    Lease Agreement dated as of August 1, 2001, between National Medical
         Health Card Systems, Inc. and BFS Realty, LLC (6)
10.40    Amended Lease Agreement dated as of August 1, 2001, between National
         Medical Health Card Systems, Inc. and BFS Realty, LLC
21       List of Subsidiaries
23.1     Consent of Ernst & Young to the incorporation by reference in the
         Registration Statement on Form S-8 (File No. 333-82224) of its report
         dated September 30, 2002
23.2     Consent of Goldstein Golub Kessler to the incorporation by reference
         in the Registration Statement on Form S-8 (File No. 333-82224) of its
         report dated August 31, 2001
23.3     Consent of BDO Seidman LLP to the incorporation by reference in the
         Registration Statement on Form S-8 (File No. 333-82224) of its report
         dated September 19, 2000
99.1     Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
99.2     Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act

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

     (2) Denotes  documentation  filed as an Exhibit to Health  Card's Report on
Form 10-K for the fiscal year ended June 30, 1999.

     (3) Denotes  document  filed as an Exhibit to Health Card's Form 8-K for an
event dated July 20, 2000 and incorporated herein by reference.

     (4) Denotes  documentation  filed as an Exhibit to Health  Card's Report on
Form 10-K for the year ended June 30,  2000.

     (5) Denotes  document  filed as an Exhibit to Health Card's Form 8-K for an
event dated March 5, 2001.

     (6) Denotes  document  filed as an Exhibit to Health  Card's Report on Form
10-K for the year ended June 30, 2001.

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

     (8) Denotes document filed as an Exhibit to Health Card's Current Report on
Form 8-K for events dated January 29, 2002 and incorporated herein by reference.

     (9) Denotes  document filed as an Exhibit to Health Card's Amendment number
1 on Form 8-A/A filed with the  Securities  and Exchange  Commission  on May 21,
2002 and incorporated herein by reference.

(b)      Reports on Form 8-K

     A Form 8-K was filed with the Securities and Exchange Commission on May 30,
2002.


<PAGE>


                                   SIGNATURES

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

        NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
---------------------------------------------------------------------------
        (Registrant)

By  /s/Bert E. Brodsky
    -----------------------------------------------------------------------
Date: September  30, 2002

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

By    /s/  Bert E. Brodsky
   -------------------------------------------------------------------------
        Bert E. Brodsky, Chairman of the Board
Date: September 30, 2002

By   /s/  Gerald Shapiro
  --------------------------------------------------------------------------
        Gerald Shapiro, Vice Chairman of the Board, Secretary,
Date: September 30, 2002

By /s/ James J. Bigl
   -------------------------------------------------------------------------
   James J. Bigl, Chief Executive Officer,
                   Principal Executive Officer and Director
Date: September 30, 2002

By   /s/  Gerald Angowitz
  --------------------------------------------------------------------------
Gerald Angowitz, Director
Date: September 30, 2002

By   /s/  Kenneth J. Daley
  --------------------------------------------------------------------------
        Kenneth J. Daley, Director
Date: September 30, 2002

By   /s/  Paul J. Konigsberg
  --------------------------------------------------------------------------
        Paul J. Konigsberg, Director
Date: September 30, 2002

By   /s/  Ronald L. Fish
  --------------------------------------------------------------------------
        Ronald L. Fish, Director
Date: September 30, 2002

By   /s/ David J. Gershen
  --------------------------------------------------------------------------
        David J. Gershen, Principal Financial and Accounting Officer
Date: September 30, 2002


<PAGE>

                                 CERTIFICATIONS


I, James J. Bigl, Chief Executive Officer, certify that:

     1. I have  reviewed  this annual  report on Form 10-K of  National  Medical
Health Card Systems, Inc. and its Subsidiaries;

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

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects  the  financial  condition,  results  of  operations  and cash flows of
National Medical Health Card Systems,  Inc. and its Subsidiaries as of, and for,
the periods presented in this annual report.



Dated: September 30, 2002             /s/ James J. Bigl
                                          James J. Bigl, Chief Executive Officer


I, David J. Gershen, Chief Financial Officer, certify that:


     1. I have  reviewed  this annual  report on Form 10-K of  National  Medical
Health Card Systems, Inc. and its Subsidiaries;

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

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects  the  financial  condition,  results  of  operations  and cash flows of
National Medical Health Card Systems,  Inc. and its Subsidiaries as of, and for,
the periods presented in this annual report.


 Dated: September 30, 2002         /s/ David  J. Gershen
                                       David J. Gershen, Chief Financial Officer

  <PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Reports                                  F-2 - F-4


Consolidated Financial Statements:

   Balance Sheet                                                  F-5
   Statement of Income                                            F-6
   Statement of Stockholders' Equity                              F-7
   Statement of Cash Flows                                        F-8
   Notes to Consolidated Financial Statements                  F-9 - F-32


<PAGE>


                         Report of Independent Auditors


The Board of Directors and Stockholders of
National Medical Health Card Systems, Inc. and Subsidiaries:

     We have audited the  accompanying  consolidated  balance  sheet of National
Medical Health Card Systems,  Inc. and subsidiaries as of June 30, 2002, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the year then  ended.  Our  audit  also  included  the  financial  statement
schedule  listed in the index at Item  14(a).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of National
Medical  Health Card Systems,  Inc. and  subsidiaries  at June 30, 2002, and the
consolidated  results of their operations and their cash flows for the year then
ended in conformity with accounting  principles generally accepted in the United
States.  Also, in our opinion,  the related financial statement  schedule,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.

     As  discussed  in  note 1 to the  consolidated  financial  statements,  the
Company  changed its method of  accounting  for  goodwill  and other  intangible
assets effective July 1, 2001.



                                                     /s/ ERNST & YOUNG LLP
Melville, New York
September 5, 2002


<PAGE>

                          INDEPENDENT AUDITOR'S REPORT




Board of Directors
National Medical Health Card Systems, Inc.


     We have audited the  accompanying  consolidated  balance  sheet of National
Medical Health Card Systems,  Inc. and  Subsidiaries as of June 30, 2001 and the
related  consolidated  statements of income,  stockholders' equity (deficiency),
and cash  flows for the year then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  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
Medical Health Card Systems,  Inc. and  Subsidiaries as of June 30, 2001 and the
results  of their  operations  and their  cash  flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.




GOLDSTEIN GOLUB KESSLER LLP
New York, New York

August 31, 2001



<PAGE>

Report of Independent Certified Public Accountants


Board of Directors
National Medical Health
  Card Systems, Inc. and Subsidiaries
Port Washington, New York



     We  have  audited  the  accompanying  consolidated  statements  of  income,
stockholders'  equity  (deficit) and cash flows of National  Medical Health Card
Systems, Inc. and Subsidiaries for the year ended June 30, 2000. These financial
statements are the  responsibility  of the management of National Medical Health
Card  Systems,  Inc.  Our  responsibility  is to  express  an  opinion  on these
financial statements based on our audits.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the results of operations and cash
flows of National  Medical Health Card Systems,  Inc. and  Subsidiaries  for the
year ended June 30, 2000 in  conformity  with  accounting  principles  generally
accepted in the United States of America.



BDO Seidman, LLP
Melville, New York

September 19, 2000



<PAGE>

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

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

-------------------------------------------------------------------------------------------------------------------------
                           CONSOLIDATED BALANCE SHEET

                                ($ in thousands)
-------------------------------------------------------------------------------------------------------------------------
                                                                                           June 30,              June 30,
                                                                                             2001                   2002
                                                                                             ----                   ----
-------------------------------------------------------------------------------------------------------------------------

Assets
Current:

Cash and cash equivalents (including cash equivalent investments
  of $1,216 and $1,187, respectively)                                                $     10,877           $    1,768
Restricted cash                                                                             1,598                2,653
Accounts receivable, less allowance for doubtful accounts of $1,847                        30,081               59,285
  and $2,248, respectively
Rebates receivable                                                                          7,789               15,775
Due from affiliates                                                                           987                  504
Deferred tax asset                                                                          1,103                1,542
Other current assets                                                                        1,004                  610
-------------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                                 53,439               82,137

Property, equipment and software development costs, net                                     8,584                9,031
Due from affiliates                                                                         3,832                3,620
Intangible assets, net of accumulated amortization of $39 and $406, respectively              266                2,523
Goodwill                                                                                   12,944               52,035
Other Assets                                                                                   45                  549
--------------------------------------------------------------------------------------------------------------------------------
      Total Assets                                                                   $     79,110          $   149,895
================================================================================================================================

Liabilities And Stockholders' Equity
Current Liabilities:

Accounts payable and accrued expenses                                                $     57,646         $    108,525
Revolving credit facility and loans payable-current                                           110               13,835
Current portion of capital lease obligations                                                  542                  556
Due to officer/stockholder                                                                    542                  696
Due to affiliates                                                                             344                -
Other current liabilities                                                                   1,346                1,178
--------------------------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                            60,530              124,790
Capital lease obligations, less current portion                                             1,333                  809
Long-term loans payable and other liabilities                                                  73                  865
Deferred tax liability                                                                      1,702                2,154
--------------------------------------------------------------------------------------------------------------------------------
      Total liabilities                                                                    63,638              128,618
--------------------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies
Stockholders' Equity:

Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding               -                   -

Common Stock $.001 par value, 25,000,000 shares authorized, 7,312,496 and                       7                    8
   7,550,239 shares issued 7,121,496 and 7,359,239 outstanding, respectively
Additional paid-in-capital                                                                 13,255               14,292
Retained earnings                                                                           3,254                7,721
Treasury stock at cost, 191,000 shares                                                       (744)                (744)
Notes receivable - stockholders                                                              (300)                -
---------------------------------------------------------------------------------------------------------------------------------
      Total stockholders' equity                                                           15,472               21,277
---------------------------------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                                      $    79,110         $    149,895
=================================================================================================================================

           See accompanying notes to consolidated financial statements
<PAGE>

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
   --------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------
                        CONSOLIDATED STATEMENT OF INCOME

              (All amounts in thousands, except per share amounts)
---------------------------------------------------------------------------------------------------------------------------------

                                                                                         Year ended June 30,
                                                                       ----------------------------------------------------------
                                                                       2000               2001                   2002
                                                                       ----               ----                   ----


Revenue                                                           $      167,676    $      272,119      $      459,832
Cost of claims                                                           153,377           249,572             424,733
---------------------------------------------------------------------------------------------------------------------------------

Gross profit                                                              14,299            22,547              35,099

Selling, general and administrative expenses*                             12,358            21,423              27,230

----------------------------------------------------------------------------------------------------------------------------------
Operating income                                                           1,941             1,124               7,869
----------------------------------------------------------------------------------------------------------------------------------

Other income (expense):
Interest expense                                                             (81)             (236)             (1,125)
Interest income                                                            1,003             1,113                 522
Other income, net                                                         -                 -                      101
----------------------------------------------------------------------------------------------------------------------------------
                                                                             922               877                (502)
----------------------------------------------------------------------------------------------------------------------------------

Income before provision for income taxes                                   2,863             2,001               7,367
Provision for income taxes                                                 1,247               843               2,900

----------------------------------------------------------------------------------------------------------------------------------
Net income                                                           $     1,616      $      1,158        $      4,467
==================================================================================================================================

Earnings per common share:
  Basic                                                             $       0.24      $       0.16        $       0.62

==================================================================================================================================
  Diluted                                                           $       0.24      $       0.16        $       0.56
==================================================================================================================================


Weighted-average number of common shares outstanding:
  Basic                                                                    6,720             7,101               7,213

==================================================================================================================================
  Diluted                                                                  6,720             7,200               7,909
==================================================================================================================================

* Includes amounts charged by affiliates aggregating:                $     2,986        $     4,081         $    1,889


----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

           See accompanying notes to consolidated financial statements

<PAGE>

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

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------------------
                 Consolidated Statement Of Stockholders' Equity
                           (All amounts in thousands)

-----------------------------------------------------------------------------------------------------------------------------------

                                           Notes       Preferred Stock     Common Stock   Additional               Treasury Stock
                                          Receivable   ---------------     ------------    Paid-in-     Retained   --------------
                                         Stockholders  Shares   Amount   Shares   Amount   Capital      Earnings   Shares   Amount

Balance at June 30, 1999            $      (1,356)        -    $ -        5,312  $   5    $  2,869      $   480      -       $ -
  Sale of stock                                -          -      -        1,600      2       9,536           -       -         -
  Stock purchase                               -          -      -           -      -           -            -      191      (744)
  Interest paid on notes receivable            50         -      -           -      -           -            -       -         -
  Principal paid on notes receivable        1,000         -      -           -      -           -            -       -         -
  Interest on notes receivable                (33)        -      -           -      -           -            -       -         -
  Net income                                   -          -      -           -      -           -         1,616      -         -

----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000                     (339)        -      -        6,912      7      12,405        2,096     191      (744)
  Principal paid on notes receivable           65         -      -           -      -           -            -       -         -
  Interest paid on notes receivable           (26)        -      -           -      -           -            -       -         -
  Stock Issued- PAI acquisition                -          -      -          400     -          850           -       -         -
  Net income                                   -          -      -           -      -           -         1,158      -         -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001                     (300)        -      -        7,312      7      13,255        3,254     191      (744)
  Principal paid on notes receivable          300         -      -           -      -           -            -       -         -
  Exercise of stock options                    -          -      -          175      1         787           -       -         -
  Stock issued-PAI acquisition                 -          -      -           63     -          250           -       -         -
  Net income                                   -          -      -           -      -                     4,467      -         -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002                   $   -          -    $ -        7,550  $   8   $  14,292   $    7,721     191     $(744)
===================================================================================================================================

           See accompanying notes to consolidated financial statements

</TABLE>


<PAGE>


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

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------------
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                ($ in thousands)
                                                                                         Years Ended June 30,
                                                                                         --------------------
                                                                            2000              2001                2002
                                                                            ----              ----                ----
---------------------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
           Net income                                              $       1,616     $       1,158      $        4,467
           Adjustments to reconcile net income to net cash
           provided by operating activities:
           Depreciation and amortization                                   1,300             2,585               3,264
           Amortization of deferred gain                                   -                 -                    (102)
           Net gain on sale of capital assets                              -                 -                    (331)
           Provision for doubtful accounts                                   996               857                 546
           Compensation expense accrued to officer/stockholder                60               482                 154
           Deferred income taxes                                             979               391                  13
           Interest accrued on stockholders' loans                           (33)              (26)              -
           Changes in assets and liabilities, net of effect from
           acquisitions
                Restricted cash                                             (292)             (468)             (1,055)
                Accounts receivable                                       (1,171)          (10,155)            (29,750)
                Rebate receivable                                          1,618            (1,304)             (7,986)
                Other current assets                                          26              (594)                387
                Due to/from affiliates                                      (251)             (346)                351
                Other assets                                               -                    42                 (54)
                Accounts payable and accrued expenses                      1,664            19,527              49,713
                Income taxes payable and other current liabilities          (709)              (58)                 83
                Other long term liabilities                                -                 -                     715
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                  5,803            12,091              20,415
---------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
           Capital expenditures                                           (2,432)           (3,842)             (3,196)
           Loans (to)/from stockholders                                     (390)               -                -
           Proceeds form sale of capital assets                                -                30               1,321
           Acquisition of Centrus, net of cash acquired                        -                 -             (40,287)
           Acquisition of PAI, net of cash acquired                            -            (4,614)             (1,000)
           Acquisition of PMP, net of cash acquired                            -            (6,706)              -
           Repayment of note by stockholder                                1,050                -                  300
           Principal received on notes from stockholders                       -                65               -
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                     (1,772)          (15,067)            (42,862)
----------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
           Sale of common stock - net                                      9,538             -                   -
           Proceeds from exercise of stock options                         -                 -                     788
           Proceeds from convertible note offering                         -                 -                  11,600
           Repayment of convertible note offering                          -                 -                 (11,600)
           Proceeds from revolving credit facility                         -                 4,000              28,700
           Repayment of revolving credit facility                          -                (4,000)            (14,887)
           Treasury stock                                                   (744)            -                   -
           Deferred financing costs                                        -                 -                    (486)
           Repayment of debt and capital lease obligations                  (208)             (742)               (777)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                        8,586              (742)             13,338
---------------------------------------------------------------------------------------------------------------------------------


Net increase (decrease) in cash and cash equivalents                      12,617            (3,718)             (9,109)

Cash and cash equivalents at beginning of period                           1,978            14,595              10,877
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                         $      14,595      $     10,877             $ 1,768

---------------------------------------------------------------------------------------------------------------------------------
           See accompanying notes to consolidated financial statements

</TABLE>

<PAGE>
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (All $ in thousands, except per share amounts)


1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     National Medical Health Card Systems,  Inc. (the "Company,"  "Health Card")
provides  comprehensive  pharmacy  benefit  management  ("PBM") services to plan
sponsors, which include managed care organizations,  local governments,  unions,
corporations and third party health care plan administrators through its network
of licensed  pharmacies  throughout  the United States.  The Company's  pharmacy
benefit  management  services include electronic  point-of-sale  pharmacy claims
management,  retail  pharmacy  network  management,  mail order pharmacy  claims
management,  specialty pharmacy claims management,  benefit design consultation,
preferred  drug  management  programs,  drug  review  and  analysis,  consulting
services,  disease information services, data access,  reporting and information
analysis, and physician profiling.

     The audited  consolidated  financial  statements  include  the  accounts of
National Medical Health Card Systems,  Inc., and its wholly owned  subsidiaries,
Pharmacy  Associates,  Inc.  ("PAI"),  Interchange  PMP, Inc.  ("PMP"),  Centrus
Corporation  f/k/a  HSL  Acquisition  Corp.  (see Note 2)  ("Centrus")  National
Medical  Health Card IPA, Inc.  ("IPA"),  which was formerly known as PSCNY IPA,
Inc.,  Specialty  Pharmacy Care,  Inc.  ("Specialty"),  NMHCRX  Contracts,  Inc.
("Contracts"),  and  PBM  Technology  Inc.  ("PBM  Tech").  Also  included  on a
consolidated basis are the accounts of NMHC Funding, LLC ("Funding"),  a limited
liability  company of which the Company and its  subsidiaries  are the owners of
all  of  the  membership  interests.  Unless  the  context  otherwise  requires,
references herein to the "Company" or "Health Card" refer to the Company and its
subsidiaries,  on a consolidated basis. All material  intercompany  balances and
transactions have been eliminated in the consolidation

     In October 1998, the Company acquired IPA, which is an independent practice
association  under the laws of New York.  The Company  acquired  PSCNY IPA, inc.
(`PSCNY") as part of the Centrus Acquisition (see note 2). Health Card's IPA was
dissolved.  PSCNY was  utilized by Centrus to contract  with Health  Maintenance
Organizations or providers  containing financial  risk-sharing  provisions which
represents some of Centrus' largest sponsors. PSCNY's name was changed to IPA In
September 2002. IPA is subject to the regulatory  authority of the Department of
Health and the laws,  rules and regulations  applicable to independent  practice
associations in New York.

     Specialty was  incorporated in January 2000.  This wholly owned  subsidiary
was established to provide manufacturer rebate administration services to Health
Card.  Effective  as of April  2000,  Health  Card  began to enter  into  rebate
agreements  directly with drug  manufacturers.  Although  these  agreements  are
between  Health  Card  and  drug  manufacturers,   Specialty  administers  these
contracts on behalf of Health Card. Specialty is paid administrative fees by the
drug manufacturers and/or retains a percentage of rebates collected.

     Currently,  Specialty  does  not have any  full-time  employees.  Specialty
reimburses the Company for the use of its employees on an as-needed basis.

     In April, 2002,  Contracts was incorporated.  This subsidiary was formed to
contract with certain larger sponsors.  The nature of the contractual terms with
these  sponsors  leads the  Company  to  recognize  revenue  on a net basis (see
revenue  recognition  policy below).  Contracts does not currently have any full
time employees.

     PBM Tech was  incorporated  in April 2002.  This  subsidiary  was formed to
manage the  Company's  intellectual  property.  PBM Tech  maintains an office in
Wilmington, Delaware and employs its own employees.

     The  Company  considers  all  highly  liquid  debt  instruments  and  other
short-term  investments  with an initial  maturity  date of three months or less
from purchase date to be cash equivalents. These also include short-term, highly
liquid  municipal  bonds with  interest  rates that are reset  monthly which are
readily  convertible into cash at par value (cost).  Restricted cash balances at
June 30, 2001 and 2002 includes  approximately $1,598 and $2,653,  respectively,
which are  restricted as to their use as related to the  maintenance  of minimum
cash balances in accordance with Ohio statute.

     The Company has historically entered into two types of arrangements for the
payment  of  administrative  fees:  fee for  service  (per  claim  charges)  and
capitation  (per  member  per  month   charges).   Under  the  fee  for  service
arrangement, the Company is paid by its sponsors for the Company's contractually
agreed upon rates based upon actual claims  adjudicated plus a fixed transaction
fee. Under the capitation arrangement, the Company receives its fee based on the
number of participants per month and pays for the cost of  prescriptions  filled
and thus shares the risk of  operating  profit or loss with these  plans.  Since
January 1, 2000,  all  services  have been  provided by the Company on a fee for
service basis only.

     Revenue  under  the fee for  service  arrangement  related  to the sales of
prescription  drugs  by  the  Company's  nationwide  network  of  pharmacies  is
recognized when the claims are adjudicated.  At the point-of-sale,  the pharmacy
claims  are  adjudicated   using  the  Company's  on-line   processing   system.
Adjudication  is the  process  by which  the plan  participant  is  checked  for
eligibility of coverage,  the  prescription  is compared to the plan  parameters
established   by  the   sponsor,   the   particular   drug   is   reviewed   for
contraindications  based upon the plan participant's drug history,  age and sex,
and the information is placed into a database available for reporting and query.
The Company  invoices  plan  sponsors  and  includes  as revenue  the  Company's
administrative  fees and charges  relating to  pharmaceuticals  dispensed by the
Company's  network  of  pharmacies.  Revenue is reduced by the amount of rebates
paid to the Company's sponsors.  Cost of claims includes the amounts paid to the
Company's  network of  pharmacies  for  pharmaceutical  claims  reduced by gross
rebates received from drug  manufacturers.  The Company does not take possession
or  legal  ownership  of the  pharmaceutical  drugs  dispensed  by the  pharmacy
network.  The Company  assumes the legal  responsibility  and financial  risk of
paying for dispensed  pharmaceuticals  whether or not the Company is paid by its
sponsors.

     The specific  terms of the contracts  that Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related
to the cost of the  prescriptions  filled. In certain limited cases, the Company
has not recognized the gross revenue or cost related to prescriptions filled for
a specific  sponsor.  This has no impact on the  Company's  gross  profit  since
neither the revenue nor the related cost of the prescriptions is recorded.

     The Company  follows the  provisions of EITF 00-14,  Accounting for Certain
Sales  Incentives  - Coupons,  Rebates  and  Discounts  in  connection  with the
Company's rebates to sponsors.  These rebates are recognized when the Company is
entitled to them in accordance with the terms of the Company's arrangements with
drug  manufacturers,  third  party  rebate  administrators,  and  the  Company's
sponsors,  and when the  amount of the  rebates  is  determinable.  The  Company
records the gross rebate receivable and the appropriate  payable to the sponsors
based on  estimates,  which are subject to final  settlement.  The estimates are
based upon the claims  submitted and the Company's  rebate  experience,  and are
adjusted as additional information becomes available. Currently some rebates are
processed by a third party rebate  administrator  and the remaining  rebates are
submitted by Specialty directly to the drug manufacturers for reimbursement. For
the years  ended June 30,  2000,  2001 and 2002,  the  rebates  retained  by the
Company were approximately $3,818, $4,255 and $6,513, respectively.

     Property and equipment is recorded at cost. Depreciation is provided for by
the  straight-line  method over the  estimated  useful lives of the property and
equipment  (generally 3 to 7 years).  Leasehold  improvements are amortized on a
straight-line  basis over the shorter of the term of the lease or the  estimated
useful lives of the assets.

     The costs of  software  developed  for  internal  use  incurred  during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application  development  stage are  capitalized.  Costs incurred during the
post-implementation/operation   stage  are  expensed  as  incurred.  Capitalized
software  development  costs are amortized on a  straight-line  basis over their
estimated  useful  lives.  During  the  years  ended  June 30,  2001  and  2002,
approximately $870 and $824, respectively, in software development costs related
to internal programming time were capitalized.

     Amortization of capitalized  amounts  commences on the date the software is
placed  into  use and is  computed  using  the  straight-line  method  over  the
estimated economic life of the software, which prior to June 2001 was five years
and  subsequently  has been  primarily  three  years.  Amortization  expense was
approximately  $842,  $1,327 and $1,834 for the years ended June 30, 2000,  2001
and 2002, respectively.

     A significant  portion of the Company's computer software for its reporting
system was previously developed by a company affiliated by common ownership (see
Note 4). Currently,  the Company's development is performed by its own employees
or by  unrelated  third party  consultants.  The cost  includes  development  of
software programs and  enhancements,  which may either expand or modify existing
programs  which allows the Company to do  customized  reporting  from its claims
adjudication system.

     The Company  accounts  for income  taxes in  accordance  with SFAS No. 109,
Accounting for Income Taxes.  Under this standard,  deferred taxes on income are
provided for those items for which the  reporting  period and methods for income
tax purposes differ from those used for financial  statement  purposes using the
asset and liability  method.  Deferred  income taxes are  recognized for the tax
consequences  of "temporary  differences"  by applying  enacted  statutory rates
applicable  to future  years to  differences  between  the  financial  statement
carrying amounts and the tax bases of existing assets and liabilities.

     Basic  earnings  per share  has been  computed  using the  weighted-average
number of shares of common  stock  outstanding.  Diluted  earnings per share has
been  computed  using the basic  weighted-average  shares of common stock issued
plus outstanding stock options and warrants,  and contingently  issuable shares,
in the periods in which such options and  warrants,  and  contingently  issuable
shares have a dilutive effect under the treasury stock method.

     The Company may be subject to a  concentration  of credit risk with respect
to its trade receivables. The Company performs ongoing credit evaluations of its
customers  and  generally  does not require  collateral.  The Company  maintains
allowances to cover potential or anticipated losses for uncollectible accounts.

     Financial   instruments   which   potentially   subject   the   Company  to
concentrations  of  credit  risk  are  cash  balances   deposited  in  financial
institutions which exceed FDIC or SIPC insurance limits. Amounts on deposit with
financial institutions, which exceeded the FDIC or SIPC insurance limits at June
30, 2001 and 2002, were approximately $16,457 and $7,710, respectively.

     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally accepted in the United States requires the Company to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.

     The carrying  amounts of financial  instruments,  including cash,  accounts
receivable,  accounts  payable and accrued  liabilities,  approximate fair value
because of the current nature of these  instruments.  Loans due from  affiliates
and an officer bear market interest rates; therefore,  the Company believes that
the carrying amount approximates fair value.

     For  comparability,  certain 2000 and 2001 amounts have been  reclassified,
where appropriate,  to conform to the financial  statement  presentation used in
2002.

     Long-lived  assets are evaluated for  impairment  when events or changes in
circumstances  indicate  that  the  carrying  amount  of the  assets  may not be
recoverable through the 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. No such impairment existed through June 30, 2002.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142,  Business  Combinations  and  Goodwill and Other  Intangibles,
respectively.  FASB 141 requires all business combinations  initiated after June
30, 2001 to be accounted for using the purchase method. Under FASB 142, goodwill
is no longer subject to  amortization  over its estimated  useful life.  Rather,
goodwill is subject to at least an annual  assessment for impairment by applying
a fair-value based test.  Additionally,  an acquired  intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual  or other  legal  rights,  or if the  intangible  asset can be sold,
transferred,  licensed, rented or exchanged, regardless of the acquirer's intent
to do so. The Company has adopted  SFAS Nos.  141 and 142 as of July 1, 2001 and
has performed the requisite  impairment testing. As of June 30, 2002 there is no
impairment to the goodwill recorded on the accompanying balance sheet.

     SFAS 142  requires  the  disclosure  of net income and  earnings  per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter  until  all  periods  presented  reflect  goodwill  accounted  for in
accordance with SFAS 142. Had SFAS 142 been effective prior to July 1, 2001, the
Company's net income would have been  unchanged for the year ended June 30, 2000
and  $1,554 or $0.22 per basic and  diluted  share for the year  ended  June 30,
2001.

     In  October  2001,  the  FASB  issued  SFAS  No.  144,  Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets,  that is applicable to financial
statements  issued for fiscal years  beginning  after  December  15, 2001,  with
transition provisions for certain matters.  FASB's new rules on asset impairment
supersede SFAS No. 121,  Accounting for the Impairment of Long-Lived  Assets and
for Long-Lived  Assets to be Disposed of, and provide a single  accounting model
for  long-lived  assets  to be  disposed  of.  Although  retaining  many  of the
fundamental  recognition  and  measurement  provisions  of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as  held-for-sale.  The new rules  supersede the  provisions of Accounting
Principals  Board  Opinion No. 30 ("APB No. 30") with  regard to  reporting  the
effects of a disposal  of a segment of a business  and require  expected  future
operating  losses from  discontinued  operations to be displayed in discontinued
operations in the period in which the losses are incurred  rather than as of the
measurement  date  as  presently  required  by APB No.  30.  In  addition,  more
dispositions  will qualify for discontinued  operations  treatment in the income
statement.  The Company does not believe that the implementation of SFAS No. 144
will have any impact on its  financial  statements as of and for the year ending
June 30, 2003.

 2.  ACQUISITIONS

     The Company  entered into an Asset Purchase  Agreement (the "Asset Purchase
Agreement"),  dated as of January 29, 2002, with Health  Solutions,  Ltd., a New
York corporation  ("HSL"),  HSL Acquisition Corp., a Delaware  corporation and a
wholly-owned  subsidiary of the Company ("Sub"), and the security holders of HSL
named therein, pursuant to which the Company agreed to acquire certain assets of
HSL relating to the pharmacy benefit management  business conducted by HSL under
the name "Centrus" (the "Acquisition").  Centrus provides PBM services primarily
to managed care organizations in the northeast.  The Company intends to continue
to use the  Centrus  assets  to  provide  PBM  services.  The  Centrus  business
complements  the  Company's  business  while  significantly   strengthening  the
Company's presence in the managed care market.

     The aggregate purchase price of the Acquisition was $40 million in cash, of
which  $3  million  is  held  in  escrow  to  secure   certain   indemnification
obligations.  ($2  million  has been  released  as of July  2002).  The  Company
acquired  approximately $1.4 million of HSL's assets which included $0.9 million
of property and equipment and $0.5 million of software.  The Company also agreed
to assume  approximately  $1.4  million  of HSL's  liabilities  relating  to the
Centrus  business which  included $1.1 million of rebates due to sponsors,  $0.1
million of capital  leases,  and $0.2  million of  miscellaneous  payables.  The
acquisition  was accounted for under the purchase  method of accounting  and the
results of  Centrus'  operations  were  included in the  consolidated  financial
statements  commencing with the acquisition  date. The excess of the acquisition
costs over the fair value of  identifiable  net assets  acquired was  $40,671.5,
which consists of the following components: (i) customer relationships valued at
$2,415,  which  will be  amortized  over  five  (5)  years;  (ii) an  employment
agreement and a consulting  agreement  valued at a combined  value of $89, which
will be amortized over two (2) years: (iii) non-compete contracts valued at $76,
which will be amortized  over four (4) years,  and (iv)  goodwill of  $38,091.5,
which will not be amortized for book purposes per SFAS 142 (see Note 1). For tax
purposes,  the goodwill  and other  intangibles  will be amortized  over fifteen
years.  In addition,  the Company has agreed to pay HSL, as additional  purchase
price,  up to $4 million  over a period of three years if the  acquired  Centrus
business  achieves  certain  financial  performance  targets during the two-year
period  following  the  Closing.  HSL may  also  be  entitled  to an  additional
incentive  payment based on the financial  performance  of the Centrus  business
during the one-year period following the Closing.

     Simultaneously  with  the  consummation  of the  Acquisition,  the  Company
entered  into an  Employment  Agreement  and a Stock Option  Agreement  with the
former  president of Centrus,  pursuant to which he will serve as Executive Vice
President  of Managed  Care for the Company.  Additionally,  several  members of
Centrus'  management  team have joined the Company as employees or a consultant,
and have been granted stock  options to purchase an aggregate of 375,000  shares
of Common Stock, under the Company's 1999 Stock Option Plan, as amended.

     On January 29, 2002,  the Company and certain of its  subsidiaries  entered
into a $40 million secured  revolving  credit facility (the "Facility") with HFG
Healthco-4 LLC, a specialty  finance company.  Borrowings of $28.7 million under
the  Facility  were used to finance  part of the  purchase  price of the Centrus
Acquisition and will also be used by the Company and certain of its subsidiaries
for working capital purposes and future  acquisitions in support of its business
plan.  Details of this  financing  are  disclosed  in Note 9,  "Commitments  and
Contingencies."

     On January 22, 2002 the Company  completed a convertible note offering (the
"Note Offering") in the aggregate  principal amount of $11.6 million,  which was
subordinated  to the  Facility.  Pursuant  to  the  Note  Offering,  subscribers
received a  promissory  note (each a "Note")  paying  interest  quarterly on the
unpaid  principal  balance  at the  rate  of 12%  per  annum.  The  subscribers,
including two who are directors of the Company,  were all accredited  investors.
The Notes had a term of one year,  unless  otherwise  extended  pursuant  to the
terms of the Note. The Notes were convertible at any time at the election of the
holders into shares of the common stock,  par value $.001 per share (the "Common
Stock") of the Company ("Conversion Shares") at a conversion price of $12.00 per
share,  the fair value of the Common Stock on January 22, 2002. The Note holders
were granted certain registration  rights.  Proceeds from the Note Offering were
used to finance part of the purchase  price of the  Acquisition.  The Notes were
repaid in full on June 30, 2002.

     On March 5, 2001, the Company acquired substantially all of the assets, and
certain of the liabilities, of Provider Medical Pharmaceutical,  LLC ("PMP"), an
Oklahoma  limited  liability  company,  pursuant to an Asset Purchase  Agreement
among the Company, a wholly owned subsidiary of the Company, PMP and the members
of PMP.  The assets  acquired  from PMP  included,  among  other  things,  PMP's
accounts  receivable  and  intellectual  property,  PMP's rights  under  various
contracts and the goodwill value of PMP's business.

     The purchase price for the assets consisted of (i) $4,000 in cash, (ii) the
satisfaction  by the  Company of PMP's bank  indebtedness  of $1,255,  and (iii)
cancellation  of the  $1,500  promissory  note  from PMP to the  Company,  dated
January 16, 2001. Part of the cash portion of the purchase price ($722) was paid
into an escrow account to provide security for the  indemnification  obligations
of PMP and its members to the Purchaser. The acquisition was accounted for under
the  purchase  method of  accounting  and the results of PMP's  operations  were
included  in  the  consolidated   financial   statements   commencing  with  the
acquisition  date.  The excess of the  acquisition  costs over the fair value of
identifiable  net assets  acquired was $6,474.7  which consists of the following
components:  (i) customer  relationships valued at $305, which will be amortized
over 2.5 years using the straight-line method of amortization, and (ii) goodwill
of $6,169.7,  which has not been  amortized for book purposes since July 1, 2001
in  accordance  with SFAS 142.  For tax  purposes,  the  goodwill  and  customer
relationships will be amortized over fifteen years. The Company will be required
to pay up to  $1,000 of  additional  cash  consideration  if  certain  financial
targets relating to PMP's business are met over the next two years, which may be
accounted  for as an addition to  goodwill.  The targets  which were  related to
retaining   specific   contracts  were  not  achieved  in  the  first  year  and
consequently no additional consideration was paid for that period.

     Pursuant  to the  terms of the  Agreement  and Plan of Merger  between  the
Company and Pharmacy  Associates,  Inc.  ("PAI"),  dated July 20, 2000 (the "PAI
Agreement"),  the Company acquired PAI, a regional  pharmacy benefit  management
company operating in Arkansas, Louisiana and Mississippi. Under the terms of the
merger  agreement,  stockholders  of PAI received an aggregate of $6,000 in cash
and 400,000 shares of the Company's  common stock,  which was valued at $850, on
the acquisition  date. Of the 400,000 shares,  200,000 were placed in escrow for
two years to secure  certain  indemnification  obligations.  All of those shares
were released  from escrow in July of 2002.  The  acquisition  was accounted for
under the purchase method of accounting and the results of PAI's operations were
included  in  the  consolidated   financial   statements   commencing  with  the
acquisition  date.  The excess of the  acquisition  costs over the fair value of
identifiable  net assets acquired was $6,345.5,  which consists of the following
components:  (i) customer  relationships  valued at $131.0,  which was amortized
entirely over the first year, (ii) noncompete  contracts valued at $44.4,  which
will  be  amortized   over  five  years  using  the   straight-line   method  of
amortization,  and (iii) goodwill of $6,170.1,  which has not been amortized for
book  purposes,  since July 1, 2001 in  accordance  with SFAS 142.  The goodwill
associated  with  this  acquisition  is not  deductible  for tax  purposes.  PAI
stockholders were entitled to receive  additional  consideration of up to $2,000
payable in a combination of cash and  unregistered  common stock over a two-year
period if certain  financial targets of PAI are met, which will be accounted for
as an addition to goodwill.  The financial targets were achieved for both years;
therefore, $750, in cash and $250 in Common Stock (62,500 shares valued at $4.00
per share) was paid and  issued in  August,  2001,  and $750 in cash and $250 in
Common Stock  (41,668  shares valued at $6.00 per share) were paid and issued in
August, 2002.

     The following  summarized  unaudited  pro forma  results of operations  set
forth below for the years ended June 30, 2001 and 2002 assume the PAI,  PMP, and
Centrus acquisitions had occurred as of the beginning of these periods:

     June   30,                                   2001                2002
--------------------------------------------------------------------------------
Revenue                                         $469,506             $618,730
Net income                                        $2,810               $5,187
Net income per common share:
Basic                                              $0.40                $0.72
Diluted                                            $0.39                $0.66
Pro forma  weighted-average  number of
common shares outstanding:
Basic                                          7,100,674            7,212,536
Diluted                                        7,199,526            7,909,054
--------------------------------------------------------------------------------

For comparability  purposes,  goodwill  amortization has been excluded from both
years  presented.   This  pro  forma  financial  information  is  presented  for
information  purposes  only. The pro forma adjusted net income per common share,
including  acquisitions,  may not be  indicative  of actual  results,  primarily
because pro forma  earnings  include  historical  results of  operations  of the
acquired  entity and do not reflect any cost savings or potential  sales erosion
that may result from the Company's integration efforts.



  3.  PROPERTY,      Property, equipment and software development costs
      EQUIPMENT      consist of the following:
      AND SOFTWARE
      DEVELOPMENT
        COSTS:
                                                                     Estimated
       June 30,                      2001              2002         Useful Life
      ---------                     ------            ------        -----------
      Equipment                 $   2,841            $3,748        3 to 5 years
      Software                      7,889             9,673        3 to 5 years
      Leasehold improvement           253               528       Term of lease
      Automobile                       44                44             5 years
      Equipment acquired under
      capital leases                2,538             2,575        5 to 8 years
-------------------------------------------------------------------------------
                                   13,565            16,568
     Accumulated depreciation
      and amortization              4,981             7,537

--------------------------------------------------------------------------------
                                   $8,584          $  9,031
================================================================================


     Accumulated   depreciation  on  equipment   acquired  under  capital  lease
obligations was $501 and $867 as of June 30, 2001 and 2002, respectively.

     Depreciation  and  amortization  expense for the years ended June 30, 2000,
2001 and 2002 was approximately $1,300, $2,028 and $2,898, respectively.



<PAGE>


     Due to affiliates  represents trade payables for developed software,  other
software services, operating leases and maintenance costs.

     The  Company  had  historically  entered  into  various  verbal and written
agreements  with Sandata  Technologies,  Inc.  ("Sandata")  and its wholly owned
subsidiaries.   The  Company's  Chairman  of  the  Board  is  also  a  principal
stockholder of Sandata.  Sandata provides  computerized data processing services
and custom software and programming services.

     As of  June  30,  2001,  Sandata  owed  Health  Card  $504,  pursuant  to a
promissory note,  dated May 31, 2000, in the original  principal amount of $500,
plus interest at the rate of 9 1/2%; interest on such note was payable quarterly
and such note was paid in full on May 31, 2001.  On June 9, 2001,  Sandata again
gave a  promissory  note to Health Card in the  principal  amount of $500,  with
interest at the rate of 7%, which was to have been due on June 8, 2002. The note
was paid in full on August 15,  2001.  As of June 30,  2002,  Sandata  also owed
Health  Card $6 for  pharmacy  benefit  services  which  has  subsequently  been
reimbursed.

     Due from affiliates also includes a note from another company affiliated by
common  ownership.  As of June 30,  2002,  the balance  due from this  affiliate
including  accrued interest was $4,019.3.  Such amount bore interest at 8.5% per
annum,  payable  quarterly.  The note was  collateralized by 1,022,758 shares of
$.001  par  value  common  stock of the  Company  registered  in the name of the
Company's Chairman of the Board and was subject to his personal  guarantee.  The
original note was replaced by a new non-recourse  promissory note dated July 31,
2000, made payable by the affiliate to the order of the Company in the amount of
$3,890.9.  The note is payable in annual  installments  of $400,  consisting  of
principal  and interest at the rate of 8 1/2% per annum on each of the first and
second  anniversary  dates,  with the total  remaining  balance of principal and
interest  due and  payable  on July  31,  2003.  The note is  collateralized  by
1,000,000  shares of $.001 par value common stock of the Company  registered  in
the name of the  Company's  Chairman of the Board and is subject to his personal
guarantee.  The first two $400  payments  due under the note as of July 31, 2001
and 2002 were satisfied by offsetting an equal amount owed by the Company to the
Chairman of the Board.  Effective  July 31, 2001,  the interest rate on the note
was  changed  to the prime rate in effect  from time to time  (4.75% at June 30,
2002).  For the years ended June 30, 2000, 2001 and 2002, the amount of interest
income  accrued  related  to this note was  approximately  $314,  $340 and $206,
respectively.

     Concurrent  with the  consummation  of the Company's  Public  Offering,  on
August 2, 1999, a trust  controlled by the Company's  Chairman of the Board (the
"Selling  Stockholder")  sold 400,000  shares of common stock from its holdings.
The  Company  received  approximately  $1,993  from  the  sale  by  the  Selling
Stockholder  of which  approximately  $1,043 was applied to amounts  owed by the
Selling Stockholder and the balance to amounts due from the affiliate. (See Note
15.)

     On February 8, 2001, the President gave to the Company his Promissory  Note
in the amount of $34 as evidence of the loan by the Company to the President. On
April 12, 2002, the  Promissory  Note was amended and Company agreed to increase
the loan to $100.  The loan bears  interest at 8%, and is due on April 25, 2003.
The interest  rate was lowered  effective  July 1, 2002 to the rate at which the
Company borrows money.

     Certain  costs  paid  to  the  affiliates  were   capitalized  as  software
development  costs.  For the years  ended June 30,  2001 and 2002,  the  amounts
charged  by  affiliates  and  capitalized  were   approximately  $844  and  $96,
respectively.

     The Company  purchased  computer  equipment and furniture and fixtures from
affiliates during the years ended June 30, 2001 and 2002 for approximately  $433
and  $122,  respectively.  The  price  of  some of  these  assets  included  20%
purchasing, handling, consulting, set-up and other service fees.

     For the  periods  presented,  certain  general,  administrative  and  other
expenses reflected in the financial  statements  include  allocations of certain
corporate  expenses from  affiliates  which take into  consideration  personnel,
estimates  of the time spent to provide  services  or other  appropriate  bases.
These  allocations   include  services  and  expenses  for  information  systems
maintenance,  financial  consulting,  employee  benefits  administration,  legal
communications and other miscellaneous services.

     Management  believes the  foregoing  allocations  were made on a reasonable
basis.  Although these allocations do not necessarily  represent the costs which
would  have been or may be  incurred  by the  Company  on a  stand-alone  basis,
management believes that any variance in costs would not be material.

     General and administrative expenses related to transactions with affiliates
included in the consolidated statement of income are:

Year ended June 30,                         2000           2001            2002
-------------------------------------------------------------------------------
 Software maintenance and
 related services and supplies (a)       $   977        $ 1,244            $496
 Management and consulting fees (b)          923          1,294             303
 Administrative, accounting
 services and supplies (c)                   695            894             548
Rent and utilities (d)                       391            649             542

-------------------------------------------------------------------------------
                                          $2,986         $4,081          $1,889
===============================================================================


          (a) A company affiliated by common ownership  historically  provided a
     significant portion of the Company's software maintenance (Note 1), certain
     other  software  services,  computer  hardware under  operating  leases and
     maintained certain computer hardware.

          (b) The Company  incurred fees to certain other  affiliated  companies
     for various management and consulting services.

          (c) A company affiliated by common ownership provides the Company with
     various administrative, legal and accounting services.

          (d) See Note 9 for information regarding leases with related parties.

     Notes  receivable  -  stockholders  represents a loan to a  stockholder  to
purchase  the  Company's  stock.  This  note  bore  interest  at 8.5%  and had a
repayment  date of July 1, 2002.  The note was paid in full in January 2002. The
Company  has accrued  approximately  $235 of  interest  income  from  affiliates
arising from this note and the three loans described above during the year ended
June 30, 2002.

     For the years  ended June 30, 2001 and 2002,  the  Company  paid the annual
premium of  approximately  $60 on behalf of the Company's  Chairman of the Board
for a life  insurance  policy.  The  aggregate  amount of premiums paid for such
policy will be repaid to the Company upon the payment of the  policy's  benefits
to the beneficiary.

 5.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

        Accounts payable and accrued expenses consist of the following:

June 30,                                             2001                 2002
-------------------------------------------------------------------------------

 Claims payable                                    $46,616              $82,195
 Rebates payable to sponsors                         6,479               16,921
 Trade payables                                      1,598                6,693
 Other payables                                      2,953                2,716
-------------------------------------------------------------------------------
                                                   $57,646             $108,525
===============================================================================
 6.  CAPITAL LEASE OBLIGATIONS

     The  following is a schedule,  by year, of future  minimum  lease  payments
under  capitalized  leases,  together  with the present value of the net minimum
lease payments at June 30, 2002.

    Payments for the year ending June 30,
                     2003                                         $   653
                     2004                                             536
                     2005                                             336
 ------------------------------------------------------------------------------

    Total minimum lease payments                                    1,525

    Less amount representing interest                                 160
 ------------------------------------------------------------------------------

   Present value of net minimum lease payments                      1,365
   Less current portion                                               556
-------------------------------------------------------------------------------
    Long-term lease obligations                                      $809
===============================================================================


 7.  MAJOR CUSTOMERS AND PHARMACIES

     For the year ended June 30, 2000,  approximately 27% and 12% of revenue was
derived from two plan sponsors. For the year ended June 30, 2001,  approximately
16% of  revenue  was from one plan  sponsor,  which  was the only  sponsor  that
represented more then 10% of the Company's revenues. For the year ended June 30,
2002,  approximately 15% and 10% of revenue was from two plan sponsors.  Amounts
due from  these  sponsors  at June 30,  2001 and 2002  approximated  $1,936  and
$13,386,  respectively.  The  Company's  arrangements  with these plan  sponsors
generally  are,  short-term,   terminable  by  the  sponsor  and/or  subject  to
continuing  negotiation.  One of the Company's  major  sponsors  terminated  its
contract as of June 30, 2002.

     During the years ended June 30, 2000 and 2001, the Company  settled certain
fees due from a major sponsor  related to a capitation  arrangement for calendar
years 1997 through 1999. The impact of these  settlements  was to reduce revenue
by $821 and $733,  respectively.  The calendar  year 2000 and 2001 contract with
this sponsor was no longer a capitation arrangement.  During the year ended June
30, 2001,  the Company also reached an agreement  with a former major sponsor to
settle   amounts  due.   This   settlement   increased   selling,   general  and
administrative expenses by $588.

     For the years  ended  June 30,  2000 and 2001,  approximately  44% and 26%,
respectively,  of the cost of claims were from two pharmacy chains. For the year
ended  June  30,  2002,  approximately  22% of the cost of  claims  was from one
pharmacy chain.  Amounts payable to the two pharmacy chains at June 30, 2001 was
approximately  $10,493.  Amounts  payable to the one chain at June 30,  2002 was
$17,803.

 8.  TAXES ON INCOME

        Provisions for federal and state income taxes consist of the following:

        Year ended June 30,             2000               2001           2002
-------------------------------------------------------------------------------
            Current:
            Federal                     $199            $   364       $  2,149
            State                         69                 89            738
-------------------------------------------------------------------------------
                                         268                453          2,887
-------------------------------------------------------------------------------
            Deferred:
            Federal                      727                324             23
            State                        252                 66            (10)

-------------------------------------------------------------------------------
                                         979                390             13
-------------------------------------------------------------------------------

 Total provision                      $1,247               $843         $2,900
===============================================================================


     Differences between the federal statutory rate and the Company's effective
tax rate are as follows:

   Year ended June 30,                    2000           2001          2002
-------------------------------------------------------------------------------
 Statutory rate                           34.0%         34.0%         34.0%
 State taxes - net of federal taxes        7.4           5.1           5.1
 Permanent differences                     1.5           4.2           0.3
 Other                                     0.7          (1.2)          --

-------------------------------------------------------------------------------
                                          43.6%         42.1%         39.4%
===============================================================================

     Deferred  income  tax  assets  (current  and  noncurrent)   resulting  from
temporary differences are as follows:

June 30,                                            2001                 2002
-------------------------------------------------------------------------------

 Accounts receivable allowances                     $757             $1,004
 Vacation expense accrual                             73                100
 Officer/stockholder bonus accrual                   273                326
 Deferred revenue                                     --                102
 Other                                                --                 10

-------------------------------------------------------------------------------
                                                  $1,103             $1,542
===============================================================================


     Deferred  income tax  liabilities of $1,702 and $2,154 at June 30, 2001 and
2002, respectively, resulted from temporary differences between depreciation and
amortization of property and equipment.

 9. COMMITMENTS AND CONTINGENCIES

     The Company currently occupies  approximately  26,500 square feet of office
space at 26 Harbor  Park Drive,  Port  Washington,  New York 11050 (the  "Leased
Premises").  The Company subleases the Leased Premises from BFS Realty,  LLC, an
affiliate of the Chairman of the Board (the  "Affiliate").  The Affiliate leases
the  Leased  Premises  from the Nassau  County  Industrial  Development  Agency,
pursuant to a lease which was entered  into by the agency and the  Affiliate  in
July 1994,  and which  expires in March  2005.  The  Affiliate  has the right to
become the owner of the Leased  Premises  upon  expiration  of this  lease.  The
Affiliate  subleases  a portion  of the  Leased  Premises  to the  Company  (the
"Lease").  As of November 1, 2001,  the  Company and the  Affiliate  amended the
Lease.  The Lease provides that,  effective  August 1, 2001, the rent payable by
the Company  shall be an  aggregate  annual  rent of $308.  While  formerly  the
Company  made  estimated  monthly  real estate tax,  utilities  and  maintenance
expense payments to the Affiliate,  the Lease now provides that the Company will
pay its  pro-rata  share of such  expenses  directly,  to the  entities  to whom
payment must be made.  The Company  estimates  that such monthly  expenses  will
approximate  an aggregate of $336, per year. The annual rent will increase by 5%
per year during the term of the Lease.  The annual expenses are also expected to
increase, although the Company cannot estimate by how much. The Lease expires in
July,  2010.  The Company  believes  that the Leased  Premises  is adequate  for
current  purposes.  Leasehold  improvements  made to this space during the years
ended June 30, 2001 and 2002 were approximately $142 and $60, respectively.

     Pursuant to a lease dated  August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington,  New York, which is used as a pharmacy.  The landlord for these
premises is 61 Manorhaven Boulevard, LLC, of which the Company's Chairman is the
sole member.  The current  monthly rent is $1,654 per month  through  August 31,
2002. The annual rent increases by 5% per year.  Additional rent, in the form of
certain expenses, is also payable.

     In August 2001, the Company entered into a lease with an affiliated Company
to rent a two family  home for the use of  out-of-town  employees  while in Port
Washington.  This facility is in lieu of renting multiple hotel rooms. The lease
expires in December 2005.  With the acquisition of Centrus,  additional  "hotel"
space was required.  Therefore, the Company entered into two leases with another
affiliated Company to rent two additional houses.  These leases expire in April,
2007.

     Additionally,  the Company leases office space through its  subsidiaries in
Little Rock,  Arkansas,  Tulsa,  Oklahoma and Latham,  New York.  The  aggregate
annual rental payments for leased space in Little Rock are  approximately  $169;
for leased space in Tulsa are approximately  $48; and for Latham,  approximately
$700.  In Latham,  the  subsidiary  currently  occupies two floors;  the Company
anticipates that the amount of space leased by the Company (and,  concomitantly,
the amount of rent paid) will be significantly reduced in the near future.

     Real estate rental expense,  including utilities,  for the years ended June
30, 2000, 2001 and 2002 was approximately $412, $792 and $ 1,169,  respectively.
Of these amounts, approximately $391, $564 and $542, respectively,  were charged
by affiliates under operating leases.

     The Company has entered into various other operating  leases with unrelated
third parties for office  equipment.  These leases have different  payment terms
and expiration dates.

     Future minimum payments under the  noncancelable  operating leases for real
estate and office  equipment with related and other parties at June 30, 2002 are
as follows:

    Year ending June 30,
       2003                                                         $   1,612
       2004                                                             1,433
       2005                                                             1,238
       2006                                                             1,100
       2007                                                             1,027
      Thereafter                                                        3,932

   ----------------------------------------------------------------------------
                                                                      $10,342
   ============================================================================


     In addition to the  operating  leases  above,  the Company  entered  into a
sale-leaseback  operating  lease of certain fixed assets  (principally  computer
hardware and externally  developed  software) with an affiliate of the Company's
Vice Chairman.  The minimum future operating lease payments at June 30, 2002 are
as follows:

    Year ending June 30,
       2003                                                          $     443
       2004                                                                443
       2005                                                                148
   ----------------------------------------------------------------------------
                                                                        $1,034
   ============================================================================

     In  February  1998,  the  Company  entered  into an  agreement  to purchase
computer software products and professional  services with an unrelated company.
The  agreement  required the Company to pay an initial  license fee of $400,  of
which $100 was paid upon signing and $25 was payable  monthly  through  February
1999. The initial  license fee of $400 has been  capitalized and fully amortized
as of June 30, 2002. In addition, if certain milestones are reached based on the
number of processed claims, as defined, the license fee increases incrementally,
up to an additional $500 over the term of the agreement.  In February 1999, 2001
and 2002,  the Company met certain  milestones,  resulting  in total  additional
license fees of $400.  These amounts were  capitalized  and are being  amortized
over three years.  The agreement  also provides for the annual payment of 18% of
the then current  cumulative license fee, as defined,  as a service  maintenance
fee which is expensed as incurred.

     An action was commenced against the Company on December 8, 1998 by the West
Contra Costa Unified School  District (the "School  District") and an individual
plaintiff in the State of California. The case was subsequently moved to Federal
court. The complaint alleged,  among other things, that the parties entered into
a contract in November  1996, and that the Company  unilaterally  terminated the
contract  on  December  16,  1996.  The  complaint   further  alleged  that  the
termination  resulted in the School  District  incurring  approximately  $150 in
costs and $867 in expenses to obtain  coverage  from December 1996 until October
1997. The complaint also sought treble damages. The parties reached an agreement
pursuant to which the Company  paid to the  plaintiffs  an amount that was lower
than the  amount of costs and  expenses  claimed,  and is  funding a part of the
plaintiffs' litigation against another defendant. The proceeds of any settlement
with or verdict  against such defendant will be divided  between the Company and
the School District.

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plans Inc.  ("MHP") in the United States  District  Court for the Eastern
District of  Michigan.  The  complaint  alleges,  among other  things,  that the
parties entered into a contract dated July 1999 (the  "Agreement"),  and further
alleges  that  the  Company  has  overcharged  MHP  for  the  administration  of
prescription  benefit  services in  contravention to the terms of the Agreement.
MHP is seeking $3 million  dollars in damages.  The Company  filed an answer and
counterclaim on June 12, 2002. In the counterclaim,  the Company claimed damages
in excess of $2.8 million based on Midwest's failure to pay under a contract. In
late June  2002,  Midwest  agreed to make two  payments  in the  amount of $1.34
million and $1.36  million to  partially  settle the  Company's  claims  against
Midwest.  As a part of  that  payment,  Midwest  dropped  one of its two  claims
against the Company that had sought to setoff or recoup  alleged  overcharges by
the Company.  The Company  continues to have  counterclaims  totaling  over $200
against  Midwest for  Midwest's  failure to pay the amounts it had agreed to pay
Health Card for goods and services.  Trial  currently is scheduled for September
22, 2003.  Factual  discovery cut-off is February 28, 2003. The Company believes
the claims  alleged in the complaint are without merit and intends to vigorously
defend the action.

     The Company has entered into employment agreements with its Chairman, Chief
Executive  Officer and  President,  Chief  Operating  Officer,  Chief  Financial
Officer,  and Senior  Vice  President  of Sales and  Marketing.  The  agreements
provide  for (i)  participation  in the bonus pool for senior  executives,  (ii)
eligibility  for stock option  grants  under the  Company's  then current  stock
option plan, and (iii) certain  termination  benefits which,  depending upon the
reason  for  termination,  can equal up to one year of  salary  for all of these
senior executives  except the Chairman,  who is eligible for up to two years. In
addition,  the Senior  Vice  President  of Sales and  Marketing  is  entitled to
commissions  earned  as a  percentage  of gross  margin  generated  from  direct
accounts as well as from accounts sold by salespeople under her management.

     On January 29, 2002,  the Company and certain of its  subsidiaries  entered
into the  Facility,  a $40 million  secured  revolving  credit  facility  with a
specialty  finance  company.  In connection  with the Facility,  the Company and
certain of its  subsidiaries  have agreed to sell, on an on-going  basis,  their
accounts receivable to Funding. Funding utilizes those receivables as collateral
to secure  borrowing  under the  Facility.  The Facility has a three-year  term,
provides for  borrowing up to $40 million at the London  InterBank  Offered Rate
(LIBOR)  plus 2.4% (4.2% at June 30,  2002) and is secured  by  receivables  and
other  assets of the Company and certain of its  subsidiaries.  The  outstanding
balance as of June 30, 2002 was  $13,813.3,  which was all  classified  as short
term. The Facility  requires the Company to maintain certain financial and other
covenants. The Company was in compliance with all covenants at June 30, 2002.


 10.  STOCK OPTIONS AND  WARRANTS

     During the years ended June 30, 2000,  2001 and 2002,  the Company  granted
stock options under the 1999 Stock Option Plan (the  "Plan").  During 2002,  the
Company  amended  the Plan and  increased  the  number  of  shares  issuable  in
connection  with options  granted under the Plan.  The total number of shares of
common stock  reserved by the Company for  issuance  under the Plan is 2,850,000
plus an  indeterminable  number  of shares of  common  stock  issuable  upon the
exercise of "reload options." There are no options  outstanding that contain the
"reload"  provision.  Shares issuable pursuant to options granted under the Plan
as of June 30, 2002 equal  1,936,026.  Stock options  outstanding have a life of
from 4 to 10 years,  as defined in Section  422 of the  Internal  Revenue  Code.
Incentive  options  may not be  granted  for a price  less than 100% of the fair
market value of the common stock as of the date of the grant or 110% in the case
of an  individual  who owns more than 10% of the  combined  voting  power of all
classes of stock of the  Company.  All  options to date have been issued with an
option  exercise price at or above the fair market value of those options on the
date of grant.

     The following tables summarize  information about stock option activity for
the years ended June 30, 2000, 2001 and 2002:

                                                               Weighted-
                                                                average
                                                               Exercise
                                            Number of          Price per
                                            Options              Share
-------------------------------------------------------------------------------
 Outstanding options at June 30, 1999       345,180               $5.87
 Canceled                                  (345,180)               5.87
 Granted                                    656,469                5.98
-------------------------------------------------------------------------------
 Outstanding options at June 30, 2000       656,469                5.98
 Canceled                                  (251,127)               6.23
 Granted                                    837,942                2.92
-------------------------------------------------------------------------------
 Outstanding options at June 30, 2001     1,243,284                3.87
 Canceled                                  (222,775)               8.46
 Granted                                  1,015,760               10.36
 Exercised                                 (175,243)               4.49
-------------------------------------------------------------------------------
Outstanding options at June 30, 2002      1,861,026               $6.77
===============================================================================

     SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company
to provide pro forma information  regarding net income and net income per common
share as if  compensation  costs for the  Company's  stock option plans had been
determined in accordance with the fair value method  prescribed in SFAS No. 123.
Had compensation expense been recorded under the provisions of SFAS No. 123, the
impact on the Company's net earnings and earnings per share would have been:

-------------------------------------------------------------------------------
Year ended June 30,                  2000              2001             2002

Reported net income                $1,616            $1,158           $4,467
Pro forma compensation expense       (237)             (320)            (666)
-------------------------------------------------------------------------------
Pro forma net income               $1,379            $  838           $3,801
===============================================================================

Pro forma earnings per share:
 Basic                         $     .21            $   .12          $   .53
===============================================================================
 Diluted                       $     .21             $  .12          $   .48
===============================================================================


     The fair value of each  option  granted is  estimated  on the date of grant
using the Black-Scholes  ption-pricing model with the following weighted-average
assumptions used for all grants in the years ended June 30, 2000, 2001 and 2002:
no  dividend  yield in 2001 and 2002 and a  dividend  yield of  0.008%  in 2000;
risk-free interest rate ranges from 1.7% to 5.8%; an expected life of options of
5.0 years for all three  years,  and a  volatility  of 45.6%,  90.8% and  86.2%,
respectively,  for all grants. The weighted-average  value of options granted is
$1.09,  $.96 and $6.77 for the three years ended June 30,  2000,  2001 and 2002,
respectively.

     The following table summarizes  information about stock options outstanding
at June 30, 2002:
<TABLE>
<S>                                                                             <C>         <C>

                                             Outstanding                         Exercisable
------------------------------------------------------------------------------------------------------
                                               Weighted-        Weighted-                  Weighted-
                                               average          average                     average
  Option                          Number       Remaining        Exercise         Number     Exercise
 Price Range                     of Shares       Life             Price        of Shares      Price
------------------------------------------------------------------------------------------------------

$  1.67  to $  2.51                565,995      3.65 years      $  1.82        240,340       $  1.81

$  2.52  to $  3.78                 30,000      4.09 years      $  3.17          6,670       $  3.00

$  3.79  to $  5.69                212,900      3.58 years      $  4.63         74,105       $  4.81

$  5.70  to $  8.55                191,211      2.75 years      $  7.36        110,283       $  7.43

$  8.56  to $ 12.84                859,081      5.28 years      $ 10.54         33,240       $  9.00

$ 12.85  to $ 15.10                  1,839      4.63 years      $ 14.68          -           $   -

------------------------------------------------------------------------------------------------------
$  1.67  to $ 15.10              1,861,026      3.45 years      $  6.77        464,638       $  4.16
======================================================================================================
</TABLE>

     The  Company  granted  the  underwriters  of the  Public  Offering  200,000
warrants for nominal consideration.  The warrants entitle the holders thereof to
purchase  200,000 shares of common stock from the Company at $9.00 per share and
are  exercisable  for four years  commencing on July 29, 2000. Of such warrants,
80,000  were  subsequently  purchased  from the  underwriters  by the  Company's
Chairman of the Board and are exercisable for four years  commencing on July 29,
2000.

     The  total   outstanding   stock  options  detailed  above  exclude  75,000
nonstatutory  options  granted to one of the  shareholders  of  Centrus,  who is
providing consulting services to the Company.


 11. 2000 RESTRICTED STOCK GRANT PLAN

     On October 16, 2000,  the board of  directors  approved the adoption of the
Company's 2000 Restricted  Stock Grant Plan (the "Stock Grant Plan").  The Stock
Grant Plan was subsequently  adopted by the shareholders at the Company's annual
meeting on November 20, 2000.  The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g.,  the standard  seven-year  vesting  schedule set forth in the
Stock  Grant  Plan)  and/or  restrictions  that the  board may  impose,  such as
restrictions  relating  to length of  service,  corporate  performance  or other
restrictions. As of June 30, 2002, no grants had been made under the Stock Grant
Plan and, therefore,  no shares had vested under it. There are 700,000 shares of
common  stock  reserved for  issuance in  connection  with grants made under the
Stock Grant Plan.

<PAGE>

12.  SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows:

  Year ended June 30,                     2000          2001              2002
-------------------------------------------------------------------------------
 Cash paid:
  Interest                         $      98       $     236          $   1,125
  Income taxes                           960           1,287              2,277

 Noncash investing and
 financing activities:
  Capital lease obligations
  were incurred for computer
  equipment and software               2,538              -                  -
 Issuance of common stock
  in connection with the
  acquisition of PAI                     -               850                250
-------------------------------------------------------------------------------

 13.  EMPLOYEE BENEFIT PLAN

     Effective  June 1, 1998,  the  Company  adopted a 401(K) plan as part of an
affiliated  Company plan which covered  substantially  all employees.  Effective
January 1, 2001,  the  Company  adopted  its own 401(K) plan and rolled over all
prior  balances into the new plan. At the same time,  the Company  merged in the
PAI 401(K) plan so that one plan now covers substantially all Company employees.
Participants may elect to contribute to the plan a minimum of 1% to a maximum of
18% of their  annual  compensation,  not to  exceed a dollar  limit  set by law.
Monthly, the Company will determine a discretionary  matching contribution equal
to a percentage of each  participant's  contribution.  Contributions made by the
Company for the years ended June 30, 2000, 2001 and 2002 were approximately $18,
$109 and $79, respectively.


 14.  EARNINGS PER SHARE

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

  Year ended June 30,                       2000            2001          2002
-------------------------------------------------------------------------------
Basic                                  6,720,104       7,100,674     7,212,536
 Effect of assumed conversion
 of employee stock options                    -           65,406       661,999

Contingently issuable shares
 (see Note 2)                                 -           33,446        34,519

-------------------------------------------------------------------------------
Diluted                                6,720,104       7,199,526     7,909,054
===============================================================================


<PAGE>


     Outstanding  options and warrants to purchase  shares of common stock which
were  antidilutive  were not included in the computation of diluted earnings per
share (see Note 10). These options were as follows:

 Year ended June 30,                  2000              2001              2002
-------------------------------------------------------------------------------

Number of options and warrants     856,469           866,284            435,700
-------------------------------------------------------------------------------

Weighted-average exercise price  $    6.69        $     5.22        $     12.23

===============================================================================
 15. PUBLIC OFFERING

     The  registration  statement  for  the  Company's  Public  Offering  became
effective  on July 28,  1999.  The Company  consummated  the Public  Offering on
August 2, 1999 and issued  1,600,000 shares of common stock at an offering price
of $7.50 per share. In addition,  the underwriters were granted an overallotment
option by the Company to buy 300,000  shares of common  stock at $7.50 per share
exercisable  by  September  11, 1999.  The  underwriters  did not exercise  this
option.  Concurrent  with the Public  Offering,  the  Selling  Stockholder  sold
400,000 shares of common stock from its holdings at $7.50 per share. The Company
received  gross  proceeds  of $12,883  representing  payment for the sale of the
1,600,000  shares,  plus 73% of the proceeds from the sale of the 400,000 shares
by the  Selling  Stockholder  for a total  repayment  of $1,993.  Of this total,
$1,043 was applied to  indebtedness  by the Selling  Stockholder and the balance
was applied to amounts  owed by  affiliates  of the Selling  Stockholder  to the
Company. Such proceeds were reduced by underwriting discounts and commissions, a
nonaccountable  expense  allowance  and a  financial  advisory  fee  paid to the
underwriters plus certain fees and expenses paid by the Company.

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

16.      QUARTERLY FINANCIAL DATA (UNAUDITED):

(In thousands, except per share amounts)
                                                         FY 2002                                              FY 2001
-----------------------------------------------------------------------------------------------------------------------------------
Quarters ended                         6/30         3/31        12/31           9/30        6/30      3/31       12/31         9/30
-----------------------------------------------------------------------------------------------------------------------------------

Revenue                            $145,995      $145,683      $87,509       $80,645     $79,452    $72,374   $64,429       $55,864

Income before income taxes            2,323         1,839        1,799         1,406         507        547       440           507

Net income                            1,327         1,103        1,048           989         415        277       225           241

Earnings per common share:
  Basic                                 .18           .15          .15           .14         .06        .04       .03           .03
  Diluted                               .16           .14          .13           .13         .06        .04       .03           .03

Common share prices:
  High                                12.90         15.61        10.40          4.82        3.49       3.13      2.25          3.25
  Low                                  7.90          9.10         2.65          1.45        2.90       1.31      1.16          1.88


</TABLE>

17.  SUBSEQUENT EVENTS

     On August 20, 2002,  the Company  announced  that it has signed a letter of
intent to acquire Wellpartner Inc., a home-delivery  pharmacy based in Portland,
Oregon.   Wellpartner  offers  personal  pharmnacy   convenience  through  mail,
telephone,  facsimile,  or online  shopping  to  members  throughout  the United
States. If this acquisition is consummated, the Company believes it will enhance
its ability to offer integrated,  full-service, mail order pharmacy services to
its customers.
<PAGE>




REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
 FINANCIAL STATEMENT SCHEDULE




Board of Directors
National Medical Health Card Systems, Inc.


     The audit  referred to in our report to the board of  directors of National
Medical  Health Card  Systems,  Inc.  and  Subsidiaries,  dated August 31, 2001,
relating to the  consolidated  financial  statements of National  Medical Health
Card Systems,  Inc. and Subsidiaries,  included the audit of the schedule listed
under  Item 14 of Form 10-K for the year  ended June 30,  2001.  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 audit.

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




GOLDSTEIN GOLUB KESSLER LLP
New York, New York

August 31, 2001


<PAGE>

Report of Independent Certified Public Accountants
on Financial Statement Schedule



     The audit referred to in our report dated  September 19, 2000,  relating to
the consolidated  financial  statements of National Medical Health Card Systems,
Inc. and  Subsidiaries,  included the audit of the schedule listed under Item 14
of Form 10-K for the year ended June 30, 2000. 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 audit.

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



BDO Seidman, LLP
Melville, New York

September 19, 2000


<PAGE>




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

                                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------------------------------------
                                                            ($ in thousands)

                                                         Additions
                                       Balance at       Charged to                                            Balance
                                        Beginning        Costs and                          Other             at End
Description                              of Year        Expense (a)     Write-offs         Changes            of Year
----------------------------------------------------------------------------------------------------------------------------
Reserves and allowances
deducted from asset accounts:

Allowance for doubtful accounts

  Year ended June 30, 2000                  $846            $996           ($1,115)            -             $   727
  Year ended June 30, 2001                   727             942               (96)          274 (b)           1,847
  Year ended June 30, 2002                 1,847             546              (145)            -               2,248

(a) Charged to bad debts.
(b) Opening reserve balances of acquisitions.

</TABLE>