SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)

(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

For the fiscal year ended June 30, 2001

(  )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)

New York                                        11-2581812
(State or Other Jurisdiction of                 (I.R.S. Employer
Incorporation or Organization)                  Identification No.)

26 Harbor Park Drive, Port Washington, New York         11050
(Address of Principal Executive Offices)             (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                Name of Each Exchange on Which Registered
     None                            _______________________________________

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

     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. [ ]

     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  of the registrant.  The aggregate market value shall be
computed by reference to the price at which the common  equity was sold,  or the
average bid and asked  prices of such  common  equity,  as of a  specified  date
within 60 days prior to the date of filing: $8,367,338 as of September 21, 2001.

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

<PAGE>

     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:  7,183,996 shares outstanding as of September
21, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

<PAGE>
                                      INDEX

<TABLE>
<S>               <C>                                                                        <C>
Forward Looking Statements                                                                        4

                                     PART I

Item 1.           Description of Business                                                         4

Item 2.           Description of Property                                                        24

Item 3.           Legal Proceedings                                                              25

Item 4.           Submission of Matters to a Vote of Security Holders                            26

                                     PART II

Item 5.           Market for Common Equity and Related Stockholder Matters                       27

Item 6.           Selected Financial Data                                                        28

Item 7.           Management's Discussion and Analysis of Financial Condition                    30
                  and Results of Operations

Item 7A.          Quantitative and Qualitative Disclosures about Market Risk                     40

Item 8.           Financial Statements and Supplementary Data                                    40

Item 9.           Changes in and Disagreements on Accounting And Financial                       40
                  Disclosures

                                    PART III

Item 10. Directors and Executive Officers of Registrant                                          42
         Compliance with Section 16(a) of the Exchange Act                                       44

Item 11. Executive Compensation                                                                  45

Item 12. Security Ownership of Certain Beneficial Owners and Management                          51

Item 13. Certain Relationships and Related Transactions                                          53

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                         59

Signatures
</TABLE>

<PAGE>


                             INTRODUCTORY STATEMENTS

Forward Looking Statements

     When  used  herein,  the  words  "may,"  "could,"  "estimate,"   "believe,"
"anticipate,"  "think,"  "intend,"  "will be," "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,
that provides comprehensive pharmacy benefit management services.  Health Card's
programs are designed to assist pharmacy benefit plan sponsors by monitoring the
cost and quality of prescription drugs and related services.

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  (each a "Shareholder"  and
collectively  the  "Shareholders"),  Acquisition  merged with and into  Pharmacy
Associates. Pharmacy Associates, located in Little Rock, Arkansas, is a regional
pharmacy  benefit  management  company  operating  in  Arkansas,  Louisiana  and
Mississippi.

     Pursuant  to the  Agreement,  the  Shareholders  as of the  Effective  Date
received an aggregate of $6,000,000 in cash and 400,000  shares of  unregistered
common stock of Health Card. In addition,  since  Pharmacy  Associates'  pre-tax
income for the 12 months ending on June 30, 2001 (the "First  Earn-Out  Period")
was greater than $1,000,000. Health Card was required to pay to the Shareholders
the amount  determined  by the  calculations  described  below (the  "Contingent
Payment") :

     (i)  if Pharmacy  Associates  achieves a pre-tax income equal to or greater
          than  $2,500,000 in the First  Earn-Out  Period,  then the  Contingent
          Payment for such Earn-Out Period shall be $1,000,000;

     (ii) if  Pharmacy  Associates  achieves a pre-tax  income of  greater  than
          $1,000,000 but less than $2,500,000 in the First Earn-Out Period, then
          the Contingent  Payment for such Earn-Out Period shall be equal to (x)
          the  amount of  pre-tax  income in excess of  $1,000,000  achieved  by
          Pharmacy  Associates  during such Earn-Out  Period (such excess amount
          not to exceed  $1,500,000)  divided by  $1,500,000,  multiplied by (y)
          $1,000,000; and

     (iii)if Pharmacy  Associates  does not achieve a pre-tax income of at least
          $1,000,000 in the First Earn-Out Period,  then the  Shareholders  will
          not be entitled to a Contingent Payment for such Earn-Out Period.

     Seventy-five  percent (75%) of the  Contingent  Payment is payable in cash,
with the remaining  twenty-five  percent (25%) payable in unregistered shares of
common stock of Health Card based on the Health Card Average Price  (hereinafter
defined).  The Health  Card  Average  Price  shall mean the  average of the last
reported  per  share  trading  price of Health  Card  common  stock  over the 30
business day period immediately  preceding the date of determination;  provided,
that if such average is below $4.00,  then the deemed  Health Card Average Price
shall be $4.00,  and if such  average is above  $6.00,  the deemed  Health  Card
Average  Price shall be $6.00.  The  Contingent  Payment for the First  Earn-Out
Period,  which was paid in August of 2001,  consisted  of  $750,000  in cash and
62,500 shares of Common Stock valued at $4.00 per share. If Pharmacy Associates'
pre-tax  income for the 12 months  ending  June 30,  2002  meets or exceeds  the
thresholds  described  above,  Health  Card will be  obligated  to make a second
Contingent Payment.

     Additionally,  200,000  shares of Health  Card common  stock  issued to the
Shareholders  as part of the merger will be held in escrow as  security  for the
indemnification  obligations of the Shareholders  under the Agreement until July
20, 2002.

     Pursuant to the  Agreement,  all of the  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.  Each of the  Shareholders
further  agreed  not to (i) seek to  transact  any  business  with or alter  the
relationship  in any  way  between  any of  Pharmacy  Associates'  customers  or
prospective  customers  and (ii) solicit for  employment or in any way alter the
relationship  between  Pharmacy  Associates  and  any  person  who  was or is an
employee of Pharmacy  Associates  during the period of April 20, 2000 until 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  paid  into  an  escrow   account   to  provide   security   for  the
indemnification obligations of PMP and its members to the Purchaser. 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 three
years.

     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 $4,000,000.00 (the "Note").  The term of the Note expires on
December 31, 2001.  Interest on any advances under the Note is payable beginning
on March 30, 2001 and the last day of each month  thereafter;  the interest rate
is determined at the time of each such advance.  The amount  borrowed  under the
Note was repaid to the bank on March 9,  2001,  and no  advances  have been made
since that date.

     Simultaneously  with  the  consummation  of the  acquisition,  Health  Card
entered into an employment agreement with Mark Lewandowski, the former President
of PMP,  pursuant to which Mr.  Lewandowski  will serve as Health  Card's Senior
Vice President of Business Development.

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  evolved to address this need. These companies  created an opportunity
for plan sponsors to provide prescription drug benefits to their plan members in
a cost-effective manner through:

      o        mail pharmacy services        o        claims management
      o        formulary management          o        drug review and analysis

     while  often  improving  patient   compliance  with  recommended  drug  and
treatment guidelines.  An industry source estimates that 2000 U.S. purchases for
prescription  drugs increased 16% from 1999 to approximately  $141 billion.  The
total number of prescriptions filled in 2000 reached approximately 2.8 billion.


Services

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,  one HMO and third  party  health care plan
administrators.  Sponsors  retain  Health Card to manage the  prescription  drug
plans that they maintain for the benefit of their plan participants. Health Card
consults with sponsors to assist them in  customizing  their  prescription  drug
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."

     Health Card provides a wide variety of services including,  but not limited
to:

     o    Claims Management

     o    Pharmacy Network

     o    Benefit Design Consultation

     o    Preferred Drug Management

     o    Drug Review & Analysis

     o    Consulting Services and Disease Information Services

     o    Data Access, Reporting & Information Analysis

     o    Physician Profiling

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.

     As  of  November  1,  2000,  Pharmacy  Associates'  sponsors'  claims  were
incorporated into Health Card's on-line claims management system. As of June 16,
2001 PMP's sponsors' claims were  incorporated into Health Card's on-line claims
management system.

     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.  Sometimes  sponsors  are  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 prior agreement
with PAI, the Administrator has prepaid certain estimated rebates to PAI. PAI is
obligated  to  repay  this  amount,   plus  interest  at  8.5%,  in  four  equal
installments at the end of four successive  quarters starting December 31, 2000,
and ending September 30, 2001.

     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.

     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.  Health  Card may be
required to pay participating  pharmacies whether or not it has been paid by its
sponsors.  The loss of a substantial  portion of the  pharmacies in the pharmacy
network  could  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.  Pharmacy  Associates  also  maintains a
network  in certain  states in the  Southeast.  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 90% of pharmacies in the U.S.

     Mail Pharmacy Claims Management. 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 is
for a one year  automatically  renewable  term.  The agreement was renewed as of
June 30, 2001.  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.

     E-Pharmacy  Service  Management.  Health  Card  intends  to  establish  and
maintain an e-pharmacy  website pursuant to which  participants in Health Card's
e-pharmacy  program  will  be  able to  purchase  over-the-counter  medications,
vitamins,  nutritional  supplements and prescription drugs through the Internet.
The Company's previous e-pharmacy arrangement has been terminated.

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.  In  addition,  Health Card staff
analyze and provide  recommendations  to sponsors regarding how to improve their
plan(s) performance based upon their objectives. General areas of focus include:

          o Participant cost sharing levels

          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.  Once a plan design has been implemented,  the
clinical and account  management  staff monitors plan  performance  for customer
satisifaction 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  geriatric or pediatric precautions
o    premature refills of prescriptions    o  compliance with prescriptions
o    duration and duplication of therapy   o  other contraindications
o    pregnancy and breast feeding precautions

     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.

Consulting Services and Disease Information Services

     Pharmacy Benefit Plan  Consulting.  Health Card's  consulting  services are
designed to enable  sponsors to enhance the quality of plan  participants'  care
while  reducing  related  costs.  Using data  relating  to the  progression  and
treatment of diseases,  Health Card disseminates information regarding therapies
that are aimed at treating a disease in a cost-effective  manner.  Health Card's
information systems, which include a comprehensive  database,  allow Health Card
to  provide  (i)  drug  review  and  analysis,   (ii)  appropriate  reports  and
information,  and (iii) disease information services.  Health Card believes that
technology and information systems advances will allow for future integration of
health care claims  information,  including  hospital,  laboratory  and clinical
costs.  Health Card further  believes that  integration will enable it to assess
outcomes on a statistical  basis and based on such  statistical  assessments  to
make  recommendations  regarding effective  prescribing  practices.  Health Card
believes this should allow for improved patient care while  controlling  therapy
costs.

     Health Card has  established a Pharmacy & Therapeutics  Committee (the "P&T
Committee")   currently  comprised  of  physicians  and  pharmacists.   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 P&T Committee  currently  consists of eight members:  Martin Edelstein,
M.D., Paul Cohen, M.D., Carole Moodhe,  M.D., and David Grossman,  M.D., each of
whom is a practicing physician and medical school professor,  Jack M. Rosenberg,
a university professor of clinical pharmacy and pharmacology, Joseph B. Laudano,
a manager  of  medical  affairs of a major drug  company,  Howard G.  Levine,  a
pharmacist  who is the Chairman of the Board of an independent  pharmacy  group,
and John Ciufo, who is Health Card's Senior Vice President of Strategic Planning
and its liaison with the P&T Committee.  Mr. Ciufo is the only member of the P&T
Committee  otherwise  affiliated  with Health Card.  Vytra Health Plans,  Health
Card's  largest  customer,  has the  right to  designate  one  member of the P&T
Committee,  but has not exercised its right.  Each Committee member is requested
to disclose his or her  affiliation  with any drug company.  Mr. Laudano and Mr.
Rosenberg have disclosed a current affiliation with drug companies.

     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  treatment  of  medication.  Health Card has  developed  disease
information  systems covering  cardiovascular and  gastrointestinal  conditions,
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 - HC Focus.

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.

Sponsors

     Health Card's Sponsors are located  throughout the United States.  Sponsors
include managed care organizations,  local governments, unions, corporations, an
HMO 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  bi-weekly  or
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 the
bi-weekly or  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.

Significant Sponsors

     For the fiscal year ended June 30,  2001,  Vytra  Health Plans Long Island,
Inc., Vytra Health Plans Managed Systems,  Inc. and Vytra Health Services,  Inc.
(individually and collectively, "Vytra") was the only sponsor 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 is detailed in the
immediately following sections.

Vytra

     Vytra  is a  particularly  significant  sponsor,  as  the  following  table
indicates:

                                         Percent of
                                         Health Card's     Number of
         Year Ended June 30,              Revenues         Participants

                1999                         39%            150,061
                2000                         27%            133,218
                2001                         16%            128,720


     Health Card provides services to Vytra under an arrangement that expires in
December 2001 (the "Current Arrangement").

     Under the Current Arrangement,  Health Card provides Vytra pharmacy benefit
management  services  and  charges  Vytra a fee  based on the  number  of claims
processed  during each  applicable  billing  period.  Vytra is invoiced  for the
processed prescription claims of its members on a semi-monthly basis.

     Pursuant  to the  Current  Arrangement,  Health  Card  is  Vytra's  primary
provider of pharmacy benefit management services. Vytra has the right to place a
percentage  of its claims  with other  pharmacy  benefit  management  companies,
individual  physicians or groups of physicians  associated  with Vytra. If Vytra
processes  more than such  percentage of its claims with other  parties,  Health
Card can terminate the Current  Arrangement or renegotiate  the present  amounts
charged to Vytra.

     The Current Arrangement requires Health Card to arrange for and maintain an
adequate and accessible  pharmacy network for Vytra plan  participants  (i.e., a
specified number of pharmacies).  Health Card meets this standard if one or more
participating  pharmacies  are  located in each zip code in  Queens,  Nassau and
Suffolk County, in the State of New York. In addition, Health Card must exercise
its best efforts to maintain  pharmacy network  participation in accordance with
certain  historical  levels.  Health  Card is not  responsible  if the number of
pharmacies in the network declines because of pharmacy closings,  consolidations
or changes in the pharmacy payment  schedule.  Health Card has agreed with Vytra
that it will not terminate a major chain of participating  pharmacies during the
term of the Current Arrangement without Vytra's consent.  However, if Vytra does
not consent and the  inclusion of such chain  results in higher  actual costs to
Health  Card,  then Vytra will be required  to pay such  increase on a quarterly
basis. In addition,  Vytra may require Health Card to add specific pharmacies to
the pharmacy network.  Similarly, if the inclusion of such pharmacies results in
higher actual costs to Health Card, Vytra will be responsible for the increase.

     The Current  Arrangement  requires  that Health Card  maintain a Pharmacy &
Therapeutics  Committee.  Vytra has the right to designate one representative to
serve on the  Pharmacy &  Therapeutics  Committee,  but,  as of the date of this
Annual Report on Form 10-K, Vytra has not exercised this right.

     The Current Arrangement also sets forth certain guarantees that Health Card
must meet. These include:

     o    processing certain percentages of claims within certain periods,

     o    making all  reasonable  efforts to process all claims within a maximum
          period,

     o    answering all calls within a specified average time,

     o    ensuring that a certain percentage of mail order prescriptions,  which
          do not  require  pharmacy or  physician  intervention,  are  dispensed
          within certain periods,

     o    making   all   reasonable   efforts   to  make  sure  all  mail  order
          prescriptions  are dispensed  within a maximum time period, o reaching
          certain generic substitution rates, and

     o    maintaining a certain level of rebates per claim.

     The Current  Arrangement  further  requires  that Health Card  establish an
irrevocable  standby  letter of credit in favor of Vytra for $2,000,000 in order
to ensure the  fulfillment of certain of Health Card's  obligations to Vytra. As
of the date of this Annual Report on Form 10-K, Vytra has not drawn against this
letter of credit.

     If  Health  Card were to lose  Vytra as a  sponsor,  or lose a  significant
portion of Vytra's  business,  it would have a material adverse effect on Health
Card's business, operating results and financial condition.

Sales and Marketing

     Health Card markets its services  through a sales and marketing  department
led by the Senior Vice President of Sales and  Marketing,  who utilizes a direct
sales  force of eight  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 utilizes  advertising,
public relations and marketing literature for sales support.

     In addition,  Health Card has recently  launched a marketing  strategy that
includes new corporate  brand and  identity.  The Company has adopted new visual
imagery and taglines to convey its heightened  focus on blending "Best in Class"
practices with high technology and personalized  service. At the core of the new
imagery is a stock car racing theme  focused on the visual  imagery of pit crews
projecting the Company's  "High Tech,  High Touch" and  "extraordinary  customer
service"  philosophy.  This  "branding"  and  new  images  will  be  used in all
marketing  materials  and print  media  advertising.  Additionally,  Health Card
markets its services by attending,  exhibiting and providing guest speakers to a
number of industry trade shows.

     Furthermore,   Health   Card   continues   to  expand   its  web   presence
(www.nmhc.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.  Many of Health Card's  competitors have been in existence for
longer periods of time and are better established than Health Card. Many 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,
pharmacy  benefit  program  management  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  7,  2001,  Health  Card  and  its  subsidiaries  had  149
employees:  43 of these  employees are located in the Little Rock,  Arkansas and
Tulsa, Oklahoma offices. Of the 149 total employees, 146 are full-time and 3 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.
See Item 13 hereof.

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 receives data processing services and technology infrastructure
consulting services from Sandata, Inc. and its subsidiaries ("Sandata"). Sandata
is a public  company  (NASDAQ:  SAND) of which Bert E.  Brodsky,  Health  Card's
Chairman  of the Board and  Chief  Executive  Officer,  is also  Chairman,  CEO,
Treasurer and a principal stockholder. See Item 13 hereof.

Government Regulation

     The activities of pharmacy benefit management companies such as Health Card
are subject to regulation at the federal,  state and local levels.  While Health
Card may not have complied in the past, it has recently  reviewed its operations
for areas of non-compliance and believes that it substantially complies with the
laws and  regulations  material to the  operation  of its  business or is taking
steps to identify and comply with such laws and  regulations.  The laws that may
affect Health Card's operations and relationships  include,  but are not limited
to, the  federal  Anti-Kickback,  FDA,  anti-trust  and ERISA  laws,  the Health
Insurance  Portability  and  Accountability  Act and the laws of various  states
relating to health,  utilization  review,  and the licensing  and  regulation of
professions,  including physicians,  nurses, pharmacists and pharmacies.  Health
Card is also subject to laws and regulations  relating to business  corporations
in general.

     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  and  relationships  with  sponsors,
pharmacies,   rebate  administrators,   plan  participants  or  brokers  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 specific laws and regulations affecting
the business, operations and relationships of Health Card is set forth below.

Anti-Kickback Regulations

     The federal  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 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.

     Safe harbor  regulations have been adopted under the Anti-Kickback  Statute
which immunize certain  remuneration  arrangements which 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.  While it is unclear  whether Health Card's  conduct,
operations,  and relationships would fall within a safe harbor under the Statute
or regulations promulgated thereunder, failure to fall within a safe harbor does
not mean that Health Card's  practices  would  violate the law,  although it may
result in heightened scrutiny or challenge.

     Health  Card  believes  that it is not in  violation  of the  Anti-Kickback
Statute because (i) it does not receive any remuneration directly from Medicare,
Medicaid or any other government sponsored health care program, and (ii) it does
not believe the payments to it from any of its sponsors,  other than Vytra and a
state  licensed HMO client,  are derived from funds from  Medicare,  Medicaid or
other federal government  sponsored health care programs.  With respect to other
sponsors,  although Health Card does not have any knowledge to the contrary,  it
cannot  be sure  that no  portion  of a  sponsor's  payment  is  derived  from a
government health care program source.  However,  even if Health Card were found
to receive  indirectly a benefit from such a  government  sponsored  health care
program  in the form of a  rebate  from a  rebate  administrator  or from a drug
manufacturer,  Health  Card  believes  that its  conduct  would not  violate the
Anti-Kickback  Statute  because it receives and shares rebates with its sponsors
only to share cost savings and reduce the cost of pharmacy benefit services, not
to induce  referrals.  Health Card cannot be sure,  however,  that a  government
regulatory agency or judicial tribunal would not view the receipt and sharing of
rebates as a violation of the federal Anti-Kickback Statute.

     The  Anti-Kickback  Statute  and  related  regulations  have  been  broadly
interpreted by the federal courts to prohibit the payment or receipt of any form
of  remuneration,  even if only one purpose of such  remuneration is to obtain a
referral  for any item or  service  that is  covered  by a federal  health  care
program.  Certain  states  other than New York have  similar  statutes  that may
extend  the   prohibitions   to  items  or   services   that  are  paid  for  by
non-governmental third-party payers, as well as individuals who pay directly for
their own health care.

     Health Card is not aware of any instance in which the Anti-Kickback Statute
has  been  applied  (i) to  prohibit  independent  pharmacy  benefit  management
companies 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  pharmacy  benefit  management  companies  and  their  sponsors  and
participating pharmacies.

     In the last few years, private citizens have commenced litigation, known as
Qui Tam actions,  against  health care  providers and suppliers on behalf of the
federal government alleging that such providers and suppliers filed false claims
with the Medicare and/or Medicaid programs.  While the law on the issue is still
unsettled,  if Health Card's  activities with respect to its receipt and sharing
of rebates  were  challenged  as a  kickback  in such a Qui Tam  proceeding  and
determined to form the basis for a false claim under the Anti-Kickback  Statute,
Health  Card could be subject to  substantial  penalties  and treble  damages in
addition  to  the  punishments   described  above.  Health  Card's  exposure  to
litigation and enforcement  actions is increased  because of the availability of
such Qui Tam actions to a broader class of plaintiffs.

Pharmacy Regulations

     New York  prohibits  unlicensed  persons  from  engaging in the practice of
pharmacy.  The practice of pharmacy is defined as "the  preparing,  compounding,
preserving, or the dispensing of drugs, medicines and therapeutic devices on the
basis of prescriptions or other legal  authority."  Health Card believes that it
is engaging in the business of providing management and administrative  services
for prescription benefit plans and not in the practice of pharmacy.

     As a precautionary  measure, in order to preclude any possible finding that
it is engaged in the  unauthorized  practice of  pharmacy,  Health Card became a
licensed pharmacy in New York in March 1999. Health Card cannot be sure that the
New York  Department of Education will not claim that Health Card was engaged in
the practice of pharmacy  without a license prior to that date.  Health Card has
not determined,  and does not believe that it could determine with any degree of
accuracy, the nature or extent of any sanctions that might be imposed on it as a
result of such claim.

     As a  licensed  pharmacy,  Health  Card is  subject  to all of the laws and
regulations   governing  pharmacies   including  those  regarding   professional
misconduct.  Professional misconduct for a pharmacy is defined to include, among
other  things,   (i)  splitting  fees  in  connection  with  the  furnishing  of
professional  care or  services,  including  the sale of drugs,  (ii)  receiving
valuable consideration as a commission,  discount or gratuity in connection with
the sale of drugs, and (iii) paying or receiving any  consideration to or from a
third party for referring a patient,  or in connection with the performance of a
professional service.

     Health Card is not aware of any interpretation by any court or governmental
agency of the laws and  regulations  regarding fee splitting or referral fees by
licensed professionals to any arrangements similar to those engaged in by Health
Card nor has Health Card  obtained or applied for any opinion of any  regulatory
or judicial authority that its business  operations or relationships are or will
be in compliance with such laws and regulations. The following aspects of Health
Card's business should be considered in light of these laws and regulations.

     Health Card receives rebates direct from drug manufacturers as well as from
one or more third party rebate administrators through contracts between them and
pharmaceutical companies. While Health Card shares the proceeds of those rebates
with some of its sponsors, it does not share any rebates with pharmacies.

     In connection  with its  formulary  management  program,  Health Card's P&T
Committee,  or its formulary  administrators,  considers the net cost of various
drugs as one factor in determining  which drugs should be included in the Health
Card  formulary.  While the  determination  to include or exclude drugs from the
formulary is primarily based on the quality and efficacy of the drugs, their net
cost after any available  rebate is also  considered.  If Health Card chooses to
include certain drugs in its formulary,  or adapt the formulary of its formulary
administrator, for which it receives rebates, it may be required under the terms
of its agreements with rebate  administrators  or drug  manufacturers to exclude
certain other drugs from its formulary in order to receive those rebates.

     Although it is licensed  as a pharmacy,  Health Card does not believe  that
its  activities  as a pharmacy  benefit  manager  constitute  the  rendering  of
pharmacy  services  that  would  subject  it  to  the  professional   misconduct
regulations  for its pharmacy  benefit  management  activities.  Even if it were
determined  that Health Card's  activities  constitute the practice of pharmacy,
Health  Card  does  not  believe  that  any of its  activities  are of the  type
prohibited  by the laws  governing the  pharmacies or the rules of  professional
misconduct  applicable to pharmacies.  Health Card cannot be sure, however, that
the New York  Department of Education  would not come to a different  conclusion
and commence a regulatory  investigation  or seek to impose  sanctions on it for
such conduct.

Regulations Regarding Certain Rights of Privacy and Confidentiality

     It  is  also  professional  misconduct  in  New  York  for  a  pharmacy  to
disseminate  personally  identifiable health information about a patient without
the  patient's  prior  written  authorization.  Improper  dissemination  of such
information  may subject a  pharmacist  to fines,  penalties,  other  sanctions,
injunctive relief, professional disciplinary actions and loss of license.

     In the course of its business,  Health Card receives  data  regarding  each
plan   participant's   prescription   drug  utilization   history.   Under  some
circumstances,  Health Card may also receive other medical information regarding
a plan  participant.  The  availability  of such  information to Health Card may
enable it to draw certain  conclusions about a plan  participant's  health.  For
example,  a  plan  participant   receiving  long-term  insulin  therapy  may  be
identified  as a diabetic.  Health Card calls  these  identifications  "inferred
disease states."

     Based on the information Health Card obtains regarding a plan participant's
inferred disease state, Health Card may make  recommendations to sponsors on how
to reduce costs and improve the plan to better serve plan  participants.  Health
Card routinely  shares such  information  with its sponsors through its computer
network.  Under the terms of most  plans,  Health  Card also may be  required to
provide  patient  specific  information  directly to  sponsors,  including  drug
history information that may suggest an inferred disease state. In utilizing the
data  received by Health Card in this  manner,  it is possible  that Health Card
could be found to have violated the privacy  rights of plan  participants  under
the  laws of New York  and  other  states  in  which  it does  business.  Such a
determination  could have a material  adverse effect on Health Card's ability to
provide disease information  services,  an area of its business that Health Card
believes gives it a competitive  advantage and is anticipated to be an important
element of its future success.

     The Health Insurance  Portability and  Accountability Act of 1996 ("HIPAA")
required  the  Secretary  of  Health  and  Human  Services  to  issue  standards
concerning health information privacy. Health Card has formed a HIPAA Compliance
Committee  comprised of a representative from each of Health Card's departments.
The group has been meeting  periodically  since October 2000 to review the HIPAA
Compliance  Project and establish new goals as needed. The goal of the Committee
is  to  focus   internal   resources  on  the   standardization   of  electronic
communication  wherever  appropriate;  to  implement  practices  to support  the
principles of patient privacy; and to implement practices to ensure the security
of electronic transmissions.

     Health Card is or is becoming compliant with the standards of communication
for the PBM industry set by the National Council for Prescription Drug Programs.
Health Card performs risk assessments, employee training with respect to patient
confidentiality,  and evaluations of business  practices in order to continue to
support patient privacy.  The HIPAA Compliance  Committee has presented  several
reports to senior management  concerning the goals of  standardization,  patient
privacy and electronic security.

     Health  Card is not a  covered  entity  as  defined  by the  HIPAA  Privacy
Regulations.  Health  Card is a Business  Associate  as  defined by the  Privacy
Regulations  and as such  supports  HIPAA  requirements  as an  extension of our
existing business practices.

     Health Card cannot predict  accurately  what effect HIPAA  regulations  may
have on its operations,  and there can be no assurance that the restrictions and
duties  imposed by the  regulations  will not have a material  adverse effect on
Health Card's business, results of operations or financial conditions.

Regulations Applicable to Health Care Professionals

     All states, including New York, regulate the practice of medicine,  nursing
and other licensed health professions. Activities deemed by a state's regulatory
authority to constitute the practice of medicine, nursing, 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,  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 or any other licensed health  profession.  Health Card cannot
assure that a regulatory  authority in New York,  or any other state in which it
engages in such activities,  would not assert a contrary position and subject it
to the sanctions described above.

Utilization Review Regulations

     Under the  Insurance Law and Article 49 of the Public Health Law, the State
of New York regulates  utilization review.  Utilization review is defined as the
review to determine  whether  health care services that have been,  are being or
will be provided are medically necessary.  Health care services, for purposes of
the   utilization   review  law,  are  defined  to  include  the   provision  of
pharmaceutical products. In some of the contracts to which it is a party, Health
Card  agrees  to  provide  "drug  utilization   review"  and  "drug  utilization
management."  However,  Health Card  believes  that the drug review and analysis
services it provides to its sponsors do not involve making  determinations as to
the medical necessity of the pharmaceutical products provided that would subject
it to regulation under the utilization review laws.

FDA Regulation

     The  United  States  Food  and Drug  Administration  has  asserted  general
authority to regulate promotional  activities of, and materials disseminated by,
pharmacy benefit management companies that are owned or influenced by or subject
to  contractual  relationships  with drug  companies.  In January 1998,  the FDA
published a draft guidance concerning certain promotional practices performed by
such pharmacy benefit management companies. Among the practices discussed in the
FDA's  commentary  to the  draft  guidance  were  the  use  of  product-specific
financial  incentives to influence  drug  selection and  prescribing  decisions,
disease  information  programs,  and  the use of  specified  or  preferred  drug
formularies.  Although the FDA's draft guidance has effectively  been withdrawn,
there  can be no  assurance  that the FDA  will  not  again  attempt  to  assert
jurisdiction  over certain aspects of Health Card's business in the future,  and
in such event,  the impact  could  materially  adversely  affect  Health  Card's
operations.

     Since Health Card is neither owned,  nor directly  controlled or influenced
by a drug company, it believes that the existing regulations do not apply to it.
However,  due to its contractual  relationship  with rebate  administrators  and
various drug  companies,  there can be no assurance  that some of Health  Card's
activities may not be subject to FDA review and regulation.  In such event, some
of Health Card's  activities and its rebate program may require  modification or
elimination.

Medicare Prescription Drug Benefit

     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.

Regulation in Other States

     Health Card is in the process of evaluating its  involvement  with sponsors
and plan  participants  located in states  other than New York.  Health  Card is
conducting that review systematically, focusing its attention initially on those
states where it has the most  sponsors  and/or plan  participants.  As a result,
Health Card has applied for and became  licensed as a third party  administrator
in Ohio, Kansas,  Kentucky,  South Carolina and Michigan. In addition,  Pharmacy
Associates  is  licensed  as a  third  party  administrator  in  Louisiana,  has
determined  that it need not be licensed in Arkansas and is currently  reviewing
the requirements for licensure in Mississippi.

     Health Card intends to apply for a third party  administrator's  license in
each state in which it determines that its business operations require it. Prior
to September 1998, Health Card conducted its activities without applying for any
such  licenses.  While  Health Card has sought to comply with all such laws that
are in effect in the  states in which it  conducts  its  business,  Health  Card
cannot  be sure  that it will  not be  subject  to  fines  and  other  penalties
including injunctive relief, as a result of its past non-compliance. Health Card
has not determined, and does not believe that it could determine with any degree
of accuracy,  the nature or extent of any punishment that might be imposed on it
as a result of such historical non-compliance.

     New York  does not  regulate  prescription  benefit  management  companies.
Health  Card  cannot be sure that New York or any other  state  will not  assert
regulatory  authority over it or its activities as a pharmacy benefit management
company or otherwise,  now or at any time in the future.  If a state does assert
such regulatory  authority,  Health Card will seek to comply with all applicable
regulations; however, Health Card cannot be sure compliance will be achieved. If
Health  Card is  unable  to  comply,  it may not be  permitted  to  conduct  its
activities in those states as it currently conducts them, or at all.

     Health Card has requested advice from special counsel  regarding changes in
laws and regulations  covering  insurance,  health,  licensure and certain other
regulatory matters governed by New York State laws and federal laws. 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
"Facility").  The  Company  subleases  the  Facility  from BFS  Realty,  LLC, an
affiliate of the Company's Chairman (the "Affiliate").  The Affiliate leases the
Facility from the Nassau County  Industrial  Development  Agency,  pursuant to a
lease (the "Lease"),  which was entered into by that Agency and the Affiliate in
July 1994.  The Lease  expires in March  2005.  The  Affiliate  has the right to
become the owner of the Facility  upon  expiration  of the Lease.  The Affiliate
subleases a portion of the Facility to the Company.  The Company  currently pays
rent to the Affiliate in the amount of $336,780 per year, plus monthly  expenses
for maintenance,  real estate taxes,  utilities and the like. The rent increases
5% annually.  The Affiliate also receives rent from other  companies that occupy
space in the Facility, some of which are affiliated with the Company's Chairman.
The Company believes that the Facility is adequate for current purposes.  A copy
of the lease between the Company and the Affiliate is attached hereto as Exhibit
10.60.

     PAI currently occupies  approximately  7,000 square feet of office space in
Little  Rock,  Arkansas,  at an  annual  rent  of  $110,372,  including  monthly
expenses.  The landlord for these  premises is Executive Park  Partnership.  The
lease expires on April 30, 2002.  PAI is currently  negotiating  with  Executive
Park  Partnership the terms of a lease that would commence May 1, 2002 and would
increase the space occupied by PAI.

     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 addition,  Health Card rents a two family house in Port Washington,  New
York (near the Company's  offices)  from P.W.  Capital,  LLC,  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, 2001, Health Card
paid P.W. Capital, LLC, $16,500 in rent for this facility.

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
and financial condition.

     An action was commenced against Health Card 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 Health Card  unilaterally  terminated the
contract  on  December  16,  1996.  The  complaint   further  alleged  that  the
termination resulted in the School District incurring  approximately $150,000 in
costs and  $867,000 in  expenses to obtain  coverage  from  December  1996 until
October  1997.  The  complaint  also sought  treble  damages.  While  settlement
documents are currently being  finalized,  the parties have reached an agreement
that  contemplates  Health  Card  paying to the  plaintiffs  an  amount  that is
significantly lower than the amount of costs and expenses claimed, and 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
Health Card and the School District.  Although,  the settlement  papers have not
been  finalized,  Health Card  believes that these terms will be the crux of the
agreement.

     An action has been  commenced by a former  executive  of Health Card,  Mary
Casale,  who alleges that employees of Health Card engaged in sex discrimination
in  violation  of Title  VII of the  Civil  Rights  Act of 1964.  The  matter is
presently  pending before the New York District  Office of the Equal  Employment
Opportunity  Commission  ("EEOC").  The  EEOC  has  made no  findings  or  other
determinations as to the merits of the parties' claims or defenses.  The Company
is being  defended  pursuant  to an  employment  practices  liability  insurance
policy,  the  coverage  of which is subject to various  terms,  conditions,  and
exclusions.   Only  a  preliminary  investigation  into  this  matter  has  been
conducted,  and discovery has not commenced. Ms. Casale has yet to bring suit in
state or federal court, and, thus, could conceivably  assert additional  claims.
The Company denies the material  allegations  Ms. Casale has brought  against it
and intends to defend itself vigorously.

     On October 23,  2000,  the  Company  was served  with a complaint  filed by
Allcare  Health  Management  Systems,  Inc.  ("Allcare")  in the  United  States
District Court for the Northern District of Texas, alleging that the Company and
numerous other  defendants  infringed  certain patent rights  allegedly owned by
Allcare.  On April 10, 2001, the Company  settled the lawsuit with Allcare,  and
all of the  claims  against  the  Company  were  dismissed  by the  Court,  with
prejudice,  on April 17, 2001.  As part of the  settlement,  the Company and its
subsidiaries were released from any and all claims that were or could be brought
in the  lawsuit.  The  release  covers  all prior  periods as well as all future
periods  as  long  as the  Company  continues  licensing  its  pharmacy  benefit
management  information technology systems (the "NMHCS Systems") from a licensee
of Allcare.  Furthermore,  the future  activities  of  entities  acquired by the
Company are  covered  under the  release as long as such  entities'  systems are
converted to the NMHCS Systems within six months of acquisition.  The settlement
provides  Allcare  the right to audit the  Company  in the  future to insure the
NMHCS Systems are still covered by the release.  The Company also has the option
to extend the  duration of the  release,  for a fee,  if it  licenses  its NMHCS
Systems from a different vendor in the future.

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

        None.

<PAGE>

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK 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,
                                    2000                        2001
                                    ----                        ----
                                High     Low              High      Low

First Quarter                  $7.75   $4.81             $3.25    $1.88
Second Quarter                  5.63    2.75              2.25     1.16
Third Quarter                   5.25    2.81              3.13     1.31
Fourth Quarter                  3.38    1.75              3.49     2.90

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 21 2001 was 46.

Dividend Policy

     Health  Card has not  declared or paid any cash  dividends  in the past and
does not anticipate doing so in the foreseeable  future.  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.  No assurance can be given that Health
Card will pay dividends in the foreseeable future.

Recent Sales of Unregistered Securities

     In August of 2001, a total of 62,500  shares of Common Stock of Health Card
were issued to certain  shareholders  of Pharmacy  Associates in connection with
the  acquisition.  The  shares  were  issued  pursuant  to  the  exemption  from
registration  provided by Section  4(2) of the  Securities  Act of 1993,  and in
accordance with the contingent payment provisions of the acquisition  agreement.
For a detailed description of the acquisition of Pharmacy Associates, see Item 1
hereof,   "Description  of  Business  -  Recent  Acquisitions"  and  Note  2  of
Consolidated Financial Statements.



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,  2001 and  provides
certain  supplemental data. The selected  consolidated income statement data for
the years  ended  June 30,  1999,  2000 and 2001 and the  selected  consolidated
balance  sheet  data as of June 30,  2000 and 2001  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, 1997 and 1998 and the selected  consolidated  balance  sheet data as of June
30,  1997,  1998 and 1999  have  been  derived  from  the  audited  consolidated
financial  statements  of Health Card which are not  included in this Form 10-K.
Revenue and cost of claims for all five years have been  adjusted  based on EITF
00-14 (see Item 7 hereof and Note 1 to Consolidated Financial  Statements).  The
impact is to reduce revenues and cost of claims by the same amounts each year so
there is no impact to gross  profit.  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.
<TABLE>
<S>                             <C>           <C>           <C>            <C>           <C>
                                                     Year Ended June 30,
                                    1997         1998           1999           2000           2001

Income Statement Data:
Revenues......................  $70,248,597   $95,473,116   $128,262,665   $167,675,627   $272,119,140
Cost of Claims................   63,137,128    86,715,134    115,768,372    153,377,200    249,572,132
                                 ----------    ----------    -----------    -----------    -----------
Gross Profit..................    7,111,469     8,757,982     12,494,293     14,298,427     22,547,008
Selling, general and
 administrative expenses*..       5,855,282     7,192,027      10,171,314     12,357,819    21,423,140
                                  ---------      ---------     ----------     ----------    ----------
Operating income (loss).....      1,256,187     1,565,955       2,322,979      1,940,608     1,123,868
Other income (expense)......         42,595      (180,507)        592,032        922,066       877,402
                                  ----------     ---------    ------------     ---------     ---------
Income before income taxes
 (loss).....................      1,298,782      1,385,448      2,915,011      2,862,674     2,001,270
Provision for income taxes
 (benefit)..................       (189,984)       569,000        976,000      1,247,000       843,330
                                   ---------       -------         -------     ---------       -------
Net income (loss)...........    $ 1,488,766    $   816,448    $ 1,939,011    $ 1,615,674   $ 1,157,940
                                ===========    ===========    ===========    ===========   ===========

Earnings (loss) per
common share:
  Basic.....................    $      0.46    $     0.16     $      0.37    $      0.24   $      0.16
                                ===========    ==========     ===========    ===========   ===========
  Diluted...................    $      0.37    $     0.16     $      0.37    $      0.24   $      0.16
                                ===========    ==========     ===========    ===========    ==========

Weighted average number of
common shares outstanding:
  Basic.....................      3,258,459     4,966,885       5,205,084      6,720,104     7,100,674
  Diluted...................      4,008,481     4,969,166       5,205,084      6,720,104     7,199,526

*Includes amounts charged by
  affiliates aggregating....     $4,511,144   $ 4,904,514     $ 2,816,982    $ 2,985,506   $ 4,080,998
</TABLE>

<PAGE>

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

                                                      Year Ended June 30,
                                   1997          1998              1999          2000         2001

Balance Sheet Data:
Cash and cash equivalents...    $ 1,782,597   $ 1,305,792     $  2,815,863   $ 15,724,730  $12,474,945
Working capital (deficit)...     (7,436,095)   (8,658,324)      (6,680,593)     6,030,219   (7,089,973)
Total assets................     11,871,820    18,343,900       30,846,011     44,363,618   79,109,564
Long-term debt (including
current portion)............        263,648         9,742            1,950      2,331,881    1,875,443
Total stockholders' equity
(deficit)...................     (2,343,671)   (2,006,282)       1,998,315     13,425,259   15,472,219

</TABLE>

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

                                                      Year Ended June 30,
                                   1997          1998              1999          2000         2001

Supplemental Data (1):
Retail pharmacy claims
 processed..................      1,990,976     2,405,627        3,066,098      4,058,748    7,402,712
Mail pharmacy claims
 processed..................         62,413       131,611           171,295       255,211      487,131
Estimated plan participants
(at period end).............        291,446       401,226           521,150       505,401    1,500,000

(1)  This data has not been audited.  See Items 1 and 7 hereof.
</TABLE>

<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,  IPA, and  Specialty.
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. 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 the  adjudication of the drug claims at the point of service.  Health
Card also recognizes administrative fees 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  following  table sets forth the  breakdown  of Health  Card's  charges
relating to pharmaceuticals dispensed and administrative fees:

                                   Years Ended June 30,
                                    1999           2000           2001
Charges  relating to
Pharmaceuticals                 $127,120,998   $165,170,552   $266,958,691
Administrative fees and other      1,141,667      2,505,075      5,160,449
                                ------------   ------------    -----------

         Total Revenues         $128,262,665   $167,675,627    $272,119,140
                                ------------   ------------    ------------

     Health  Card  does  not  take   possession   or  legal   ownership  of  the
pharmaceutical  drugs  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,  unless it
states  otherwise in Health Card's contracts with individual  pharmacies  and/or
chains.  All of Health Card's new pharmacy contracts specify that the pharmacies
will not be paid if Health Card is not 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,  or through a
third party  rebate  administrator.  During the fiscal year ended June 30, 2001,
Health Card dealt with three different rebate administrators.  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 administrators
provide  estimates  to Health  Card  based on their  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 its
previous  rebate  administratior  which  terminated  June 30, 2001,  and its new
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 paid within  120-150
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.

     Manufacturer  rebates have historically had a significant  impact on Health
Card's financial performance as the following table shows:



                             Years ended June 30,
                             1999     2000    2001
                             ---------------------
Rebates as a:
% Of cost of claims             2.1%   2.4%   3.9%
% Of total gross profit          20%    27%    45%
% Of income before taxes         87%   133%   508%

     Due to the expected  continued growth and  diversification of Health Card's
business, Health Card also expects rebates as a percentage of cost of claims, to
increase and  continue to account for a  significant  percentage  of total gross
profit and income before taxes.  Certain of Health Card's  sponsors are entitled
to all or a portion of rebates  received by Health Card, which portion varies by
sponsor. 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,  it would have a material  adverse
effect on Health Card's business, operating results and financial condition.

     Due to changing market conditions and competition,  it is possible that the
percentage of rebates retained by Health Card based on its arrangements with its
sponsors  may  change  when  these  arrangements  expire  and  may be  lower  in
arrangements  with new  sponsors.  Any such change in the  percentage of rebates
retained and recorded as a reduction  of revenue  could have 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  internal  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  internal  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. See Item 13 hereof.

Results of Operations

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 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 Item 3, Legal  Proceedings),  (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 the Allcare patent infringement
(See Item 3 - Legal  Proceedings),  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  $861,000,  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 Item 3 - Legal  Proceedings,  and which  relate to prior
fiscal years, 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.

Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999

     Revenues increased $39.4 million, or approximately 31%, from $128.3 million
for the fiscal  year ended June 30,  1999 to $167.7  million for the fiscal year
ended June 30, 2000. The increase  related to revenues from new sponsors  during
the fiscal year was  approximately  $21 million.  The majority of the  remaining
increase of  approximately  $17 million was due to 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.  The remainder of the increase,
approximately  $630,000,  was due to new services offered during the year around
the e-pharmacy and clinical services.

     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 $5.8  million and $4.6  million for
the fiscal years ended June 30, 1999 and 2000, respectively.

     Revenues grew year over year despite the loss of two key clients during the
June 30, 2000 fiscal year. One, a previous significant  sponsor,  terminated its
contract  with  Health  Card as of  January  1,  2000.  The second was placed in
receivership  by the State of Florida as of January 1, 2000,  and their  members
were  dispersed  to other plans not covered by Health  Card.  These two sponsors
accounted  for $20.5  million and $21.4  million in  revenues  during the fiscal
years ended June 30,  1999 and 2000,  respectively.  The revenue  from these two
sponsors was replaced by the $21 million of revenue from new sponsors  described
above. This helped to mitigate the overall impact of their loss on an actual run
rate basis.  Two other factors  influencing  the year to year  comparison  were:
revenues  of the  fiscal  year  ended June 30,  1999  included  a one-time  rate
increase of $500,000 from a major  sponsor,  and the revenue for the fiscal year
ended June 30, 2000 was net of an $821,000 reduction in revenue when Health Card
settled  certain fees from a major sponsor as  consideration  for a new two year
arrangement with this sponsor.

     Cost of claims increased $37.6 million,  or approximately  32%, from $115.8
million for the fiscal year ended June 30, 1999 to $153.4 million for the fiscal
year ended June 30, 2000. As a percentage of revenues,  cost of claims increased
from 90.3% for the fiscal  year ended June 30, 1999 to 91.5% for the fiscal year
ended June 30, 2000. The primary  reason for the cost of claims  increasing as a
percentage of revenue has to do with a risk sharing  arrangement Health Card had
with a major  sponsor.  During the fiscal  year ended June 30,  2000 the cost of
drugs covered under this arrangement were greater than the agreed upon capitated
rate, which led to a sharing of those costs between Health Card and the sponsor.
This fact along with the $821,000  revenue  reduction  mentioned  above led to a
differential between revenue and cost under this contract of $1.6 million during
fiscal 2000.  This risk sharing  arrangement  is no longer in effect.  Partially
offsetting  this  increase  in costs was a  $540,000  increase  in the amount of
manufacturer  rebates  received due to the increased  volume of claims in fiscal
2000 and the administrative fee to be paid to Specialty.  See "Business Services
- - Claims Management - - Rebate Administration". In addition, during the fiscal
year ended June 30, 2000 rebates  payable  were reduced by $736,000  when Health
Card reevaluated its liability to a plan sponsor.  Cost of claims for the fiscal
year was decreased by the same amount.

     Gross profit  increased  $1.8  million,  or  approximately  14%, from $12.5
million for the fiscal year ended June 30, 1999 to $14.3  million for the fiscal
year ended June 30,  2000,  primarily  as a result of the  increase in revenues,
offset by the increase in cost of claims.

     Selling, general and administrative expenses, which include amounts charged
by affiliates,  increased $2.2 million, or approximately 22%, from $10.2 million
for the fiscal  year ended June 30,  1999 to $12.4  million  for the fiscal year
ended June 30, 2000.  $1.3 million of the increase  resulted  from  increases in
compensation,  benefits, rent, sales and marketing and other expenses related to
the  continued  expansion  of  Health  Card's  business.  The  majority  of  the
compensation and benefits increase is related to approximately twenty additional
employees  at  June  30,  2000  compared  to June  30,  1999.  Depreciation  and
amortization expenses also increased by approximately $528,000, as a function of
increased hardware procurement and software development as Health Card continues
to enhance its information technology  capabilities.  Health Card also evaluated
its receivables due from certain sponsors,  including a key sponsor currently in
receivership, as described above, and determined it should increase its reserves
and/or  write-off  some  balances.  The impact on Health Card was an incremental
$338,000 in bad debt  expense in fiscal 2000 as  compared to fiscal  1999.  This
accounted  for the majority of the  remaining  increase in selling,  general and
administrative  expenses.  While selling,  general and  administrative  expenses
increased year over year in an absolute amount,  they grew at a slower rate than
the  increase in revenue.  These  expenses as a percentage  of revenue  actually
declined from 7.6% in fiscal year 1999 to 7.2% in fiscal year 2000.

     General  and  administrative   expenses  charged  by  affiliates  increased
$169,000,  or  approximately  6%, from $2,817,000 for the fiscal year ended June
30, 1999 to $2,986,000  for the fiscal year ended June 30, 2000,  primarily as a
result of  increased  information  technology  services  and rent to support the
business.

     Other income increased approximately $330,000, from $592,000 for the fiscal
year ended June 30,  1999 to $922,000  for the fiscal year ended June 30,  2000.
The net increase to income was due to an increase in interest income of $327,000
earned on increased  cash from the Public  Offering  and an $83,000  decrease in
offering  costs.  This  addition  to income was  partially  offset by an $80,000
increase in interest expense from a capital lease for computer hardware.

     The  provision  for income  taxes  increased  approximately  $271,000  from
$976,000  for the fiscal year ended June 30, 1999 to  $1,247,000  for the fiscal
year ended June 30, 2000.  The provision for the fiscal year ended June 30, 1999
was reduced by the  utilization of a $595,000 net operating  loss  carryforward.
There is no remaining net operating loss carryforward to the year ended June 30,
2000.

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, 2001, the Company had a
working  capital  deficit of $7.1 million as compared to working capital of $6.0
million  as of June 30,  2000.  The  primary  reasons  for the change in working
capital were the acquisitions of PAI and PMP. The Company utilized $11.3 million
of cash and cash equivalents,  net of cash received,  to acquire these companies
during the fiscal year ended June 30, 2001.  These funds came from the Company's
working  capital;  thus a long term asset,  goodwill,  was acquired with a short
term asset, cash.

     Net cash  provided  by  operating  activities  was $6.1  million  and $12.6
million for the fiscal years ended June 30, 2000 and 2001, respectively. For the
fiscal year ended June 30, 2001, accounts payable increased by $9.4 million more
than accounts  receivable,  thus providing  cash. For the fiscal year ended June
30, 2000,  accounts payable increased by more than accounts  receivable as well,
but only by $0.5 million.  There was also $2.6 million of non-cash  depreciation
and  amortization  related to the acquisitions and increased fixed assets during
the fiscal year ended June 30,  2001 as compared to $1.3  million for the fiscal
year ended June 30, 2000.

     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.  There can be no assurance that such  financing  could be obtained at
rates or on terms  acceptable to the Company,  if at all. 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.  The net cash outlay for PAI was  initially  $4.6  million,
representing  the initial  payment of $6.0  million plus $0.3 million of related
expenses, 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.  In addition,  there were $3.8 million of capital asset
additions during the period.  For the fiscal year ended June 30, 2000 there were
$2.4  million of capital  asset  additions,  which was  partially  offset by the
repayment  of a note by the  majority  stockholder.  Net cash used in  financing
activities  was  $742,000  for the fiscal year ended June 30,  2001,  reflecting
repayments  against  capital leases.  This compares to $8.6 million  provided by
financing  activities  for the fiscal year ended June 30, 2000,  reflecting  the
cash received from the Public Offering described herein.

     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.  The principal  balance of these three capital
leases as of June 30, 2001 was $1,875,443.

     The Company  assumed all the assets and  liabilities of PAI, as of July 20,
2000,  including two outstanding loans as follows: (i) a note payable to Regions
Bank with a  principal  balance  as of June 30,  2001 of  $71,136.  Such note is
payable in monthly  installments in the amount of $2,432,  including interest at
the rate of 7.75% and  principal  through  July 2004.  Repayment of such note is
currently  secured by a lien on and a security  interest in an  automobile;  and
(ii) a loan representing  prepaid rebates from its rebate  administrator  with a
principal  balance as of June 30, 2001 of $86,625,  payable with interest at the
rate of 8.5% in four quarterly payments of $94,261 commencing  December 31, 2000
and ending September 30, 2001.

     PAI  stockholders  were  eligible to receive up to $1,000,000 in additional
consideration  payable  in  combination  of cash and  common  stock  if  certain
financial targets of PAI were met for the fiscal year ended June 30, 2001. These
targets have been achieved and the $1 million has been earned.  $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,  2001. The PAI
stockholders  are  eligible to receive  one more  payment of up to $1 million if
certain  financial  targets  of PAI are met for the  fiscal  year ended June 30,
2002.

     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,  three such milestones  have been met,  resulting in a 75% 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 PAI and PMP
acquisitions, at least one additional milestone will be met during calendar year
2001.  If the two  remaining  milestones  are  reached,  the cash  outlay by the
Company would be $200,000.

     The Company anticipates that current cash positions,  after the PAI and PMP
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 two  acquired  during the fiscal  year  ended  June 30,  2001.  This will
require  cash.  Depending on the Company's  evaluation  of future  acquisitions,
additional  cash may be  required.  Therefore,  the  Company  has put in place a
$4,000,000 revolving credit line for acquisitions with its bank. The Company has
no current  borrowings  against this credit line.  The Company is also currently
negotiating  a larger  amount,  based on  anticipated  future  earnings  and its
balance sheet, to meet anticipated future needs. In the event that the Company's
plans change or its assumptions  prove to be inaccurate,  or that the additional
financing  is not  consummated,  or the  proceeds of the  financing  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.

Recent Pronouncements

     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  is in the  process  of  determining  the impact of these
pronouncements on its financial position and operations.

Subsequent Events

     Effective  August 1, 2001,  Health  Card  entered  into a new lease for the
premises  it  occupies  in  Port  Washington,   New  York.  See  Item  2  hereof
(Description of Properties) for a description of such lease.

     In August of 2001,  the  Company  and West  Contra  Costa  School  District
reached an agreement on the terms of a settlement  of the  litigation  involving
these two parties.  See Item 3 hereof (Legal  Proceedings)  for a description of
the litigation and the contemplated settlement.

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, 2000 and
2001 and for the years ended June 30,  1999,  2000 and 2001 are included in this
Form 10-K following Item 14 hereof.


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


     On June 15, 2001,  Health Card dismissed BDO Seidman LLP ("Seidman") as its
principal  independent  accountant.  Seidman's report on Health Card's financial
statements  for either of the years  ended June 30, 2000 or 1999 did not contain
an adverse  opinion or disclaimer  of opinion,  nor were either of those reports
modified as to uncertainty,  audit scope or accounting principles. Health Card's
decision to change accountants was approved by Health Card's audit committee and
its board of  directors.  During  Health Card's two most recent fiscal years and
the  subsequent   interim  period  preceding  such  dismissal,   there  were  no
disagreements  between  Health  Card and  Seidman  on any  matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure. As of June 15, 2001, Health Card has engaged Goldstein Golub Kessler,
LLP as its principal  independent  accountant to audit its financial  statements
for the fiscal year ended June 30, 2001.

<PAGE>

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Executive Officers and Directors

     Certain  information  concerning  the  executive  officers and Directors of
Health Card is set forth below:
<TABLE>
<S>                                               <C>      <C>
------------------------------------------------- -------- -------------------------------------------------
                      Name                          Age                            Positions Held
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Bert E. Brodsky                                     58     Chairman of the Board and Chief Executive Officer
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Gerald Shapiro                                      71     Vice Chairman of the Board and Secretary
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
James Bigl                                          38     President
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Tery Baskin                                         47     Chief Operating Officer
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
David Gershen                                       46     Treasurer and Chief Financial Officer
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Gerald Angowitz                                     52     Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Kenneth J. Daley                                    64     Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Ronald Fish                                         60     Director
------------------------------------------------- -------- -------------------------------------------------
------------------------------------------------- -------- -------------------------------------------------
Paul Konigsberg                                     65     Director
------------------------------------------------- -------- -------------------------------------------------

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

     Bert E.  Brodsky  has served as  Chairman of the Board of Health Card since
December 7, 1998, and as Chief Executive  Officer since June,  1998. Mr. Brodsky
has at various times since 1983 served as Chairman of the Board, President and a
Director  of Health  Card.  Mr.  Brodsky has served as Chairman of the Board and
Treasurer of Sandata,  Inc., a provider of computerized data processing services
and custom software and programming  services,  since June 1983 and as President
of Sandata from December 1989 through January 2000.  Sandata's  shares of common
stock are publicly traded.  From October 1983 through December 1993, Mr. Brodsky
served as Chairman of the Board of Compuflight, Inc., a provider of computerized
flight planning services.  Since August 1980, Mr. Brodsky has served as Chairman
of the Board and President of P.W.  Medical  Management,  Inc.,  which  provides
financial and  consulting  services to  physicians.  For more than the past five
years,  Mr. Brodsky has served as President of P.W.  Capital Corp., a consulting
services firm and Chairman of Sandsport Data Services, Inc., a computer services
firm and  wholly-owned  subsidiary  of  Sandata.  Mr.  Brodsky has also been the
Operating Manager of BFS Realty, LLC, a real estate company, since October 1996,
BFS Realty II, LLC, a real estate company, since November 1996 and 4 B's Realty,
LLC, a real estate company, since July 1996. See Item 13 hereof.

     Gerald  Shapiro  has served as Vice  Chairman  of the Board of Health  Card
since February 4, 1998.  Mr. Shapiro has also served as Secretary  since October
28,  1998.  From June 1, 1998 until  December  7, 1998,  Mr.  Shapiro  served as
Chairman of the Board.  For more than the past five years,  Mr. Shapiro has been
an  employee  of  Sandata,  President  of Lee  Management  Associates,  Inc.,  a
physician  billing and  consulting  firm,  Chairman and  Treasurer of Mediclaim,
Inc., a physician billing and consulting firm,  President of Brookhaven  M.R.I.,
Inc.,  a  company  that  operates  magnetic  resonance  imaging  machines,  Vice
President  of Mobile  Health  Management  Services,  Inc., a provider of medical
screening services. From 1973 to 1978, Mr. Shapiro served as President of Ally &
Gargano,  Inc., an advertising agency, and from 1971 to 1973 he was President of
Hertz Corporation.

     James  Bigl has served as  President  of Health  Card since June 12,  2000.
Immediately  prior to joining  Health Card, Mr. Bigl served as President and CEO
of York HealthNet,  SelectPro and USI Care Management ("USI"). In late 1998, Mr.
Bigl directed the sale of the Pharmacy Benefit  Management Company he founded at
Yale-New  Haven to USI. In October of 1994,  Mr. Bigl  oversaw the wide  ranging
operations,  including home infusion,  health care collections,  real estate and
retail  pharmacy at Yale-New Haven Health's  for-profit  division.  For the last
fifteen  years,  Mr. Bigl has been  working in the retail  pharmacy and Pharmacy
Benefit Management Industries.

     Tery Baskin has served as Chief Operating Officer of Health Card since June
2001. He has been a licensed  pharmacist  since 1978.  From 1993 to July 2000 he
served as the  President and a Director of Pharmacy  Associates,  Inc. From July
2000 to June 2001,  Mr.  Baskin was the Senior Vice  President of PAI,  which by
July 2000 was a wholly  owned  subsidiary  of Health  Card.  He has  served as a
Director of the American Pharmaceutical Association Foundation since 1998 and as
Treasurer since March 2001.

     David  Gershen  has served as Senior Vice  President  of Finance for Health
Card since May 2000. Mr. Gershen was named Chief Financial Officer and Treasurer
of Health Card in November,  2000.  From July 1996 until April 2000, Mr. Gershen
served as the Vice  President of Finance and  Administration  of CSC  Healthcare
Inc.,  a  subsidiary  of Computer  Sciences  Corporation  ("CSC"),  a healthcare
information  services company.  Prior thereto,  and since 1985, Mr. Gershen held
various financial positions with APM, Inc., which was acquired by CSC in 1996.

     Gerald  Angowitz  has  served as a Director  of Health  Card since June 26,
1998.  Mr.  Angowitz  presently  serves as a management  consultant  through the
Angowitz Company, which provides consulting services. Mr. Angowitz had served as
Senior Vice  President of Human  Resources and  Administration  for RJR Nabisco,
Inc. ("RJR"), a consumer products  manufacturer,  from March 1995 until December
1999. Mr.  Angowitz  previously  served as Vice President of Human Resources for
RJR from February 1994 to March 1995 and Vice President of employee  benefits at
RJR from January 1992 to February 1994. Mr.  Angowitz is the  brother-in-law  of
Hugh Freund, a Vice President,  Secretary, principal stockholder and Director of
Sandata.  Mr.  Angowitz  also  serves on the  Company's  Audit and  Compensation
Committees.

     Kenneth  J. Daley has  served as a  Director  of Health  Card since May 10,
1999.  For more than the five years prior to January  1999,  Mr. Daley served as
Senior Vice  President  of Chase  Manhattan  Bank.  Mr. Daley also serves on the
Company's Audit and Compensation Committees.

     Paul J.  Konigsberg  has served as a Director of the Company since November
2000.  Mr.  Konigsberg  currently  serves on the Board of  Directors of Sandata,
Inc.,  an affiliate of Health Card,  since  January  1998.  Mr.  Konigsberg is a
certified public accountant and has been a senior partner in the accounting firm
of Konigsberg  Wolf & Co., P.C.  since 1970. Mr.  Konigsberg  also serves on the
Company's Audit and Compensation Committees.

     Ronald L. Fish served as a Director of the Company since November 2000. Mr.
Fish currently serves on the Board of Directors of Sandata Inc., an affiliate of
Health  Card,  since June 1998.  Since 1975,  Mr. Fish served as  Administrator,
Treasurer and Director of Unlimited Care Inc., a nursing services firm, and is a
certified  public  accountant.  Mr. Fish also serves on the Company's  Audit and
Compensation Committees.

     Each of Health  Card's  Directors  is elected  for a period of one year and
serves  until his  successor  is duly  elected and  qualified.  Health Card paid
$18,500  in  Directors'  fees  during the fiscal  year ended June 30,  2001.  No
Directors' fees had been paid previously.

     Each of the  executive  officers  serves at the  pleasure of Health  Card's
Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16 of the  Securities  Exchange Act of 1934,  as amended  ("Section
16"), requires that reports of beneficial ownership of capital stock and changes
in such  ownership be filed with the  Securities  and Exchange  Commission  (the
"SEC") by Section 16 "reporting persons," including directors, certain officers,
holders of more than 10% of the  outstanding  Common Stock and certain trusts of
which  reporting  persons are  trustees.  Health Card is required to disclose in
this  10-K  each  reporting  person  whom it  knows to have  failed  to file any
required reports under Section 16 on a timely basis during the fiscal year ended
June 30, 2001 or prior fiscal years.

     To Health Card's knowledge,  based solely on a review of copies of Forms 3,
4 and 5 furnished to it and written  representations  that no other reports were
required,  during the fiscal year ended June 30, 2001  Health  Card's  officers,
Directors  and  10%   stockholders   complied  with  all  Section  16(a)  filing
requirements applicable to them except: Messrs.  Angowitz, Bigl, Brodsky, Daley,
Shapiro,  Konigsberg,  and Fish all failed to timely file one report relative to
one transaction each.

Item 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

     The  following  table sets forth  certain  information  with respect to the
compensation  paid or awarded by Health Card to the Chief Executive  Officer and
other executive officers,  (collectively, the "Named Executive Officers"), whose
salary and bonus  exceeded  $100,000 in all capacities for the fiscal year ended
June 30, 2001:
<TABLE>
<S>                   <C>        <C>          <C>          <C>            <C>         <C>            <C>          <C>

===================== ========== ======================================== ======================================= ===============
                                           Annual Compensation                    Long-Term Compensation
--------------------- ---------- ---------------------------------------- --------------------------------------- ---------------
--------------------- ---------- ------------ ------------ -------------- --------------------------- ----------- ---------------
                                                                                    Awards             Payouts
--------------------- ---------- ------------ ------------ -------------- --------------------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                                                                          Restricted    Securities
                                                           Other Annual      Stock      Underlying       LTIP       All Other
      Name and          Year       Salary        Bonus     Compensation     Awards     Options/SARs    Payouts     Compensation
 Principal Position                  ($)          ($)           ($)           ($)           (#)          ($)           ($)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
  Bert E. Brodsky,      2001     377,015(2)   120,000(2)    89,380(10)        -0-       500,000(15)      -0-           -0-
  Chairman of the
       Board
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        2000     182,114(3)   120,000(6)    97,310(10)        -0-           -0-          -0-           -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        1999     403,867(4)   487,500(6)    90,717(10)        -0-           -0-          -0-           -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
    James Bigl,         2001       184,760    60,000 (7)    12,000(11)        -0-       31,000(16)       -0-         908(25)
     President                                                                                                       578(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        2000        7,230       25,000          -0-           -0-       100,000(17)      -0-           -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
   David Gershen,       2001       155,250    55,000 (8)        -0-           -0-       11,000(18)       -0-         737(25)
  Chief Financial
 Officer, Treasurer
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        2000       23,077         -0-           -0-           -0-       35,000(19)       -0-           -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
   Linda Portney,       2001       125,000        -0-       18,813(12)        -0-           -0-          -0-         551(25)
   Executive Vice                                                                                                    551(26)
    President of
   Operations(1)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        2000       125,000        -0-       20,140(12)        -0-           -0-          -0-        1,011(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        1999       125,000        -0-       20,027(13)        -0-           -0-          -0-         952(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
  Kenneth Hammond,      2001       122,192        250        7,969(13)        -0-           -0-          -0-         380(25)
 Vice President of                                                                                                   354(26)
     Operations
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        2000       114,231      10,250          -0-           -0-       10,000(20)       -0-         740(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        1999       103,135      10,250          -0-           -0-           -0-          -0-         656(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
  John Ciufo, Vice      2001       144,588      11,922          -0-           -0-           -0-          -0-         606(25)
    President of                                                                                                     490(26)
 Clinical Services
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        2000       141,730      20,000          -0-           -0-       35,568(21)       -0-         508(26)
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
                        1999       59,000        5,000          -0-           -0-       25,568(22)       -0-           -0-
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
 Tery Baskin, Chief     2001       132,923     56,440(9)    10,408(14)        -0-       55,000(23)       -0-        8,338(26)
 Operating Officer
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
--------------------- ---------- ------------ ------------ -------------- ------------ -------------- ----------- ---------------
  Gerald Shapiro,       2001     113,800(5)       -0-           -0-           -0-       11,000(24)       -0-           -0-
   Vice Chairman,
     Secretary
===================== ========== ============ ============ ============== ============ ============== =========== ===============
</TABLE>

          (1)  Ms.  Portney  was no longer an  executive  officer of the Company
               effective  October 2000, is no longer an employee  effective June
               30, 2001 and is currently  providing  consulting  services to the
               Company.

          (2)  Represents  salary and bonus  accrued  for Mr.  Brodsky,  but not
               paid. The only amount paid during the year was $15,385.

          (3)  Represents salary paid to Mr. Brodsky.

          (4)  Represents  salary and consulting  fees paid to certain  entities
               affiliated with Mr. Brodsky. See Item 13 hereof.

          (5)  Represents salary and consulting fees paid to Mr. Shapiro.

          (6)  For the fiscal  year ending  June 30,  2000,  reflects a $120,000
               bonus  awarded  to Mr.  Brodsky in  January  2000.  Such bonus is
               accrued in twelve equal monthly  installments of $10,000, but has
               not been paid.  Also  includes a bonus of $360,000 for the fiscal
               year ended June 30, 1999.

          (7)  For the fiscal year ended June 30,  2001,  a bonus of $60,000 was
               awarded to Mr. Bigl, but was paid subsequent to June 30, 2001.

          (8)  For the fiscal  year ended June 30,  2001,  a $25,000  guaranteed
               bonus was paid to Mr. Gershen per his employment  agreement after
               one year of service.  An additional  bonus of $30,000 was awarded
               to Mr. Gershen, but was paid subsequent to June 30, 2001.

          (9)  For the fiscal  year  ending  June 30,  2001,  reflects a $25,000
               bonus awarded to Mr. Baskin; such amounts were paid to Mr. Baskin
               subsequent  to June 30,  2001.  Also  reflects  commissions  paid
               pursuant  to an  employment  agreement  with the  Company,  which
               commission  arrangement  terminated  on June  4,  2001  with  the
               execution of a new employment agreement with the Company.

          (10) Includes  automobile lease payments to an entity  affiliated with
               Mr. Brodsky. Also includes life insurance premiums paid by Health
               Card on Mr.  Brodsky's  behalf,  the  aggregate  amount  of which
               premiums are repaid to Health Card upon the payment of the policy
               benefits to the beneficiary.

          (11) Represents a nonaccountable expense allowance during fiscal 2001.

          (12) Represents  automobile  lease payments to an unaffiliated  entity
               and amounts for automobile insurance and travel allowance.

          (13) Represents automobile lease payments to an entity affiliated with
               Mr.  Brodsky  and  amounts for  automobile  insurance  and travel
               allowance.

          (14) Represents  payments  under  a  bank  loan  collateralized  by an
               automobile for Mr. Baskin and life insurance premiums.

          (15) Includes  an option  granted on  February  20,  2001 to  purchase
               500,000 shares of common stock at an exercise price of $1.84,  of
               which  100,000  shares were  exercisable  as of June 30, 2001 and
               September 21, 2001.

          (16) Includes  an option  granted on  February  20,  2001 to  purchase
               11,000 shares of common stock at an exercise  price of $1.67,  of
               which  3,670  shares  were  exercisable  as of June 30,  2001 and
               September 21, 2001.  Also includes an option  granted on June 12,
               2001 to  purchase  20,000  shares of common  stock at an exercise
               price of $3.00,  of which no shares were  exercisable  as of June
               30, 2001 and September 21, 2001.

          (17) Includes an option  granted on June 12, 2000 to purchase  100,000
               shares of common  stock at an exercise  price of $4.00,  of which
               33,350 shares were  exercisable as of June 30, 2001 and September
               21, 2001.

          (18) Includes  an option  granted on  February  20,  2001 to  purchase
               11,000 shares of common stock at an exercise  price of $1.67,  of
               which  3,670  shares  were  exercisable  as of June 30,  2001 and
               September 21, 2001.

          (19) Includes  an option  granted  on May 1, 2000 to  purchase  35,000
               shares of common  stock at an exercise  price of $5.00,  of which
               11,670 shares were exercisable of June 30, 2001 and September 21,
               2001.

          (20) Includes an option  granted on August 3, 1999 to purchase  10,000
               shares of common  stock at an exercise  price of $7.50,  of which
               7,000  shares  were  exercisable  as  of  June  30,  2001.  As of
               September 21, 2001,  10,000 shares of such option were  currently
               exercisable.

          (21) Includes an option  granted on August 3, 1999 to purchase  10,000
               shares of common  stock at an exercise  price of $7.50,  of which
               6,700  shares  were  exercisable  as  of  June  30,  2001.  As of
               September  21, 2001,  10,000 shares were  currently  exercisable.
               Also  includes an option  granted on February 1, 2000 to purchase
               25,568 shares of common stock at an exercise  price of $5.87,  of
               which 17,049  shares of such option were  exercisable  as of June
               30, 2001 and September 21, 2000.

          (22) Includes an option  granted by Mr. Brodsky on December 7, 1998 to
               purchase  an  aggregate  of 25,568  shares of Health  Card common
               stock from Mr. Brodsky at a price of $5.87 per share. Such option
               was surrendered by Mr. Ciufo on February 1, 2000.

          (23) Includes  an option  granted on June 4, 2001 to  purchase  15,000
               shares of common stock at an exercise price of $5.00, of which no
               shares were  exercisable  as of June 30, 2001 and  September  21,
               2001.  Also  includes  an  option  granted  on July  20,  2000 to
               purchase  40,000  shares of common stock at an exercise  price of
               $4.00,  of which no shares were  exercisable as of June 30, 2001.
               As of  September  21,  2001,  8,000  shares of such  option  were
               currently exercisable.

          (24) Includes  an option  granted on  February  20,  2001 to  purchase
               11,000 shares of common stock at an exercise  price of $1.67,  of
               which  3,670  shares  were  exercisable  on  June  30,  2001  and
               September 21, 2001.

          (25) Represents  amounts  anticipated to be contributed by Health Card
               under Health Card's  401(k) Plan.  Such amounts have not yet been
               contributed  and the  obligation  to pay these  amounts is at the
               discretion of Health Card.

          (26) Represents amounts contributed by Health Card under Health Card's
               401(k) Plan as of June 30, 2001.

Option/SAR Grants in Last Fiscal Year

     The following table sets forth certain  information  concerning  individual
grants of stock options during the fiscal year ending June 30, 2001:
<TABLE>
<S>                   <C>             <C>              <C>          <C>                <C>               <C>
===============================================================================================================================
                                                                                            POTENTIAL REALIZABLE VALUE AT
                                                                                            ASSUMED ANNUAL RATES OF STOCK
                                                                                            PRICE APPRECIATION FOR OPTION
                                  INDIVIDUAL GRANTS                                                      TERM
-------------------------------------------------------------------------------------- -----------------------------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
                       Number of       Percent of
                      Securities          Total
                      Underlying      Options/SARs
                       Options/        Granted to       Exercise or
                     SARs Granted     Employees in      Base Price       Expiration
       Name               (#)          Fiscal Year        ($/Sh)            Date               5% ($)               10% (S)
                                           (%)
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
------------------- ---------------- ---------------- ---------------- --------------- ------------------ ----------------------
                                                                                           $145,695              $424,776
 Bert E. Brodsky      500,000 (1)         59.7%            $1.84          2/20/06

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

    James Bigl        11,000 (2)          1.3%             $1.67          2/20/06            $5,075               $11,215
                      20,000 (3)          2.4%             $3.00          6/12/06           $17,343               $37,597

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

  David Gershen        11,000(2)          1.3%             $1.67          2/20/06            $5,075               $11,215

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

   Tery Baskin        15,000 (4)          1.8%             $5.00           6/4/06              -                     -
                      40,000 (5)          4.8%             $4.00          7/20/06              -                  $34,872

=================== ================ ================ ================ =============== ================== ======================
</TABLE>

          (1)  Exercisable  over a five  year  period to the  extent of  100,000
               shares of Common Stock in each of February  2001,  February 2002,
               February 2003, February 2004 and February 2005.

          (2)  Exercisable  over a three  year  period  to the  extent  of 3,670
               shares  of Common  Stock in  February  2001 and  3,665  shares of
               Common Stock in each of February 2002 and February 2003.

          (3)  Exercisable  over a three  year  period  to the  extent  of 6,670
               shares  of Common  Stock in June 2002 and 6,665  shares of Common
               Stock in each of June 2003 and June 2004.

          (4)  Exercisable  over a three  year  period  to the  extent  of 5,000
               shares of Common Stock in June 2002,  February  2003 and February
               2004.

          (5)  Exercisable over a five year period to the extent of 8,000 shares
               of Common Stock in each of July 2001,  July 2002, July 2003, July
               2004 and July 2005.

<PAGE>

Aggregated Option/SAR Exercise in Last Fiscal Year and Fiscal Year-End Option
Value Table

     The following table sets forth certain information  concerning the value of
unexercised options and warrants for the fiscal year ended June 30, 2001:
<TABLE>
<S>                   <C>             <C>              <C>          <C>                <C>               <C>
========================= ====================== ====================== ======================== ===========================
                                                                         Number of Securities       Value of Unexercised
                                                                        Underlying Unexercised    In-the-Money Options and
                                                                        Options and Warrants at     Warrants at June 30,
                           Shares Acquired on       Value Realized         June 30, 2001 (#)              2001 ($)
          Name                Exercise (#)                ($)           Exercisable/UnexercisableExercisable/Unexercisable

------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
    Bert E. Brodsky                -0-                    -0-               100,000/400,000           124,000/496,000

------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
       James Bigl                  -0-                    -0-                 3,670/7,330               5,175/10,335
                                   -0-                    -0-                  0/20,000                  -0-/1,600
                                   -0-                    -0-                33,350/66,650                -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
     David Gershen                 -0-                    -0-                 3,670/7,330               5,175/10,335
                                   -0-                    -0-                11,670/23,330                -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
      Tery Baskin                  -0-                    -0-                  0/15,000                   -0-/-0-
                                   -0-                    -0-                  0/40,000                   -0-/-0-
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
    Kenneth Hammond                -0-                    -0-                 7,000/3,000                 -0-/-0-

------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
------------------------- ---------------------- ---------------------- ------------------------ ---------------------------
       John Ciufo                  -0-                    -0-                 6,700/3,300                 -0-/-0-
                                   -0-                    -0-                17,049/8,519                 -0-/-0-
========================= ====================== ====================== ======================== ===========================
</TABLE>

Employee Contracts, Termination of Employment and Change-in-Control
Arrangements

     Except as  described  below,  there are no  written  employment  or similar
agreements  with any of the Named Executive  Officers.  See Item 13 hereof for a
discussion of certain fees paid and payable to Mr. Brodsky.

     Health  Card  entered  into  an  employment  agreement  with  the  majority
stockholder, Mr. Brodsky effective July 1, 1999. Pursuant to this agreement, Mr.
Brodsky has agreed to serve as Chairman of the Board of  Directors  at an annual
salary of $200,000,  subject to adjustment by the Board of Directors. As of July
1, 2001, this amount was increased to $425,000. The agreement terminates on July
1, 2002, unless terminated by Health Card for cause, or in the event Mr. Brodsky
becomes permanently disabled. The agreement provides for certain fringe benefits
payable to or on behalf of Mr.  Brodsky,  such as the use of an  automobile.  In
addition, the agreement provides for certain termination benefits payable to Mr.
Brodsky,  which depending upon the reason for  termination,  can equal up to two
years salary.  It is  anticipated  that Mr.  Brodsky may devote a portion of his
business time to business affairs  unrelated to Health Card,  provided that such
activities  do not  prevent  him  from  fulfilling  his  obligations  under  the
agreement.  The agreement  does not quantify the amount of time that Mr. Brodsky
must devote to Health Card.  However,  it is contemplated  that Mr. Brodsky will
devote a substantial portion of his business time to the affairs of Health Card.

     In January  2000,  the Board of  Directors  authorized  the  payment to Mr.
Brodsky  of a bonus in the  amount of  $120,000.  Such bonus is payable in equal
monthly installments of $10,000. This amount has continued to be accrued monthly
through June 30, 2001. No actual payments have been paid to Mr. Brodsky.

     Health Card entered into an employment  agreement with James Bigl effective
June 12,  2000.  Pursuant  to this  agreement,  Mr.  Bigl has agreed to serve as
President at an annual salary of $188,000,  in addition to (i) a $25,000 signing
bonus upon execution of the agreement and (ii) the ability to participate in the
bonus pool for senior  executives.  The  agreement  also  provides  for  certain
termination  benefits,  which,  depending upon the reason for  termination,  can
equal up to one year of salary.  In connection  with the  employment  agreement,
Health Card  granted to Mr. Bigl an incentive  stock option to purchase  100,000
shares of common  stock at $5.00 per share.  Such option vests over a three year
period commencing on June 12, 2001. The option expires on June 12, 2005. On June
12, 2001,  Health Card  increased  the annual  compensation  paid to Mr. Bigl to
$213,000 in addition to $12,000 in  nonaccountable  expenses  annually.  Also on
June 12,  2001,  Health Card  granted to Mr. Bigl an  incentive  stock option to
purchase  20,000  shares of common  stock at $3.00 per share.  Such option vests
over a four year period commencing June 12, 2002. The option expires on June 12,
2006. A copy of the Stock Option Agreement is annexed hereto as Exhibit 10.61.

     Health  Card  entered  into an  employment  agreement  with  David  Gershen
effective May 1, 2000.  Pursuant to this  agreement,  Mr.  Gershen has agreed to
serve as Chief Financial  Officer and Treasurer at an annual salary of $150,000,
in  addition  to (i) a $25,000  bonus  upon the  completion  of one full year of
employment  with Health Card and (ii) the  ability to  participate  in the bonus
pool for senior executives.  The agreement also provides for certain termination
benefits,  including,  but not limited to, a change of control, which, depending
upon  the  reason  for  termination,  can  equal up to one  year of  salary.  In
connection with the employment agreement,  Health Card granted to Mr. Gershen an
incentive  stock option to purchase  35,000  shares of common stock at $5.00 per
share. Such option vests over a three year period commencing on May 1, 2001. The
option expires on May 1, 2005. On May 1, 2001, Mr.  Gershen's annual base salary
was increased to $185,000.

     In  connection  with  the PAI  acquisition,  Tery  Baskin  entered  into an
employment  agreement with PAI,  pursuant to which Mr. Baskin agreed to serve as
PAI's Senior Vice President at an annual salary of $130,000 in addition to (i) a
one percent  commission on all claims adjudicated by PAI and (ii) the ability to
participate  in the bonus pool for senior  executives.  In  connection  with the
employment agreement,  Health Card granted incentive stock options to Mr. Baskin
to  purchase  40,000  shares of common  stock at $4.00  per  share.  See Item 1,
Description of Business, for a detailed description of the PAI acquisition.

     Health Card entered into an employment agreement with Tery Baskin effective
June 4,  2001 to  serve as Chief  Operating  Officer,  at an  annual  salary  of
$150,000, in addition to the ability to participate in the bonus pool for senior
executives. In connection with the employment agreement,  Health Card granted to
Mr. Baskin  incentive stock options to purchase 15,000 shares of Common Stock at
$5.00 per share. A copy of the Employment Agreement is annexed hereto as Exhibit
10.62. A copy of the Stock Option Agreement is annexed hereto as Exhibit 10.63.

     The Company has an employment arrangement with its Senior Vice President of
Sales and  Marketing  who is  entitled  to  commissions  of 3% of gross  margins
generated  from direct  accounts  sold,  and 1% of gross margins  generated from
accounts sold by salespeople under his management. Mr. Ciufo and Mr. Hammond are
employed by Health Card pursuant to letters, employee covenant agreements and/or
confidentiality and non-disclosure  agreements reflecting the compensation terms
described  under Item 11 hereof and  prohibiting  the employee  from engaging in
certain competitive activity or disclosing certain  information.  Ms. Portney is
no longer employed by Health Card but serves as a consultant.

Compensation Committee Interlocks and Insider Participation

     Until May 10, 1999,  Health Card did not have a  Compensation  Committee or
other  committee  of  the  Board  of  Directors  performing  similar  functions.
Decisions  concerning the  compensation  of executive  officers were made by the
Board of Directors.

     Effective May 10, 1999,  Health Card established a Compensation  Committee.
The  Compensation  Committee is responsible  for making  recommendations  to the
Board of Directors regarding compensation arrangements for executive officers of
Health Card,  including annual bonus compensation,  and consults with management
of Health Card regarding  compensation policies and practices.  The Compensation
Committee also makes recommendations concerning the adoption of any compensation
plans in which management is eligible to participate,  including the granting of
stock options or other benefits under such plans.  Messrs.  Shapiro and Angowitz
and a third  director  comprised  the first  Compensation  Committee.  Effective
October 27, 1999,  Mr. Daley  replaced the third member.  In November  2000, Mr.
Fish and Mr. Konigsberg were added to the Board and Compensation Committee.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The  following  table sets forth certain  information,  as of September 21,
2001, concerning the beneficial ownership of Health Card's common stock for:

          o    each  person  who is known by  Health  Card to be the  beneficial
               owner of more than five (5%) percent of Health  Card's  shares of
               common stock,

          o    each of the Named Executive Officers,

          o    each of Health Card's Directors, and

          o    all of Health Card's Executive Officers and Directors as a group.

     Except as otherwise  indicated below, each of the entities or persons named
in the table has sole voting and investment  power with respect to all shares of
common stock beneficially owned.
<TABLE>
<S>                                        <C>                                      <C>

========================================== ======================================== =======================================

        Name of Management Person                     Number of Shares                      Approximate Percentage
         and Name and Address of                                                            of Outstanding Shares
          Beneficial Owner (1)
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Bert E. Brodsky                                         3,083,577 (2)                               42.9%
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
David Craig Brodsky                                       383,579                                    5.3%
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Gerald Shapiro                                            387,204 (3)                                5.4%
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
James Bigl                                                 39,020 (4)                                   *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Tery Baskin                                                76,100 (5)                                   *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
David Gershen                                              19,340 (6)                                   *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Kenneth Hammond                                             7,000 (7)                                   *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
John Ciufo                                                 23,749 (8)                                   *
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Kenneth J. Daley
6 Glen Avenue                                              13,770 (9)                                   *
Glen Head, NY 11545
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Ronald Fish                                                                                             *
107 Law Road                                                7,070 (10)
Briarcliff Manor, NY 10510
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Gerald Angowitz
37 Fieldstone Lane                                         13,770 (9)                                   *
Oyster Bay, NY 11771
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
Paul Konigsberg                                             7,070 (10)
440 Park Avenue South, 10th Fl.
New York, NY  10016
------------------------------------------ ---------------------------------------- ---------------------------------------
------------------------------------------ ---------------------------------------- ---------------------------------------
All executive officers and
Directors as a group (10 persons)               4,061,249 (2)(3)(4)(5)(6)(9)                        56.5%
========================================== ======================================== =======================================
</TABLE>
*        Less than 1%

          (1)  With the  exception  of the  addresses  specifically  noted,  the
               address of each person named in the table is c/o National Medical
               Health  Card  Systems,  Inc.,  at  26  Harbor  Park  Drive,  Port
               Washington, NY 11050.

          (2)  Includes (i) 100,000  shares of common  stock  subject to options
               that are  currently  exercisable,  (ii) 100,000  shares of common
               stock  beneficially owned by the Bert E. Brodsky Revocable Trust,
               and (iii) 1,725 shares of common stock beneficially owned by P.W.
               Capital  Corp.,  of which  Mr.  Brodsky  is  President.  Does not
               include an aggregate of 400,000 shares of common stock subject to
               currently unexercisable options.

          (3)  Includes 3,670 shares of common stock subject to options that are
               currently  exercisable.  Does not include an  aggregate  of 7,330
               shares  of  common  stock  subject  to  currently   unexercisable
               options.

          (4)  Includes  37,020  shares of common stock  subject to options that
               are  currently  exercisable.  Does not  include an  aggregate  of
               93,980 shares of common stock subject to currently  unexercisable
               options.

          (5)  Does not include an  aggregate  of 57,000  shares of common stock
               subject to currently unexercisable options.

          (6)  Includes  15,340  shares  of  common  stock  that  are  currently
               exercisable.  Does not include an aggregate  of 30,660  shares of
               common stock subject to currently unexercisable options.

          (7)  Includes 7,000 shares of common stock subject to options that are
               currently  exercisable.  Does not include an  aggregate  of 3,000
               shares  of  common  stock  subject  to  currently   unexercisable
               options.

          (8)  Includes  23,749  shares of common stock  subject to options that
               are  currently  exercisable.  Does not  include an  aggregate  of
               11,819 shares of common stock subject to currently  unexercisable
               options.

          (9)  Includes for each of Mr. Daley and Mr.  Angowitz 13,770 shares of
               common stock subject to options that are  currently  exercisable.
               Does not include for each of them 17,230  shares of common  stock
               subject to currently unexercisable options.

          (10) Includes for each of Mr. Fish and Mr.  Konigsberg 7,070 shares of
               common stock subject to options that are  currently  exercisable.
               Does not include an  aggregate  of 13,930  shares of common stock
               subject to currently unexercisable options.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     From time to time, Mr. Brodsky and his affiliates  have engaged in numerous
transactions with Health Card.

Health Card's Relationship with Sandata

     Health Card has entered into various  verbal and written  agreements,  with
Sandata and its  wholly-owned  subsidiaries.  Mr. Brodsky is the Chairman of the
Board,  Treasurer and a principal  stockholder  of Sandata.  The majority of the
services are related to database and operating system support, hardware leasing,
maintenance and related administrative services.  Health Card purchases services
from Sandata,  and its subsidiaries,  on an as needed basis at negotiated hourly
or monthly  rates.  Sandata has  historically  procured  the  majority of Health
Card's  computer  equipment and furniture  and fixtures.  Sandata  resells these
items to Health Card at their cost plus a 10-20%  servicing fee depending on the
level of up-front consulting  required to develop the proper  specifications for
the equipment and set-up required.  Approximately $407,000 of computer equipment
and  furniture  and fixtures  were  purchased on Health Card's behalf during the
fiscal  year  ended  June  30,  2001.  In  addition,  Sandata,  through  another
wholly-owned subsidiary, Santrax Systems, Inc. resells its telephone services to
Health Card based on actual usage.

     A significant  portion of Health Card's  information  systems for reporting
purposes has historically been developed,  enhanced,  modified and maintained by
Sandsport Data Services,  Inc., a wholly-owned subsidiary of Sandata. During the
fiscal year ended June 30,  2001,  Sandsport  billed  Health Card  approximately
$839,000 for quality assurance testing of software programs  developed by Health
Card  along  with  network  support  and  approximately  $256,000  for help desk
services.  Furthermore,  Health Card currently leases computer  hardware for its
data processing center at a monthly cost of approximately $44,170 from Sandsport
pursuant  to an  oral  agreement,  terminable  at will by  either  party.  Lease
payments  under  this lease for the fiscal  years  ended June 30,  2000 and 2001
totaled $490,214 and $493,965, respectively.  Management of Health Card believes
that the terms of such  lease and the  negotiated  billing  rates are as fair to
Health Card as those that could be obtained  from an  unaffiliated  third party,
although no independent fee quotes have been obtained.

     During the fiscal  years ended June 30,  1999,  2000 and 2001,  Health Card
incurred  fees to Sandata,  or its  subsidiaries,  in the  aggregate  amounts of
approximately $2,151,000,  $2,331,000 and $3,612,000,  respectively.  As of June
30, 2001, Health Card owed $341,155 to Sandata,  or its subsidiaries,  which has
been paid subsequently.

     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  reduce the  Company's
overall costs over time.

     As of June 30,  2001,  Sandata  owed  Health  Card  $503,958  pursuant to a
promissory  note,  dated  May 31,  2000,  in the  original  principal  amount of
$500,000 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
$500,000, 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, 2001, Sandata
also owed Health Card $68,123 for pharmacy  benefit  services  which has not yet
been reimbursed.

Employee Management Relationship with Medical Arts Office Services, Inc.

     Medical Arts Office Services,  Inc. is an affiliate of Health Card. Certain
persons employed by companies  affiliated with Mr. Brodsky are also officers and
Directors of Medical Arts, of which Mr. Brodsky is the sole shareholder.

     Medical  Arts  provides  Health Card with  shared  legal,  bookkeeping  and
administrative  services  (including  payroll  processing)  pursuant  to an oral
agreement, terminable at will by either party.

     During the fiscal  year ended June 30,  2001,  the total  payments  made by
Health Card to Medical  Arts were  approximately  $383,545 of which  $63,150 was
paid for bookkeeping services, $220,151 was paid for legal services and $100,244
was paid for administrative services.  Management believes that the hourly rates
charged  by  Medical  Arts are as fair to  Health  Card as those  that  could be
obtained from an  unaffiliated  third party,  although no independent fee quotes
have been obtained.

Health Card's Relationship with P.W. Capital, LLC

     Prior to the  consummation  of the Public  Offering,  in  consideration  of
consulting  fees paid to P.W.  Capital,  LLC, Mr.  Brodsky  provided  managerial
expertise and advice,  including but not limited to advice  regarding the hiring
of executive  management and other personnel,  marketing and sales matters,  and
negotiation  of  contracts  with  sponsors  and other  parties.  Pursuant  to an
agreement with Mr.  Brodsky,  payment of the above  consulting  fees ceased upon
consummation  of the Public Offering and, in  consideration  of the provision of
such executive services, Mr. Brodsky began to receive, and continues to receive,
remuneration as an executive officer of Health Card. See Item 11 hereof.

     In addition,  Health Card rents a two family house in Port Washington,  New
York (near the Company's  offices)  from P.W.  Capital,  LLC,  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, 2001, Health Card
paid P.W. Capital, LLC $16,500 in rent for this facility.

Real Estate

     The Company currently occupies  approximately  26,500 square feet of office
space  located at 26 Harbor Park  Drive,  Port  Washington,  New York 11050 (the
"Facility").  The  Company  subleases  the  Facility  from BFS  Realty,  LLC, an
affiliate of the Company's Chairman (the "Affiliate").  The Affiliate leases the
Facility from the Nassau County  Industrial  Development  Agency,  pursuant to a
lease (the "Lease"),  which was entered into by that Agency and the Affiliate in
July 1994.  The Lease  expires in March  2005.  The  Affiliate  has the right to
become the owner of the Facility  upon  expiration  of the Lease.  The Affiliate
subleases a portion of the Facility to the Company.  The Company  currently pays
rent to the Affiliate in the amount of $336,780 per year, plus monthly  expenses
for maintenance,  real estate taxes,  utilities and the like. The rent increases
by 5% annually.  The  Affiliate  also receives  rent from other  companies  that
occupy space in the Facility,  some of which are  affiliated  with the Company's
Chairman.  The  Company  believes  that the  Facility  is  adequate  for current
purposes.

     PAI currently occupies  approximately  7,000 square feet of office space in
Little  Rock,  Arkansas,  at an  annual  rent  of  $110,372,  including  monthly
expenses.  The landlord for these  premises is Executive Park  Partnership.  The
lease expires on April 30, 2002.  PAI is currently  negotiating  with  Executive
Park  Partnership the terms of a lease that would commence May 1, 2002 and would
increase the space occupied by PAI.

     Pursuant to a lease dated  August 10, 1998 and expiring on August 31, 2005,
Health Card occupies  approximately 1,500 square feet of space at 63 Manhorhaven
Boulevard, Port Washington,  New York, which is used as a pharmacy. The landlord
for these premises is 61 Manorhaven Boulevard,  LLC, of which Mr. Brodsky is the
sole member.  The current 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.

Indebtedness of Management

     From time to time, Mr. Brodsky and certain of his affiliates  (collectively
the "Brodsky  Affiliates")  and other  officers and directors and  affiliates of
Health Card have borrowed  funds,  or have incurred  indebtedness  in connection
with the  purchase  of  shares or for  other  reasons,  from  Health  Card.  The
following table describes certain information relating to such indebtedness.
<TABLE>
<S>                                                        <C>                                <C>

                                                              Largest Aggregate
                                                            Amount Owed by Debtor                Debt Owed
                                                              During Fiscal Year                   As Of
         Debtor                                               Ended June 30, 2001              June 30, 2001
         ------                                             ---------------------              -------------

P.W. Capital LLC (1)..........................                       $4,212,843                     $4,212,843
Port Charitable Foundation (2)................                           14,000                              0
Gerald Shapiro(3).............................                          338,250                        300,000
Sandata, Inc.(4)..............................                          527,603                        503,958
------------------
</TABLE>

          (1)  On  June 1,  1998,  Health  Card  assigned  certain  indebtedness
               aggregating $1,636,785 in principal and accrued interest, if any,
               from certain persons and entities, including Mr. Brodsky, to P.W.
               Capital,  LLC, a company affiliated with Mr. Brodsky.  On June 1,
               1998, P.W. Capital executed a demand promissory note made payable
               to the order of Health Card in the principal amount of $4,254,785
               with interest at the rate of 8.5% per annum,  payable  quarterly,
               such amount reflecting the assigned debt and amounts then owed by
               P.W.  Capital  to  Health  Card.  On June 1,  1998,  Mr.  Brodsky
               executed  an  unconditional  guaranty in favor of Health Card for
               the full and prompt payment to Health Card of all amounts payable
               under  shares  of  common  stock of  Health  Card and is  without
               recourse  to the  maker.  Such  note  was  restructured  by a new
               non-recourse promissory note dated July 31, 2000, made payable by
               P.W.  Capital  to the  order  of  Health  Card in the  amount  of
               $3,890,940.  Such  note is  payable  in  annual  installments  of
               $400,000  consisting  of principal  and interest at the rate of 8
               1/2% per annum on each of the first and second  anniversary date,
               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 Health Card.
               The  first  $400,000  payment  due  under the note as of July 31,
               2001,  was  satisfied by  offsetting  an equal amount owed to Mr.
               Brodsky by the Company.  Effective  July 31,  2001,  the interest
               rate on the note was  changed  to the prime  rate in effect  from
               time to time.

          (2)  Port  Charitable  Foundation  is a company  affiliated  with Hugh
               Freund and Carol Freund,  who are husband and wife. Mr. Freund is
               an Executive Vice  President,  Secretary,  Director and principal
               stockholder of Sandata.

          (3)  Mr.  Shapiro,  Vice Chairman of the Board and Secretary of Health
               Card,  is the Chairman of the Board and  Treasurer of  Mediclaim,
               Inc. The amount due includes  principal  and interest due under a
               non-recourse  (except for interest) promissory note dated July 1,
               1997 made  payable by Mr.  Shapiro to the order of Health Card in
               the original principal amount of $300,000, secured by a pledge of
               383,534  shares of common stock of Health Card.  Interest on such
               note, at the rate of 8.5% per annum,  is payable  quarterly.  The
               principal  amount of the note is payable five years from the date
               of the note.  $63,750 of interest was paid by Mr.  Shapiro during
               the fiscal year ended June 30, 2001.

          (4)  As of June 30, 2001,  Sandata owed Health Card $503,958  pursuant
               to a  promissory  note,  dated  May  31,  2000,  in the  original
               principal amount of $500,000 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
               $500,000, with interest at the rate of 7%, which was to have been
               due on June 8, 2002.  The Note was paid on August 15, 2001. As of
               June 30, 2001, Sandata also owed Health Card $68,123 for pharmacy
               benefit services which has not yet been reimbursed.

     The Brodsky Revocable Trust has repaid certain of the indebtedness above to
the extent of approximately  $1,992,900  (representing  73% of the proceeds from
the sale of shares by the Brodsky Trust pursuant to the Public Offering,  net of
underwriting discounts and commissions,  a non-accountable expense allowance and
a financial advisory fee payable to the representatives of the Public Offering).
The net proceeds from the sale of shares by the Brodsky Trust were applied first
100% to amounts  owed by Mr.  Brodsky to Health  Card and the balance to amounts
owed by P.W. Capital to Health Card. In addition,  Mr. Brodsky had agreed to pay
in full,  within  one  year of the  consummation  of the  Public  Offering,  the
remaining indebtedness owed by P.W. Capital, reflected in the above table, after
application  of the net proceeds from the sale of shares by the Brodsky Trust in
the Public  Offering.  However,  in July 2000,  Health  Card  restructured  such
indebtedness  with a new  non-recourse  promissory note dated July 31, 2000, and
made  payable  by P.W.  Capital  to the  order of Health  Card in the  amount of
$3,890,940.  Such note is payable in annual  installments of $400,000 consisting
of  principal  and interest at the rate of 8-1/2% per annum on each of the first
and second  anniversary  date, with the total remaining balance of principal and
interest due and payable on July 31, 2003. The first $400,000  payment due under
the note as of July 31, 2001,  was  satisfied by offsetting an equal amount owed
to Mr. Brodsky by the Company. Effective July 31, 2001, the interest rate on the
note was  changed  to the prime rate in effect  from time to time.  In the event
that P.W.  Capital  does not pay  amounts  due as and when  required  under this
promissory  note,  Health Card's recourse will be to exercise its legal remedies
with  respect to the Health Card shares  held by Health Card as  collateral  and
pursue legal action against Mr. Brodsky under a related guaranty. Such note does
not provide for default interest or penalties.  Mr. Shapiro had orally agreed to
pay in full the  indebtedness  reflected  opposite  his name in the above  table
within one year of the  consummation  of this offering.  However,  in July 2000,
Health Card allowed Mr. Shapiro to comply with the payment schedule reflected in
Footnote  3 to the table  above.  In the  event  that Mr.  Shapiro  does not pay
amounts due as and when required  under his July 1997  promissory  note,  Health
Card's  recourse  will be to exercise  its legal  remedies  with  respect to the
Health Card shares held by Health Card as  collateral  and pursue  legal  action
against Mr. Shapiro for unpaid interest.  Such note does not provide for default
interest or penalties.  It is not anticipated that additional  advances to or on
behalf of Mr. Brodsky or his affiliates will be permitted in the future,  unless
approved by a majority of Health Card's disinterested Directors.

SunStar Healthcare, Inc.

     SunStar Healthcare, Inc. ("SunStar") a Delaware corporation, was engaged in
providing  managed  health care services in the state of Florida by operating an
HMO. Its service  territory  covered 52 counties in central,  northern and other
parts  of  Florida,   including  the  metropolitan  areas  of  Tampa,   Orlando,
Jacksonville,  and others. As of November 1, 1998, SunStar served  approximately
57,000 enrolled plan members.  On February 19, 1999, Mr. Brodsky, as trustee for
the  irrevocable  trusts of each of his  children,  purchased  for  $250,000 (an
aggregate  of  $1,000,000)  preferred  stock and  warrants  offered by  SunStar.
Effective  May 1, 1999,  Health Card began  providing  services  to SunStar.  On
February  1,  2000,  Health  Card  was  notified  that  SunStar  was  placed  in
receivership under the Department of Insurance of the State of Florida. There is
an  outstanding  receivable  from  SunStar  for the  month of  January,  2000 of
approximately  $1.2 million.  Health Card has filed a claim for this amount with
the Department of Insurance of the State of Florida.  There is no guarantee that
the full  amount will be  collected  so Health  Card has made an  assessment  of
amounts that might be collected and has reserved for the difference.  During the
fiscal year ended June 30, 2000, Health Card billed SunStar  approximately $10.5
million.  There were no billings  from Health Card to Sunstar  during the fiscal
year ended June 30, 2001. See Item 7 hereof.

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

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-3

                  Consolidated Balance Sheets as of June 30, 2000 and 2001                                F-4

                  Consolidated Statements of Income for each of the years ended
                  June 30, 1999, 2000 and 2001                                                            F-5

                  Consolidated Statements of Stockholders' Equity (Deficit) for each
                  of the years ended June 30, 1999, 2000 and 2001                                         F-6

                  Consolidated Statements of Cash Flows for each of the years ended
                  June 30, 1999, 2000 and 2001                                                            F-7

                  Notes to Consolidated Financial Statements                                              F-8

         2.       Financial Statement Schedules

                  Schedule II:  Valuation and Qualifying Accounts                                         S-1

         3.       Exhibits
</TABLE>

<TABLE>
<S>               <C>
Exhibit
Number            Description of Exhibit

3.1               Restated Certificate of Incorporation of Health Card (1)
3.2               Certificate of Amendment, filed May 25, 1999, to Certificate of Incorporation of
                  Health Card (1)
3.3               Restated Certificate of Incorporation of Health Card, as amended (2)
3.4               Amended and Restated By-Laws of Health Card (1)
4.1               Form of Specimen Common Stock Certificate (1)
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              Letter, dated January 31, 1996, from Health Card to Mary Casale (1)
10.6              Employee Covenant Agreement, dated June 15, 1998, between Health Card
                  and Mary Casale (1)
10.7              Stock Option Agreement, dated July 1, 1997, between Bert Brodsky and Mary
                  Casale (1)
10.8              Letter, dated February 1, 2000, from Mary Casale to Bert E. Brodsky
10.9              Stock Option Agreement, dated February 1, 2000, between Health Card and
                  Mary Casale (4)
10.10             Letter, dated November 30, 1998, from Health Card to Marjorie O'Malley(1)
10.11             Employee Covenant Agreement, dated December 7, 1998, between Health
                  Card and Marjorie O'Malley(1)
10.12             Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and
                  Marjorie O'Malley(1)
10.13             Letter, dated February 1, 2000, from Marjorie O'Malley to Bert E. Brodsky
10.14             Stock Option Agreement, dated February 1, 2000, between Health Card and
                  Marjorie O'Malley (4)
10.15             Letter, dated November 3, 1998, from Health Card to John Ciufo(1)
10.16             Confidentiality and Non-Disclosure Agreement, dated November 19, 1998,
                  between Health Card and John Ciufo(1)
10.17             Stock Option Agreement, dated December 7, 1998, between Bert Brodsky and
                  John Ciufo(1)
10.18             Stock Option Agreement, dated August 3, 1999, between Health Card and
                  John Ciufo (4)
10.19             Letter, dated February 1, 2000, from John Ciufo to Bert E. Brodsky
10.20             Stock Option Agreement, dated February 1, 2000, between Health Card and
                  John Ciufo (4)
10.21             Employee Covenant Agreement, dated June 16, 1998, between Health Card
                  and Ken Hammond(1)
10.22             Stock Option Agreement, dated August 3, 1999, between Health Card and Ken
                  Hammond (4)
10.23             Employee Covenant Agreement, dated June 1, 1998, between Health Card and
                  Linda Portney(1)
10.24             Employment Agreement, dated March 27, 2000, between Health Card and
                  David Gershen (4)
10.25             Stock Option Agreement, dated May 1, 2000, between Health Card and David
                  Gershen (4)
10.26             Employment Agreement, dated May 3, 2000, between Health Card and James
                  Bigl (4)
10.27             Stock Option Agreement, dated June 12, 2000, between Health Card and James
                  Bigl (4)
10.28             Stock Option Agreement, dated August 3, 1999, between Health Card and
                  Kenneth J. Daley (4)
10.29             Stock Option Agreement, dated August 3, 1999, between Health Card and
                  Gerald Angowitz (4)
10.31             Lease, dated January 1, 1996, between Sandata, Inc. and Health Card (1)
10.32             Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
                  LLC(1)
10.33             First Amendment to BFS Realty, LLC Lease, dated June 1, 1998, between BFS
                  Realty, LLC and Health Card (1)
10.34             Second Amendment to BFS Realty, LLC Lease, dated April 1, 1999, between
                  BFS Realty, LLC and Health Card (1)
10.35             Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and
                  Health Card(1)
10.36             Promissory Note, dated July 1, 1997, made payable by Bert
                  Brodsky to the order of Health Card in the original principal
                  amount of $1,000,000(1)
10.37             Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.38             Promissory Note, dated July 1, 1997, made payable by Gerald Shapiro to the order
                  of Health Card in the original principal amount of $300,000(1)
10.39             Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.40             Promissory Note, dated June 1, 1998, made payable by P.W. Capital, LLC to the
                  Order of Health Card in the original principal amount of $4,254,785(1)
10.41             Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health
                  Card(1)
10.42             Demand Promissory Note, dated January 2, 1999, made payable by P.W. Capital,
                  LLC to the order of Health Card, in the original principal amount of $90,100(1)
10.43             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)
10.44             Consulting Agreement, dated April 14, 1994, between P.W. Medical Management,
                  Inc. and Health Card (1)
10.45             Assignment, dated July 1, 1996, between P.W. Medical Management, Inc. and
                  P.W. Capital Corp.(1)
10.46             Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card(1)
10.47             Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.48             Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health
                  Card(1)
10.49             Letter agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable
                  Trust and Health Card(1)
10.50             Employment Agreement, dated July 1, 1999, between Health Card and
                  Bert E. Brodsky(1)
10.51             Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.52             Form of Lock-Up Agreement(1)
10.53             Acquisition and Merger Agreement, dated as of June 27, 2000, between
                  Health Card and Pharmacy Associates, Inc.(3)
10.54             Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and
                  Executive Park Partnership
10.55             Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc.
                  and Executive Park Partnership
10.56             Amendment to Lease, dated November 19, 1998, between
                  Pharmacy Associates, Inc. and Executive Park Partnership
10.57             Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and
                  Executive Park Partnership
10.58             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)
10.59             Master Grid Note made by National Medical Health Card Systems,  Inc. in favor of The Chase Manhattan
                  Bank (5)
10.60             Lease Agreement dated as of August 1, 2001,  between National Medical Health Card Systems,  Inc. and
                  BFS Realty, LLC
10.61             Employment  Agreement,  dated June 4, 2001,  between National Medical Health Card Systems,  Inc. and
                  Tery Baskin
10.62             Stock Option Agreement,  dated June 4, 2001, between National Medical Health Card Systems,  Inc. and
                  Tery Baskin
10.63             Stock Option Agreement,  dated June 12 2001, between National Medical Health Card Systems,  Inc. and
                  James Bigl
21                Subsidiaries of Health Card

          (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.

          (b)  Reports on Form 8-K
</TABLE>

     A report on Form 8-K was filed by Health Card on June 22, 2001, regarding a
change in auditors. See Item 9 hereof.

<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
     ---------------------------------------------------------------------------
                            Bert E. Brodsky, Chairman
                           (Chairman of the Board and
                            Chief Executive Officer)

Date: September ___, 2001

     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, Chief Executive Officer,
         Principal Executive Officer

Date: September ___, 2001

By   /s/ Gerald Shapiro
  ------------------------------------------------------------------------------
         Gerald Shapiro, Vice Chairman of the Board, Secretary Director

Date: September ___, 2001

By   /s/ James Bigl
  ------------------------------------------------------------------------------
         James Bigl, President

Date: September ___, 2001

By   /s/ Gerald Angowitz
  ------------------------------------------------------------------------------
         Gerald Angowitz, Director

Date: September ___, 2001

By   /s/ Kenneth J. Daley
  ------------------------------------------------------------------------------
         Kenneth J. Daley, Director

Date: September ___, 2001

By   /s/ Paul J. Konigsberg
  ------------------------------------------------------------------------------
         Paul J. Konigsberg, Director

Date: September ___, 2001

By   /s/ Ronald L. Fish
  ------------------------------------------------------------------------------
         Ronald L. Fish, Director

Date: September ___, 2001

By   /s/ David Gershen
 ------------------------------------------------------------------------------
         David Gershen, Principal Financial and Accounting Officer

Date: September ___, 2001

<PAGE>
<TABLE>
<S>                                                                         <C>                         <C>
                                                                                          NATIONAL MEDICAL HEALTH CARD
                                                                                        SYSTEMS, INC. AND SUBSIDIARIES

                                                                            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------









Independent Auditors' Reports                                                                              F-2 - F-3


Consolidated Financial Statements:

   Balance Sheet                                                                                              F-4
   Statement of Income                                                                                        F-5
   Statement of Stockholders' Equity (Deficiency)                                                             F-6
   Statement of Cash Flows                                                                                    F-7
   Notes to Consolidated Financial Statements                                                              F-8 - F-27
</TABLE>

INDEPENDENT AUDITORS 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  balance  sheet of National
Medical Health Card Systems,  Inc. and Subsidiaries as of June 30, 2000, and the
related  consolidated  statements of income,  stockholders' equity (deficit) and
cash  flows  for the  years  ended  June 30,  2000  and  1999.  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 audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits 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
audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of National
Medical Health Card Systems,  Inc. and Subsidiaries as of June 30, 2000, and the
results of their  operations  and their cash flows for the years  ended June 30,
2000 and 1999 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>


                                                                                          NATIONAL MEDICAL HEALTH CARD
                                                                                        SYSTEMS, INC. AND SUBSIDIARIES

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

June 30,                                                                                     2000                 2001
----------------------------------------------------------------------------------------------------------------------

ASSETS
Current Assets:
  Cash and cash equivalents (including cash equivalent investments
   of $11,181,583 and $1,216,372, respectively)                                       $15,724,730          $12,474,945
  Accounts receivable, less allowance for possible losses of $726,551
   and $1,846,827, respectively                                                        13,409,219           30,081,118
  Rebates receivable                                                                    3,685,576            7,789,310
  Due from affiliates                                                                     903,958              986,827
  Deferred tax asset                                                                      409,000            1,102,932
  Other current assets                                                                    268,651            1,003,709
----------------------------------------------------------------------------------------------------------------------
      Total current assets                                                             34,401,134           53,438,841
Property, Equipment and Software Development Costs, net                                 6,424,170            8,583,890
Due from Affiliates                                                                     3,486,996            3,831,621
Customer Relationships, net of accumulated amortization of $39,027                      -                      265,973
Goodwill, net of accumulated amortization of $396,228                                   -                   12,943,502
Other Assets                                                                               51,318               45,737
----------------------------------------------------------------------------------------------------------------------
      Total Assets                                                                    $44,363,618          $79,109,564
======================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable and accrued expenses                                               $27,430,684          $57,645,563
  Current portion of capital lease obligations                                            456,437              542,094
  Loans payable - current                                                               -                      110,426
  Due to officer/stockholder                                                               60,000              541,630
  Due to affiliates                                                                       311,767              343,568
  Income taxes payable                                                                     11,991            -
  Other current liabilities                                                               100,036            1,345,533
----------------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                        28,370,915           60,528,814
Capital Lease Obligations, less current portion                                         1,875,444            1,333,349
Long-term Loans Payable and Other Liabilities                                           -                       72,712
Deferred Tax Liability                                                                    692,000            1,702,470
----------------------------------------------------------------------------------------------------------------------
      Total liabilities                                                                30,938,359           63,637,345
----------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies (Notes 9 and 13)

Stockholders' Equity:
  Preferred stock - $.10 par value; 10,000,000 shares authorized, none
   outstanding                                                                          -                    -
  Common stock - $.001 par value; 25,000,000 shares authorized, 6,912,496
   and 7,312,496 shares issued, respectively, and 6,721,496 and 7,121,496                   6,913                7,313
   outstanding, respectively
  Additional paid-in capital                                                           12,405,010           13,254,530
  Retained earnings                                                                     2,096,203            3,254,143
  Treasury stock at cost, 191,000 shares                                                 (743,767)            (743,767)
  Notes receivable - stockholders                                                        (339,100)            (300,000)
----------------------------------------------------------------------------------------------------------------------
      Total stockholders' equity                                                       13,425,259           15,472,219
----------------------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                                      $44,363,618          $79,109,564
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<S>                                                                                  <C>                   <C>

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

Year ended June 30,                                                         1999              2000                2001
----------------------------------------------------------------------------------------------------------------------

Revenue                                                             $128,262,665      $167,675,627        $272,119,140

Cost of claims                                                       115,768,372       153,377,200         249,572,132
----------------------------------------------------------------------------------------------------------------------

Gross profit                                                          12,494,293        14,298,427          22,547,008

Selling, general and administrative expenses*                         10,171,314        12,357,819          21,423,140

----------------------------------------------------------------------------------------------------------------------
Operating income                                                       2,322,979         1,940,608           1,123,868
----------------------------------------------------------------------------------------------------------------------

Other income (expense):
  Other income, net                                                      674,936           922,066             877,402
  Public offering costs                                                  (82,904)        -                   -

----------------------------------------------------------------------------------------------------------------------
                                                                         592,032           922,066             877,402
----------------------------------------------------------------------------------------------------------------------

Income before income taxes                                             2,915,011         2,862,674           2,001,270

Provision for income taxes                                               976,000         1,247,000             843,330

----------------------------------------------------------------------------------------------------------------------
Net income                                                        $    1,939,011    $    1,615,674      $    1,157,940
======================================================================================================================


Earnings per common share:
  Basic                                                           $         0.37     $         0.24      $        0.16

======================================================================================================================
  Diluted                                                         $         0.37     $         0.24      $        0.16
======================================================================================================================


Weighted-average number of common shares outstanding:
  Basic                                                                5,205,084          6,720,104          7,100,674

======================================================================================================================
  Diluted                                                              5,205,084          6,720,104          7,199,526
======================================================================================================================


* Includes amounts charged by affiliates aggregating              $    2,816,982    $     2,985,506     $    4,080,998
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<S>                                <C>           <C>        <C>     <C>      <C>      <C>         <C>            <C>      <C>

                                                           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
----------------------------------------------------------------------------------------------------------------------
                                                                                                     Retained
                                      Notes                                            Additional    Earnings
                                    Receivable    Preferred Stock     Common Stock      Paid-in   (Accumulated   Treasury Stock
                                   Stockholders   Shares  Amount     Shares   Amount    Capital      Deficit)    Shares   Amount
------------------------------------------------------------------------------------------------------------------------------------

Balance at June 30, 1998           $(1,453,900)     -        -     4,971,577  $4,972    $ 901,128   $(1,458,482)   -        -
Interest on notes receivable          (113,900)     -        -          -       -            -             -       -        -
Interest paid on notes receivable      171,700      -        -          -       -            -             -       -        -
Principal paid on notes receivable      40,000      -        -          -       -            -             -       -        -
Sale of stock                             -         -        -       340,919     341    1,999,659          -       -        -
Capital distributions, net of
 income taxes                             -         -        -          -       -         (32,214)         -       -        -
Net income                                -         -        -          -       -            -        1,939,011    -        -
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999            (1,356,100)     -        -     5,312,496   5,313    2,868,573       480,529    -        -
Sale of stock                               -       -        -     1,600,000   1,600    9,536,437          -       -        -
Stock purchase                              -       -        -          -       -            -             -     191,000  $(743,767)
Interest paid on notes receivable       49,583      -        -          -       -            -             -       -        -
Principal paid on notes receivable   1,000,000      -        -          -       -            -             -       -        -
Interest on notes receivable           (32,583)     -        -          -       -            -             -       -        -
Net income                                -         -        -          -       -            -        1,615,674    -        -
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000              (339,100)     -        -     6,912,496   6,913   12,405,010     2,096,203  191,000   (743,767)
Principal paid on notes receivable      64,600      -        -          -       -            -             -       -         -
Interest on notes receivable           (25,500)     -        -          -       -            -             -       -         -
Stock issued - PAI acquisition             -        -        -       400,000     400      849,520          -       -         -
Net income                                 -        -        -          -       -            -        1,157,940    -         -
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001          $   (300,000)     -        -     7,312,496  $7,313  $13,254,530   $ 3,254,143  191,000  $(743,767)
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>

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

                                                                                  CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------

Year ended June 30,                                                         1999              2000                2001
----------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
  Net income                                                         $ 1,939,011      $  1,615,674       $   1,157,940
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                                        772,389         1,299,984           2,584,923
    Bad debt expense and allowance for possible losses                   602,155           995,806             857,228
    Compensation expense accrued to officer/stockholder                  360,000            60,000             481,629
    Deferred income taxes                                                201,000           979,000             390,599
    Interest accrued on stockholders' loans                             (113,900)          (32,583)            (25,500)
    Changes in assets and liabilities, net of effects from
     purchases of PAI and PMP:
      (Increase) decrease in:
        Accounts receivable                                           (7,756,836)       (1,171,304)        (10,154,914)
        Rebates receivable                                            (1,238,918)        1,618,210          (1,304,171)
        Other current assets                                            (188,380)           26,451            (593,675)
        Due to/from affiliates                                            20,921          (250,875)           (345,693)
        Other assets                                                    -                -                      41,577
      Increase (decrease) in:
        Accounts payable and accrued expenses                          6,233,083         1,663,317          19,527,015
        Income taxes payable                                             644,608          (692,498)            (55,772)
        Other liabilities                                                 47,764           (16,508)             (2,224)
----------------------------------------------------------------------------------------------------------------------
            Net cash provided by operating activities                  1,522,897         6,094,674          12,558,962
----------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
  Capital expenditures                                                (1,930,468)       (2,431,861)         (3,841,895)
  Loans (to)/from stockholders                                            10,774          (390,000)          -
  Disposal of capital assets                                            -                -                      30,500
  Acquisition of PAI, net of cash and cash equivalents
   acquired                                                             -                -                  (4,614,008)
  Acquisition of PMP, net of cash and cash equivalents
   acquired                                                             -                -                  (6,706,267)
  Repayment of note by stockholder                                        40,000         1,049,583           -
  Principal received on notes from stockholders                          171,700         -                      64,600
----------------------------------------------------------------------------------------------------------------------
            Net cash used in investing activities                     (1,707,994)       (1,772,278)        (15,067,070)
----------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
  Sale of common stock - net                                           2,000,000         9,538,037           -
  Capital distribution                                                   (54,214)        -                   -
  Proceeds from bank line of credit                                     -                -                   4,000,000
  Repayment of bank line of credit                                      -                -                  (4,000,000)
  Treasury stock                                                        -                 (743,767)          -
  Deferred offering costs                                               (242,826)        -                   -
  Repayment of debt and capital lease obligations                         (7,792)         (207,799)           (741,677)
----------------------------------------------------------------------------------------------------------------------
            Net cash provided by (used in) financing
             activities                                                1,695,168         8,586,471            (741,677)
----------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                   1,510,071        12,908,867          (3,249,785)

Cash and cash equivalents at beginning of year                         1,305,792         2,815,863          15,724,730
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                             $ 2,815,863       $15,724,730        $ 12,474,945
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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  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 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 Company has historically entered into two types of arrangements for the
payment  of  administrative  fees:  fee for  service  (per  claim  charges)  and
capitation (per plan  participant per month charges).  Under the fee for service
arrangement, the Company is paid by the plans for their disbursements plus a set
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. As of January 1, 2000, all services have been provided on a fee for
service basis only.

     In October 1998,  the Company  acquired  National  Medical Health Card IPA,
Inc. ("IPA"), which is an independent practice association under the laws of New
York.  This wholly  owned  subsidiary  is an inactive  company  acquired  from a
relative of the principal stockholder for no consideration.  The Company intends
that IPA will be the contracting party with respect to any contracts with Health
Maintenance   Organizations  or  providers  containing  financial   risk-sharing
provisions.  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.  Activities  conducted  through June 30, 2001 included
organization,  planning and  development  of the IPA's  activities  and securing
regulatory approvals.

     Specialty  Pharmacy Care, Inc.  ("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 retains a percentage of rebates collected.

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

     The consolidated  financial  statements  include the Company and its wholly
owned  subsidiaries.  All material  intercompany  accounts and transactions have
been eliminated in consolidation.

     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). Cash equivalents at June 30,
2000 and 2001 include  approximately  $1,130,000 and  $1,598,000,  respectively,
which are  restricted as to their use as related to the  maintenance  of minimum
cash balances in accordance with Ohio statute.

     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. Although, in the past, the Company assumed the legal responsibility and
financial  risk of  paying  for  dispensed  pharmaceuticals  whether  or not the
Company was paid by its sponsors,  the  Company's  current  agreements  with the
pharmacies  specify that the  pharmacies  will be paid only after the Company is
paid by its sponsors.

     Revenue under  capitation  arrangements is recognized  monthly based on the
number of participants,  and costs under capitation agreements are recognized as
incurred.

     Revenue for the years ended June 30, 1999, 2000 and 2001 was adjusted based
on EITF 00-14,  Accounting for Certain Sales  Incentives - Coupons,  Rebates and
Discounts.  The financial impact of this EITF is to reduce revenue 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  by  approximately  $5,800,000,  $4,600,000  and
$5,900,000 for the years ended June 30, 1999, 2000 and 2001, respectively. These
rebates are recognized  when the Company is entitled to them in accordance  with
the terms of the Company's  arrangements with drug manufacturers and 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, 1999,
2000  and  2001,  net  rebates  recorded  by  the  Company  were   approximately
$2,542,000, $3,818,000 and $4,255,000,  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.  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,  2000  and  2001,
approximately  $1,179,000 and $870,000,  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,  primarily  five years.  Amortization
expense was approximately $460,000,  $842,000 and $1,327,000 for the years ended
June 30, 1999, 2000 and 2001, respectively.

     A significant  portion of the Company's computer software for its reporting
system was developed by a company  affiliated by common  ownership (see Note 4).
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 off its claims adjudication system. To the extent that the
Company has  capitalized  certain  amounts for  software  development  and those
amounts  exceeded  the cost  incurred  by the  affiliate,  this  excess has been
charged to stockholders' equity (deficiency) as a capital distribution.

     The Company  accounts for deferred  offering  costs in accordance  with SAB
Topic 5:A. Accordingly, only specific incremental costs directly attributable to
a proposed or actual offering are classified as deferred offering costs.

     The  deferred  offering  costs  in  connection  with the  Company's  Public
Offering consummated on August 2, 1999 were capitalized and subsequently charged
to equity upon consummation of the public offering (see Note 15).

     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, 2001.

     At each balance sheet, the Company  evaluates the period of amortization of
intangible  assets.  The factors used in evaluating  the period of  amortization
include: (i) current operating results, (ii) projected future operating results,
and (iii) other material factors that affect the continuity of the business.

     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.

     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, 2000 and 2001 were approximately $16,507,000 and $16,457,000, respectively.

     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally  accepted  in the United  States of America  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.  The fair value of the loans
due from  stockholders  and  affiliates  is  difficult  to estimate due to their
related party nature.  Certain  amounts due to a stockholder  represent  accrued
salary and  bonuses and do not bear  interest.  Loans due from  affiliates  bear
market interest rates; therefore,  the Company believes that the carrying amount
approximates fair value.

     For  comparability,  certain 1999 and 2000 amounts have been  reclassified,
where appropriate,  to conform to the financial  statement  presentation used in
2001.

     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  is in the  process  of  determining  the impact of these
pronouncements on its financial position and operations.

2.  ACQUISITIONS:

     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  $6,000,000 in
cash and  400,000  shares of the  Company's  common  stock,  which was valued at
$849,920 on the  acquisition  date. 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 $6,345,471,  which consists of the following components: (i)
customer  relationships valued at $131,000 which will be amortized entirely over
the first  year,  (ii)  noncompete  contracts  valued at  $44,400  which will be
amortized over five years using the  straight-line  method of amortization,  and
(iii)  goodwill of  $6,170,071  which will be amortized  over 20 years using the
straight-line  method of  amortization  (see the last  paragraph of Note 1). PAI
stockholders  may also  receive  additional  consideration  of up to  $2,000,000
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 the first
year, so $750,000 in cash and $250,000 in Company stock (62,500 shares) was paid
and issued on August 31, 2001.

     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) $4,000,000 in cash, (ii)
the  satisfaction by the Company of PMP's bank  indebtedness of $1,255,035,  and
(iii)  cancelation  of the $1,500,000  promissory  note from PMP to the Company,
dated January 16, 2001.  Part of the cash portion of the purchase price 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 $6,474,659 which consists of the following
components:  (i)  customer  relationships  valued  at  $305,000  which  will  be
amortized over 2.5 years using the  straight-line  method of  amortization,  and
(ii)  goodwill of  $6,169,659  which will be  amortized  over 20 years using the
straight-line  method of  amortization  (see the last  paragraph of Note 1). 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  three  years,  which  will be  accounted  for as an  addition  to
goodwill.

     The following  summarized  unaudited  pro forma  results of operations  set
forth  below for the years  ended June 30,  2000 and 2001 assume the PAI and PMP
acquisitions had occurred as of the beginning of these periods:

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

 June 30,                                                       2000                 2001
------------------------------------------------------------------------------------------

 Revenue                                                $251,025,448         $292,529,319
 Net income                                                1,475,987              922,391
 Net income per common share:
   Basic                                                        0.21                 0.13
   Diluted                                                      0.21                 0.13
Pro forma weighted-average number of
 common shares outstanding:
   Basic                                                   7,120,104            7,121,496
   Diluted                                                 7,120,104            7,220,348
------------------------------------------------------------------------------------------
</TABLE>

     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, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS:

<TABLE>
<S>                                    <C>              <C>                  <C>
Property, equipment and software development costs consist of the following:
                                                                             Estimated
June 30,                                      2000              2001         Useful Life
----------------------------------------------------------------------------------------
Equipment                              $   999,757      $  2,840,824             5 years
Software                                 5,062,599         7,888,574             5 years
Leasehold improvements                     109,385           253,544       Term of lease
Automobile                                -                   44,102             5 years
Equipment acquired under
  capital leases                          2,537,730         2,537,730       5 to 8 years
----------------------------------------------------------------------------------------------------------------------
                                          8,709,471        13,564,774
 Accumulated depreciation
  and amortization                        2,285,301         4,980,884

----------------------------------------------------------------------------------------------------------------------
                                         $6,424,170      $  8,583,890
======================================================================================================================
</TABLE>


     Accumulated   depreciation  on  equipment   acquired  under  capital  lease
obligations   was   $140,369  and  $501,139  as  of  June  30,  2000  and  2001,
respectively.

     Depreciation  and  amortization  expense for the years ended June 30, 1999,
2000  and  2001  was   approximately   $772,000,   $1,300,000  and   $2,028,000,
respectively.

4.  RELATED PARTY TRANSACTIONS:

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


     In  accordance  with SAB 48, the Company has recorded  amounts in excess of
affiliates'   costs  for   capitalized   software   development   as  a  capital
distribution, net of tax, as follows:

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

June 30,                                          1999              2000             2001
----------------------------------------------------------------------------------------------------------------------

 Software development                          $ 54,214         $     -           $     -
 Tax effect                                     (22,000)              -                 -
----------------------------------------------------------------------------------------------------------------------
 Net charge to stockholders' equity            $ 32,214         $     -           $     -
======================================================================================================================
</TABLE>

     As of June 30,  2001,  Sandata  owed  Health  Card  $503,958  pursuant to a
promissory  note,  dated  May 31,  2000,  in the  original  principal  amount of
$500,000 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
$500,000, 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, 2001, Sandata
also owed Health Card $68,123 for pharmacy  benefit  services  which has not yet
been reimbursed.

     Due from affiliates also includes a note from another company affiliated by
common  ownership.  As of June 30,  2001,  the balance  due from this  affiliate
including accrued interest was $4,212,843. 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
majority  stockholder and was subject to the personal  guarantee of the majority
stockholder.  Such note was  restructured by a new  nonrecourse  promissory note
dated July 31, 2000,  made payable by the  affiliate to the order of the Company
in the amount of  $3,890,940.  Such note is payable  in annual  installments  of
$400,000 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 majority stockholder and is subject to the
personal guarantee of the majority  stockholder.  The first $400,000 payment due
under the note as of July 31, 2001 was  satisfied by  offsetting an equal amount
owed to the majority  stockholder  by the Company.  Effective July 31, 2001, the
interest  rate on the note was  changed to the prime rate in effect from time to
time.  For the years ended June 30, 1999,  2000 and 2001, the amount of interest
income accrued was approximately $362,000, $314,000 and $340,000,  respectively.
Interest paid by the affiliate in December 1998 aggregated $183,000.  Concurrent
with the  consummation of the Company's  Public  Offering,  on August 2, 1999, a
trust   controlled  by  the  Company's   majority   stockholder   (the  "Selling
Stockholder") sold 400,000 shares of common stock from its holdings. The Company
received  approximately  $1,993,000 from the sale by the Selling  Stockholder of
which  approximately  $1,043,000  was  applied  to amounts  owed by the  Selling
Stockholder and the balance to amounts due from the affiliate (see Note 15).

     On January 2, 1999, another affiliate executed a  noninterest-bearing  note
payable  to the  Company  in the amount of  approximately  $90,000  to  evidence
advances to the  affiliate in the same amount.  Such advances were repaid during
fiscal 2000.

     Certain  costs  paid  to  the  affiliates  were   capitalized  as  software
development  costs.  For the years  ended June 30,  2000 and 2001,  the  amounts
charged by affiliates and capitalized were approximately  $493,000 and $844,000,
respectively.

     The Company  purchased  computer  equipment and furniture and fixtures from
affiliates  during  the years  ended  June 30,  2000 and 2001 for  approximately
$182,000 and $433,000,  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:
<TABLE>
<S>                                   <C>                <C>                <C>


Year ended June 30,                          1999              2000               2001
----------------------------------------------------------------------------------------------------------------------

Software maintenance and
related services and supplies (a)      $   770,396       $   977,032         $1,244,212
Management and consulting
fees (b)                                 1,524,451           923,048          1,293,814
Administrative, bookkeeping
services and supplies (c)                  237,307           694,581            893,494
Rent and utilities                         284,828           390,845            649,478

----------------------------------------------------------------------------------------------------------------------
                                        $2,816,982        $2,985,506         $4,080,998
======================================================================================================================
</TABLE>
          (a)  A company  affiliated by common ownership  provides a significant
               portion of the Company's  software  maintenance (Note 1), certain
               other software services, computer hardware under operating leases
               and maintains 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.

     Notes  receivable  -  stockholders  represents a loan to a  stockholder  to
purchase  the  Company's  stock.  This  note  bears  interest  at 8.5% and has a
repayment date of July 1, 2002. The Company has accrued  approximately  $422,000
of interest  income  from  affiliates  arising  from this note and the two loans
described above during the year ended June 30, 2001.

     For the years  ended June 30, 2000 and 2001,  the  Company  paid the annual
premium of  approximately  $69,000 and $60,000,  respectively,  on behalf of Mr.
Brodsky 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.

     See Note 9 for information regarding leases with related parties.

5.  ACCOUNTS PAYABALE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:
<TABLE>
<S>                                                    <C>                   <C>


June 30,                                                       2000                2001
----------------------------------------------------------------------------------------

Claims payable                                          $22,571,928          $46,615,563
Rebates payable to sponsors                               3,565,258            6,479,069
Other payables                                            1,293,498            4,550,931
----------------------------------------------------------------------------------------
                                                        $27,430,684          $57,645,563
========================================================================================
</TABLE>

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, 2001.

Payments for the year ending June 30,

                 2002                       $   687,753
                 2003                           632,104
                 2004                           522,804
                 2005                           335,556
--------------------------------------------------------------------------------
Total minimum lease payments                  2,178,217
Less amount representing interest               302,774
--------------------------------------------------------------------------------
Present value of net minimum lease payments   1,875,443
Less current portion                            542,094
--------------------------------------------------------------------------------
Long-term lease obligations                  $1,333,349
================================================================================

7.  MAJOR CUSTOMERS AND PHARMACIES:

     For the year ended June 30, 1999, approximately 39%, 14% and 13% of revenue
was from three plan  sponsors.  For the year ended June 30, 2000,  approximately
27% and 12% of revenue was from two plan  sponsors.  For the year ended June 30,
2001,  approximately 16% of the consolidated revenue of the Company was from one
plan sponsor. Amounts due from these sponsors at June 2000 and 2001 approximated
$3,859,000 and $1,936,000,  respectively.  The Company's arrangements with these
plan sponsors generally are either oral,  short-term,  terminable by the sponsor
or subject to continuing  negotiation.  The major sponsor  during the year ended
June 30, 2001  executed a two-year  contract with the Company which runs through
December 31, 2001.

     During the year ended June 30,  1999,  the Company  recorded  approximately
$500,000  of  additional  revenue  when the  amount of an  adjustment  under the
provisions of one of its arrangements to adjust for the increased cost of drugs,
primarily  related to the prior  year,  became  determinable,  upon the  Company
receiving verbal acceptance of the calculations.

     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 $821,000 and $733,000, respectively. The calendar year 2000 and 2001 contract
with this sponsor is 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 $588,000.

     For the years ended June 30, 1999,  2000 and 2001,  approximately  43%, 44%
and 26%,  respectively,  of the cost of claims  were from two  pharmacy  chains.
Amounts  payable  to these two  pharmacy  chains at June 30,  2000 and 2001 were
approximately $9,608,000 and $10,493,000, respectively.

     As specified in one of its arrangements  with a major sponsor,  the Company
has  deposited  with this  sponsor an  irrevocable  standby  letter of credit of
$2,000,000 to ensure the  fulfillment  of certain  obligations by the Company to
the sponsor.  As of June 30, 2001, no claims have been made under this letter of
credit.  The  letter of credit  expires on  December  31,  2001  which  shall be
automatically extended through March 31, 2002 if the sponsor renews its contract
with the Company.

8.  TAXES ON INCOME:

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

Year ended June 30,               1999           2000       2001
--------------------------------------------------------------------------------

Current:
 Federal                      $596,000    $   199,000   $363,918
 State                         179,000         69,000     88,813

--------------------------------------------------------------------------------
                               775,000        268,000    452,731
--------------------------------------------------------------------------------

Deferred:
 Federal                       135,000        727,000    323,911
 State                          66,000        252,000     66,688
--------------------------------------------------------------------------------
                               201,000        979,000    390,599
--------------------------------------------------------------------------------

                              $976,000     $1,247,000    $843,330
================================================================================

     In the year ended June 30, 1999, $22,000 of income tax benefits reduced the
capital distribution in that year (see Note 4).

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

Year ended June 30,                              1999    2000    2001
--------------------------------------------------------------------------------

Statutory rate                                   34.0%   34.0%   34.0%
State taxes - net of federal taxes                5.4     7.4     5.1
Utilization of net operating loss carryforward   (7.3)      -       -
Permanent differences                             1.4     1.5     4.2
Other                                               -      .7    (1.2)

--------------------------------------------------------------------------------
                                                 33.5%   43.6%   42.1 %
================================================================================
<PAGE>
     Deferred  income  tax  assets  (current  and  noncurrent)   resulting  from
temporary differences are as follows:

Year Ended June 30,                       2000                 2001
--------------------------------------------------------------------------------
Accounts receivable allowances        $309,000          $   757,200
Vacation expense accrual                43,000               72,414
Officer/stockholder bonus accrual       57,000              273,318

--------------------------------------------------------------------------------
                                      $409,000           $1,102,932
================================================================================

     Deferred income tax liabilities of $692,000 and $1,702,470 at June 30, 2000
and 2001,  respectively,  resulted from  temporary  differences  in property and
equipment.


9.  COMMITMENTS AND CONTINGENCIES:

     The Company currently occupies  approximately  26,500 square feet of office
space  located at 26 Harbor Park  Drive,  Port  Washington,  New York 11050 (the
"Facility").  The  Company  subleases  the  Facility  from BFS  Realty,  LLC, an
affiliate of the Company's chairman (the "Affiliate").  The Affiliate leases the
Facility from the Nassau County  Industrial  Development  Agency,  pursuant to a
lease (the  "Lease")  which was entered into by that agency and the Affiliate in
July 1994.  The Lease  expires in March  2005.  The  Affiliate  has the right to
become the owner of the Facility  upon  expiration  of the Lease.  The Affiliate
subleases a portion of the Facility to the Company.  The Company  currently pays
rent to the Affiliate in the amount of $336,780 per year, plus monthly  expenses
for maintenance,  real estate taxes,  utilities and the like. The rent increases
5% annually.  The Affiliate also receives rent from other  companies that occupy
space in the Facility, some of which are affiliated with the Company's chairman.
The  Company  believes  that the  Facility is  adequate  for  current  purposes.
Leasehold  improvements  made to this space during the years ended June 30, 2000
and 2001 were approximately $37,000 and $142,000, respectively.

     In  September  1998,  the  Company  leased  space  for a  pharmacy  in Port
Washington,  New York,  from a Company  affiliated by common  ownership  under a
seven-year agreement expiring August 31, 2005.

     Additionally,  the Company  leases office space  through its  subsidiary in
Arkansas expiring in April 2002.

     Rent expense charged by affiliates  including utilities for the years ended
June 30, 1999,  2000 and 2001 under operating  leases amounted to  approximately
$285,000, $391,000 and $564,000, respectively.

     Future minimum rent payments under the noncancelable  operating leases with
related and other parties at June 30, 2001 are as follows:

Year ending June 30,
                2002                   $   467,000
                2003                       374,000
                2004                       393,000
                2005                       412,000
                2006                       412,000
                Thereafter               2,409,000

--------------------------------------------------------------------------------
                                        $4,467,000
================================================================================

     Rent  expense  for the  years  ended  June  30,  1999,  2000  and  2001 was
approximately $274,000, $412,000 and $792,000, respectively.

     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 $400,000, of
which  $100,000  was paid upon signing and $25,000 was payable  monthly  through
February  1999.  The initial  license fee of $400,000 has been  capitalized  and
fully  amortized as of June 30, 2001.  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  $500,000  over  the term of the
agreement.  In February 1999 and again in February 2001, the Company met certain
milestones,  resulting  in total  additional  license  fees of  $300,000.  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 Health Card 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 Health Card  unilaterally  terminated the
contract  on  December  16,  1996.  The  complaint   further  alleged  that  the
termination resulted in the School District incurring  approximately $150,000 in
costs and  $867,000 in  expenses to obtain  coverage  from  December  1996 until
October  1997.  The  complaint  also sought  treble  damages.  While  settlement
documents are currently being  finalized,  the parties have reached an agreement
that  contemplates  Health  Card  paying to the  plaintiffs  an  amount  that is
significantly lower than the amount of costs and expenses claimed, and 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
Health Card and the School District.  Although,  the settlement  papers have not
been  finalized,  Health Card  believes that these terms will be the crux of the
agreement.

     The  Company  entered  into  an  employment  agreement  with  the  majority
stockholder  effective July 1, 1999.  Pursuant to this  agreement,  the majority
stockholder  has agreed to serve as  chairman  of the board of  directors  at an
annual salary of $200,000,  subject to adjustment by the board of directors.  As
of July 1, 2001, this amount was increased to $425,000. The agreement terminates
on July 1, 2002, unless terminated by the Company for cause, or in the event the
stockholder  becomes  permanently  disabled.  The agreement provides for certain
fringe benefits payable to or on behalf of the majority stockholder, such as the
use  of  an  automobile.   In  addition,  the  agreement  provides  for  certain
termination benefits payable to the majority  stockholder which,  depending upon
the reason for termination, can be equal to up to two years' salary.

     The Company has an employment arrangement with its senior vice president of
sales and  marketing  who is  entitled  to  commissions  of 3% of gross  margins
generated  from direct  accounts  sold and 1% of gross  margins  generated  from
accounts sold by salespeople under his management.

     The  Company  entered  into an  employment  agreement  with  its  president
effective  June 12,  2000.  Pursuant  to this  agreement,  an  annual  salary of
$188,000,  in  addition to (i) a $25,000  signing  bonus upon  execution  of the
agreement  and (ii) the  ability  to  participate  in the bonus  pool for senior
executives  has  been  specified.   The  agreement  also  provides  for  certain
termination benefits which, depending upon the reason for termination, can equal
up to one year of salary.  In  connection  with the  employment  agreement,  the
Company granted an incentive  stock option to purchase  100,000 shares of common
stock at $5.00 per share.  Such option vests over a three-year period commencing
on June 12, 2001.  The option  expires June 12, 2005.  On June 12, 2001,  Health
Card increased the annual compensation paid to Mr. Bigl to $213,000 plus $12,000
in nonaccountable  expenses  annually.  On June 12, 2001, Health Card granted to
Mr. Bigl an incentive  stock option to purchase 20,000 shares of common stock at
$3.00 per share.  Such option vests over a four-year period  commencing June 12,
2002. The option expires on June 12, 2006.

     The Company  entered into an employment  agreement with its chief financial
officer and treasurer  effective  May 1, 2000.  Pursuant to this  agreement,  an
annual  salary  of  $150,000,  in  addition  to (i) a  $25,000  bonus  upon  the
completion of one full year of employment  with the Company and (ii) the ability
to participate in the bonus pool for senior  executives has been specified.  The
agreement also provides for certain termination  benefits which,  depending upon
the reason for  termination,  including  but not limited to a change of control,
can equal up to one year of salary. In connection with the employment agreement,
the Company granted 35,000  incentive stock options to purchase shares of common
stock at $5.00 per share.  Such option vests over a three-year period commencing
on May 1, 2001. The option expires on May 1, 2005. On May 1, 2001, Mr. Gershen's
annual base salary was increased to $185,000.

     In  connection  with  the PAI  acquisition,  Tery  Baskin  entered  into an
employment  agreement with PAI,  pursuant to which Mr. Baskin agreed to serve as
PAI's senior vice president at an annual salary of $130,000 in addition to (i) a
1%  commission  on all  claims  adjudicated  by PAI  and  (ii)  the  ability  to
participate  in the bonus pool for senior  executives.  In  connection  with the
employment agreement,  Health Card granted incentive stock options to Mr. Baskin
to  purchase  40,000  shares of common  stock at $4.00  per  share.  See Item 1,
Description of Business, for a detailed description of the PAI acquisition.

     Health Card entered into an employment agreement with Tery Baskin effective
June 4,  2001 to  serve as chief  operating  officer,  at an  annual  salary  of
$150,000, in addition to the ability to participate in the bonus pool for senior
executives. In connection with the employment agreement,  Health Card granted to
Mr.  Baskin an option to  purchase  15,000  shares of common  stock at $5.00 per
share.

     The Company has a $4,000,000 revolving line of credit with a bank. The line
bears  interest at the bank's  prime rate plus 1% and  expires on  December  31,
2001. As of June 30, 2001, there are no amounts due under this line.

10.  STOCK OPTIONS AND WARRANTS:

     During  the  years  ended  June 30,  2000 and  2001,  the  Company  granted
incentive stock options under the 1999 Stock Option Plan (the "Plan"). The total
number of shares of common stock  reserved by the Company for issuance under the
Plan is  1,650,000  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, 2001 equal  1,243,284.  Stock options  outstanding
have a life of from 4 to 6 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.

     The following tables summarize  information about stock option activity for
the years ended June 30, 1999, 2000 and 2001:

--------------------------------------------------------------------------------
                                                          Weighted-
                                                          average
                                                          Exercise
                                             Number of    Price per
                                              Options      Share

Shares under option at June 30, 1998         255,689      $5.87
Granted                                       89,491       5.87
--------------------------------------------------------------------------------
Shares under option at June 30, 1999         345,180       5.87
Canceled                                    (345,180)      5.87
Granted                                      656,469       5.98
--------------------------------------------------------------------------------
Shares under option at June 30, 2000         656,469       5.98
Canceled                                    (251,127)      6.23
Granted                                      837,942       2.92
--------------------------------------------------------------------------------
Shares under option at June 30, 2001       1,243,284      $3.87
================================================================================

     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,                  1999          2000           2001
--------------------------------------------------------------------------------

Reported net income            $1,939,011     $1,615,674     $1,157,940
Pro forma compensation
 expense                          (67,145)      (236,664)      (320,241)
--------------------------------------------------------------------------------
Pro forma net income           $1,871,866     $1,379,010     $  837,699
================================================================================

Pro forma earnings per share:
 Basic and diluted             $      .36     $      .21     $      .12
================================================================================

     The fair value of each  option  granted is  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for all grants in the years ended June 30, 1999, 2000 and 2001:
no  dividend  yield in 2001 and a  dividend  yield of  0.008%  in 1999 and 2000;
risk-free  interest  rate ranges from 4.2% to 6.8%;  an expected life of options
for 4.3, 5.0, and 5.0 years,  respectively;  and a volatility of .1%,  45.6% and
90.8%,  respectively,  for all  grants.  The  weighted-average  value of options
granted  is $.87,  $1.09 and $.96 for the years  ended June 30,  1999,  2000 and
2001, respectively.

     The following table summarizes  information about stock options outstanding
at June 30, 2001:
<TABLE>
<S>              <C>             <C>            <C>            <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 $6.00    1,051,152      4.48 years        $3.21        324,943         $4.04
$7.50               192,132      3.63 years        $7.50         74,940         $7.50

--------------------------------------------------------------------------------------
$1.67 to $7.50    1,243,284      4.35 years        $3.87        399,883         $4.69
======================================================================================
</TABLE>

     The  Company  granted  the  underwriters  of the  Public  Offering  200,000
warrants for nominal  consideration.  The warrants  entitle the  underwriters to
purchase 200,000 shares of common stock from the Company at $9.00 per share. The
warrants are exercisable for four years commencing on July 29, 2000.

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, 2001, 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,               1999              2000              2001
--------------------------------------------------------------------------------

Cash paid:
Interest                    $       250      $     98,496        $   236,132
Income taxes                    131,827           960,498          1,287,287

Noncash investing and
 financing activities:
 Capital lease obligations
 were incurred for computer
 equipment and software            -            2,537,730              -
Issuance of common stock
 in connection with the
 acquisition of PAI                -                 -              849,920
--------------------------------------------------------------------------------

13.  EMPLOYEE BENEFIT PLAN:

     Effective  June 1,  1998,  the  Company  adopted  a  401(k)  plan  covering
substantially all 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.  Annually,  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 and 2001
were approximately $18,000 and $51,000, respectively.

     PAI also had a 401(k) plan covering substantially all employees.  This plan
was kept in effect at the time of the  acquisition,  and remains in effect as of
today.  The plan will be merged into the  Company  plan by  December  31,  2001.
Participants in the PAI plan 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. There is a mandatory  company match which is funded monthly equal to
2.5% of eligible members'  salaries.  There is also an additional  discretionary
annual match. Contributions made by PAI from July 20, 2000 through June 30, 2001
were approximately $58,000.

14.  EARNINGS PER SHARE:

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

Year ended June 30,                             1999         2000          2001
--------------------------------------------------------------------------------
Basic                                      5,205,084     6,720,104     7,100,674
Effect of assumed conversion
  of employee stock options                     -               -         65,406

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

--------------------------------------------------------------------------------
Diluted                                    5,205,084     6,720,104     7,199,526
================================================================================
<PAGE>

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

Year ended June 30,                 1999         2000         2001
--------------------------------------------------------------------------------

Number of options and warrants   345,180      856,469      866,284
================================================================================

Weighted-average exercise price   $ 5.87       $ 6.69       $ 5.22
================================================================================

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 $12,883,100  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 repayment of $1,992,900 of  indebtedness by the
Selling  Stockholder in the amount of $1,042,500 and the balance 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.

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

                                                                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------

16.      QUARTERLY FINANCIAL DATA (UNAUDITED):

          (In thousands, except per share amounts)         FY 2001                                       FY 2000
------------------------------------------------------------------------------------------------------------------------------------
Quarters ended                             6/30        3/31       12/31        9/30        6/30        3/31       12/31         9/30
------------------------------------------------------------------------------------------------------------------------------------

Revenue (as originally reported)        $79,452     $72,374     $65,594     $57,008     $42,985     $44,055     $45,747      $39,527

Revenue                                  79,452      72,374      64,429      55,864      41,410      43,090      44,650       38,526

Income before income taxes                  507         547         440         507          56         919         892          996

Net income                                  415         277         225         241           1         529         532          554

Earnings per common share:
  Basic                                     .06         .04         .03         .03        (.01)        .08         .08          .09
  Diluted                                   .06         .04         .03         .03        (.01)        .08         .08          .09

Cash dividends declared per common share

Common share prices:
  High                                     3.49        3.13        2.25        3.25        3.38        5.25        5.63         7.75
  Low                                      2.90        1.31        1.16        1.88        1.75        2.81        2.75         4.81

</TABLE>

<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 audits  referred to in our report to the Board of Directors of National
Medical Health Card Systems,  Inc. and  Subsidiaries,  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 years  ended  June 30,  2000 and 1999.  This
financial statement schedule is the responsibility of the Company's  management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.

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

BDO Seidman, LLP
Melville, New York

September 19, 2000

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

                                                                                SUPPLEMENTARY INFORMATION

                                    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------------------------------------------------------------------------------

                                                        Additions
                                       Balance at       Charged to                                            Balance
                                        Beginning        Costs and                          Other             at End
Description                             of Period       Expense (a)     Write-offs         Changes           of Period
----------------------------------------------------------------------------------------------------------------------

Reserves and allowances deducted from asset accounts:

  Allowance for possible
   losses

  Year ended June 30, 1999                $244,189        $602,155                 -             -         $   846,344
  Year ended June 30, 2000                 846,344         995,806        $1,115,599             -             726,551
  Year ended June 30, 2001                 726,551         942,417            96,166      $274,025 (b)       1,846,827

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

</TABLE>