UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                     For the fiscal year ended June 30, 2005

|_| Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

For the transition period from _______ to  __________

                        Commission file number 000-26749

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

        Delaware                                         11-2581812
(State or other jurisdiction of         (I.R.S. Employee Identification No.)
incorporation or organization)

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

Registrant's telephone number, including area code: (800) 251-3883

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

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

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

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

     The aggregate market value of the registrant's voting and non-voting common
stock held by  non-affiliates  of the  registrant,  computed by reference to the
price at which the common stock was last sold, as quoted on the NASDAQ  National
Market on December  31, 2004 (the last  business  day of the  registrant's  most
recently completed second fiscal quarter) was approximately $101,133,786.

     Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date:  4,847,660 shares of common stock outstanding
as of September 8, 2005.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant's definitive proxy statement for its 2005 Annual
Meeting of  Stockholders  is  incorporated  by  reference  into Part III of this
Annual Report on Form 10-K, which will be filed no later than October 28, 2005.

<PAGE>

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                                     INDEX
                                                                                      Page No.

Forward Looking Statements                                                               3

                                     PART I

Item 1.    Description of Business                                                       3

Item 2.    Description of Property                                                      35

Item 3.    Legal Proceedings                                                            36

Item 4.    Submission of Matters to a Vote of Security Holders                          36

                                     PART II

Item 5.  Market for Registrant's Common Equity; Related Stockholder Matters             37
          and Issuer Purchases of Equity Securities

Item 6.  Selected Financial Data                                                        38

Item 7.  Management's Discussion and Analysis of Financial Condition and                40
          Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk                     59

Item 8.  Financial Statements and Supplementary Data                                    59

Item 9.  Changes in and Disagreements on Accounting And Financial Disclosure            59

Item 9A. Controls and Procedures                                                        59

                                    PART III

Item 10. Directors and Executive Officers of Registrant                                 63
          Compliance with Section 16(a) of the Exchange Act

Item 11. Executive Compensation                                                         63

Item 12. Security Ownership of Certain Beneficial Owners and Management                 63
          and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions                                 63

Item 14. Principal Accountant Fees and Services                                         63

                                     PART IV

Item 15. Exhibits and Financial Statement Schedules                                     64

Signatures                                                                              67

</TABLE>


                             INTRODUCTORY STATEMENTS

Forward Looking Statements

     When  used  herein,  the  words  "may,"  "could,"  "estimate,"   "believe,"
"anticipate,"  "think,"  "intend,"  "expect"  and similar  expressions  identify
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995.  Such  statements  are not  guarantees of future
performance  and involve  known and unknown risks and  uncertainties,  and other
factors, which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
such  statements,  which speak only as of the date hereof.  For a discussion  of
such risks and uncertainties,  including risks relating to pricing,  competition
in the  bidding  and  proposal  process,  our  ability  to  consummate  contract
negotiations with prospective clients,  dependence on key members of management,
government  regulation,  acquisitions and affiliations,  the market for pharmacy
benefit  management  ("PBM") services,  and other factors,  readers are urged to
carefully  review and  consider  various  disclosures  made by National  Medical
Health Card Systems, Inc. ("NMHC") which attempt to advise interested parties of
the factors which affect NMHC's business,  including,  without  limitation,  the
disclosures  made under the caption  "Description of Business" in Item 1 of this
Form 10-K and "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" in Item 7 of this Form 10-K.  MNHC makes no commitment to
revise or update any  forward-looking  statements in order to reflect  events or
circumstances after the date any such statement is made.


                                     PART I


Item 1.           DESCRIPTION OF BUSINESS.

     The following  description  of our business  should be read in  conjunction
with the information  elsewhere in this Form 10-K. References in this Form 10-K
to "we," "our," "us," or the "Company," refer to NMHC.

General

     NMHC  provides  a full  range of  integrated  pharmacy  benefit  management
services  to health  maintenance  organizations,  employer  groups,  third party
administrators,  corporations, unions, and local government through our flexible
benefits  designs,  comprehensive  clinical  programs and  advanced  information
systems.  In  addition,  we operate a health  information  company  through  our
wholly-owned  subsidiary,  Integrail,  Inc. ("NMHC  Integrail"),  a mail service
pharmacy  through  our  wholly-owned   subsidiary,   NMHCRX  Mail  Order,   Inc.
("NMHCmail"), and a specialty pharmacy through our wholly-owned subsidiary, NMHC
Ascend ("NMHC Ascend").  Our mission is to improve our clients'  members' health
through  the  timely  delivery  of  effective  pharmaceutical  care  and  health
information  management systems.  NMHC was incorporated in the State of New York
in 1981 and  reincorporated  in the State of Delaware  in February of 2002.  Our
executive offices are located in Port Washington, New York.

Recent Acquisitions and Developments

Pharmaceutical Care Network Acquisition

     On  March  7,  2005,  NMHC  acquired  all  of  the  outstanding   stock  of
Pharmaceutical  Care  Network,  a  California   corporation  ("PCN"),  from  the
California  Pharmacists  Association  (the  "PCN  Acquisition").  The  aggregate
purchase price of the PCN Acquisition was $13 million in cash.  NMHC has also
agreed to pay the California Pharmacists  Association ("CPhA") earn-outs, as
additional  purchase  price,  up to $30 million  over a period of three years if
certain financial and performance  targets are achieved.  In connection with the
PCN  Acquisition,  NMHC used funds out of its working  capital and its  JPMorgan
credit facility (as described  below) for the payment of the purchase price. The
PCN operations complement NMHC's business while strengthening NMHC's presence in
the California marketplace as well as in the Medicaid managed care market.

     In  addition  to the $13 million  purchase  price for the PCN  Acquisition,
there were $561,000 of acquisition related expenses incurred by NMHC. Of the $13
million,  $10.5 million was paid to CPhA and certain of PCN's current and former
employees who participated in its Long Term Incentive Plan, and $2.5 million was
deposited into escrow to secure CPhA's obligations under the purchase agreement.
As of June  30,  2005,  $225,000  has been  accrued  based  upon  the  tentative
achievement  of the  financial  and  performance  targets.

New JPMorgan Credit Facility

     On January 28, 2005,  NMHC and certain of its  subsidiaries  entered into a
new  five-year  $65 million cash flow based,  line of credit with a syndicate of
commercial  banks led by JPMorgan Chase Bank,  N.A.  ("JPMorgan").  The JPMorgan
credit facility  replaced NMHC's $40 million secured  revolving  credit facility
(the "revolving  credit  facility) with HFG Healthco-4 LLC, a specialty  finance
company,  which  expired  on January  28,  2005.  Subject to certain  conditions
including  the  consent of the  existing  lenders,  the new line of credit  with
JPMorgan (the  "JPMorgan  credit  facility") may be increased by an aggregate of
$35 million.

     Depending on the timing and dollar amount of each loan  request,  NMHC will
either  borrow at a spread  above LIBOR,  the  overnight  Federal  Funds rate or
JPMorgan's  prime rate.  The initial  spread will be 1.75% for LIBOR and Federal
Funds loans and 0.75% for prime rate loans.  After  receipt of NMHC's  financial
statements  for the period  ended June 30, 2005,  the spreads  will  increase or
decrease  based  on an  interest  rate  grid  that is tied to a ratio of debt to
annual EBITDA.

     The JPMorgan credit facility is secured by NMHC's  consolidated  assets and
requires NMHC to be in compliance with financial and other covenants.  The three
defined financial covenants include:  consolidated net worth; consolidated fixed
charge ratio; and consolidated debt to EBITDA ratio. NMHC was in compliance with
such covenants at June 30, 2005.

                                    OVERVIEW

Industry Background

     In response  to  escalating  health care costs,  efforts in the health care
industry  have led to rapid  growth in managed  care and other cost  containment
programs.  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.  PBMs  provide  the means for plan  sponsors  to
deliver  prescription  drug  benefits to their plan members in a  cost-effective
manner.

Company Overview

     Sponsors of pharmacy  benefit plans managed by NMHC are located  throughout
the United States,  and include managed care  organizations,  local governments,
unions,  corporations,  HMO's,  employers  and  third  party  health  care  plan
administrators.  Sponsors retain NMHC to manage the prescription plans that they
maintain for the benefit of their plan participants. NMHC provides sponsors with
a  comprehensive  pharmacy  benefits  management  plan through  four  integrated
services programs:

          -  Pharmacy  Benefits  Management:  Management  of  prescription  drug
     programs for sponsors delivered through NMHCRX.

          -  Health  Information  Management:  Decision  support  services  that
     transform physician and patient data into actionable information to improve
     care while  managing  pharmacy  and medical  costs  delivered  through NMHC
     Integrail.

          - Mail Service Pharmacy:  Technology-enabled mail service pharmacy for
     chronic therapy medications delivered through NMHCmail.

          - Specialty  Pharmacy:  Management  for  specialty  pharmacy  programs
     including  women's  health,  pediatric  care,  men's health and  transplant
     delivered through NMHC Ascend.

                                   THE COMPANY

Pharmacy Benefits Management

     NMHC provides to sponsors,  including HMOs,  employers,  local governments,
union groups and third party  administrators,  management of  prescription  drug
programs through a wide variety of services including:

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

     NMHC's pharmacy benefits  management  services are delivered under the name
NMHCRX.

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 our national pharmacy network and
the  sponsor's  plan.  NMHC 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.

     In the ordinary case, 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
and the  claim is  electronically  communicated  to NMHC for  on-line  real time
processing.  If the prescription is for a drug listed on the sponsor's  approved
drug list, our on-line claims  management system will confirm that the submitted
claim is in conformity with the plan's terms and conditions,  and the pharmacist
is advised of the appropriate co-payment and deductible, if any, to be collected
from the plan participant. The on-line claims management system will also advise
the  pharmacist of the payment the pharmacy will receive from NMHC. In addition,
our on-line  claims  management  system  sends  appropriate  messages  regarding
preferred   drugs,   contraindications,   or  any  number  of  other   potential
interventions,  based upon plan participants' existing claims history with NMHC.
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 NMHC's  pharmacy  network.
Plan  participants  may  alternatively   choose  to  fill   prescriptions  at  a
non-participating  pharmacy  and would then have to submit a paper claim to NMHC
for  reimbursement.  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 our  customer  service
department.

     Invoicing   and   Payments.   Sponsors   are   generally   charged  (i)  an
administration  fee  for  each  prescription  filled,  (ii)  an  amount  for the
prescription   dispensed,   and  (iii)  a   dispensing   fee  for  filling  such
prescription.  Sponsors  pay  us for  such  amounts  and we pay an  individually
negotiated amount to the participating  independent and chain pharmacies,  which
amount  may be at a  discount  to the  amount  charged  to  the  sponsors.  Plan
participants  filing for direct  payment  receive an allowable  payment which is
usually  specified by the sponsor.  See "The Company - Pharmacy  Network" below,
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.  We submit  claims for rebates for
specified  sponsors  pursuant to an agreement with a rebate  administrator  (the
"Administrator")  effective  as of  July  1,  2001,  as  amended.  Based  on the
agreement,  the  payment  of  rebates  is  contingent  upon  NMHC  adopting  the
Administrator's  formulary for our specified sponsors.  We submit the claims for
the  specified  sponsors to the  Administrator.  The  Administrator  submits our
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.   Our  agreement  with  the
Administrator  provides that it is obligated to pay us 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 term of the agreement  with
the  Administrator  expires on December  31, 2007 and may not be  terminated  by
either party prior to such date.

     Pursuant to an agreement  between NMHC and Specialty  Pharmacy  Care,  Inc.
("Specialty"),  a wholly owned  subsidiary of NMHC, we submit claims for rebates
to Specialty for certain of our sponsors.  Specialty  performs the services of a
rebate  administrator for which it is paid an administrative  fee. Specialty has
entered into approximately  fifty separate  agreements with drug  manufacturers.
While the terms of each agreement between  Specialty and the drug  manufacturers
are unique,  the basic concept is the same.  Such agreements  generally  provide
that we must list the specified  products of each of the drug  manufacturers  on
our approved  formularies  with the  specified  sponsors.  NMHC's P&T  Committee
approves the clinical efficacy and appropriateness of such formulary drugs prior
to listing the products on any approved formularies. For a discussion of the P&T
Committee, see "- Formulary Design and Disease Information Services." We may not
refer, 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 NMHC submits its claims,  based on agreed upon specified  percentages
which can vary based on certain contractual criteria. The manufacturer contracts
provide  for  either  (i) a fixed  percentage  access  rebate or (ii) a baseline
rebate based on NMHC's initial claims and would be obligated to pay  incremental
rebates based on increases beyond the baseline.

     All, part, or none of the rebates received by NMHC from drug  manufacturers
or the  rebate  administrators  may be  remitted  to  certain  of our  sponsors,
depending upon the terms of our agreements with each sponsor. See Item 7 hereof.

Pharmacy Network

     NMHC  maintains  a pharmacy  network  that  includes  both  retail and mail
options.  Our agreements with many pharmacies do not require us to make payments
within a specified period.  However, we know from experience that timely payment
is a significant  consideration  of the  pharmacies.  NMHC  endeavors to process
claims  promptly  and obtain  funds from  sponsors  prior to making  payments to
participating  pharmacies,  but there can be no assurance that sponsors will pay
us in a timely fashion.  The loss of a substantial  portion of the pharmacies in
the  pharmacy  network  would have a material  adverse  effect on our  business,
operating results and financial condition. See Item 7 hereof.

     Retail  Pharmacy  Network   Management.   NMHC  maintains  a  comprehensive
multi-state network of participating pharmacies.  Both the retail and mail order
components of the pharmacy network,  including NMHC's own facility,  are managed
by our on-line claims management  system.  Certain of NMHC's sponsors require us
to maintain a pharmacy  network with specified  numbers of pharmacies in various
locations to serve plan  participants.  Our retail pharmacy  network consists of
over 53,000 pharmacies, with the result that cards issued by NMHC are recognized
in over 98.5% of pharmacies in the U.S.

Benefit Design Consultation

     NMHC 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.  Our staff  analyzes and provides  recommendations  to
sponsors  regarding  how to  improve  their  plan  performance  based  upon  the
sponsor's objectives. General areas of focus include:

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

     Once  a  plan  design  has  been  implemented,  the  clinical  and  account
management  staff monitors plan  performance for customer  satisfaction and cost
effectiveness, and may periodically recommend changes to the plan.

Drug Review and Analysis

     Our 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:

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

     NMHC   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.  Our  consulting  department
retrospectively  analyzes the drug utilization patterns of plan participants for
each  sponsor.  We may then  recommend  changes in the  sponsor's  plan  design,
preferred  drug  management,  and disease  information  systems  initiatives  to
contain costs or to better serve the plan participants.

Formulary Design and Disease Information Services

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

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

          - evaluates drugs for clinical  efficacy prior to cost  considerations
     for inclusion in a plan as a preferred drug;

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

          - provides recommendations on drug therapy and utilization;

          - evaluates drug review and analysis programs and criteria;

          - recommends  those drugs which require prior  authorization  from the
     sponsor; and

          - reviews the associated guidelines for those drugs' proper use

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

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

     Disease Information  Services.  Through its disease  information  services,
NMHC 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, NMHC:

        -    reviews and analyzes drugs prescribed and prescriptions dispensed;
        -    recommends plan guidelines; and
        -    conducts plan participant and physician profiling.

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

     Our 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,  we may provide the  recommended  drug and
treatment guidelines to sponsors, treating physicians and plan participants.  If
requested by the sponsor,  NMHC  monitors a  participant's  compliance  with the
recommended drug and treatment guidelines,  including  prescription usage. If it
appears,  based upon our analysis of the participant's claims history,  that the
recommended  drug and treatment  guidelines  are not being  applied,  we 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 our information
systems.

Data Access, Reporting and Information Analysis

     NMHC's on-line claims management  system enables us to efficiently  provide
sponsors with:

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

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

          -  Plan  performance  indicators  and  ad hoc  reporting  through  our
     proprietary decision support tool, known as INFO.

Physician Profiling

     NMHC 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.  We 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.

Health Information Management

     NMHC's health  information  management  services are delivered  through our
wholly-owned  subsidiary,  NMHC  Integrail,  operating out of Latham,  New York.
Acquired by us in November 2002, NMHC Integrail provides comprehensive strategic
services to analyze and predict outcomes for both medical and pharmacy data. The
focus of NMHC  Integrail's  offerings is to help  improve  quality of care while
managing pharmacy and medical costs.  NMHC Integrail's  services are provided to
payers and  sponsors,  such as managed care  organizations,  physician  hospital
organizations,  independent practice associations (IPAs), employer groups, third
party administrators, and Taft-Hartley trust funds.

     NMHC  Integrail's  work in the area of predictive  modeling has resulted in
the development of product and service offerings that enable clients to identify
future  healthcare risk and provide  solutions to better manage the clinical and
economic implications of the risk. These predictive modeling products allow NMHC
Integrail to recommend interventions as well as other services that will deliver
cost savings and future cost avoidance.

Mail Service Pharmacy

     Mail service  pharmacy 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  service  pharmacy,  the
sponsor  is  typically  charged  a lower  dispensing  fee and a lower  cost  for
prescription ingredients compared to those charged by a retail pharmacy.

     We opened our mail service  pharmacy,  NMHCmail,  operating out of Miramar,
Florida on July 1, 2003. Plan participants submit  prescriptions,  primarily for
maintenance medications,  to NMHCmail via mail. Refill requests may be submitted
via mail,  telephone,  fax or the  internet.  The  operations  of  NMHCmail  are
automated, featuring bar code and scanning technology to route and track orders,
computerized dispensing of medications and computer-generated mailing labels. To
ensure  quality  control  of the  dispensation  of  prescriptions,  NMHCmail  is
equipped  with  automated  quality  control  features and a licensed  pharmacist
inspects each prescription.

     Sponsors  using the mail service of Express  Pharmacy,  NMHC's primary mail
service vendor prior to operating its own mail service pharmacy, have nearly all
been transitioned to the mail pharmacy services of NMHCmail. Claims submitted by
mail service  pharmacies  are managed  using NMHC's  on-line  claims  management
system and are  subject  to the same  review and  verification  as those  claims
submitted by retail pharmacies.

     In addition, we dispense specialty pharmaceuticals from our Portland, Maine
facility.  For a discussion of our specialty pharmacy  business,  see "Specialty
Pharmacy."

Specialty Pharmacy

     NMHC's  specialty  pharmacy  program is delivered  through its wholly-owned
subsidiaries,  PRXA and PPRX,  both doing  business as NMHC Ascend.  NMHC Ascend
manages  high  cost  self-injected   medications  and  compounded  prescriptions
requiring  special  handling  for  some of its  sponsors  and for  Medicaid  and
Medicare  recipients.  Recently,  this  class of  medications  has become a more
significant  percentage  of our  sponsors'  pharmacy  budget.  This  growth is a
function  of  increased  utilization  as well as an  increase  in the  number of
available  treatment agents.  Diseases treated by specialty pharmacy  medication
include:  HIV/AIDS,  Hepatitis-C,   Multiple  Sclerosis,  Hemophilia,  Gaucher's
Disease,  Chronic Renal  Failure,  Infertility,  Rheumatoid  Arthritis,  Crohn's
Disease, Human Growth Hormone Deficiency,  Psoriasis,  Oncology, Transplant, and
Respiratory Syncytial Virus (RSV).

     The specialty  pharmacy services manage  utilization of these agents on two
levels:  first, at a macro level, by identifying trends in utilization patterns,
recommending  protocols based on nationally accepted guidelines,  and monitoring
compliance; second, on a micro level, by NMHC Ascend managing guidelines for its
patients to ensure appropriate dispensing and ongoing compliance.

     In addition,  NMHC aids sponsors in identifying  patients for its specialty
program either through medical claims information  provided by the sponsor or in
conjunction with existing drug profiles.  Once identified,  patients may receive
some, or all, of the following services:

        -      Delivery to a location of the patient's choice (home delivery or
               delivery to the patient's primary care physician or specialist);
        -      Educational materials about therapies and disease states;
        -      Drug and disease information services;
        -      Pharmacist hotline;
        -      Assignment of benefits; and
        -      Study protocols and financial assistance program information

     Along with providing the above services, NMHC Ascend has relationships with
biotech  and drug  manufacturers  to be a part of their  dispensing  network  of
pharmacies.

Sponsors

Agreement with Sponsors

     NMHC's sponsors are located throughout the United States.  Sponsors include
managed care organizations,  local governments,  unions, corporations, HMO's and
third party health care plan  administrators of prescription drug programs.  Our
sponsors  are  typically  asked  to sign a  standard  form of  pharmacy  benefit
management  agreement that governs our relationship with that sponsor.  Pursuant
to this  standard  agreement,  NMHC 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  access  unless we were  notified in writing or  electronically  of
ineligibility.  We are  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,  and
process claims. We are also obligated to furnish the sponsor with a semi-monthly
account  statement  which  includes a summary of claims  costs in the  preceding
period,  and a description of the drugs which are included and excluded from the
plan.

     Pursuant to the  standard  agreement,  the sponsor is  obligated to pay the
cost of claims to NMHC (less any cash advances paid) as semi-monthly  statements
are  received  by the  sponsor.  The  account  statement  will also  include  an
administrative amount due to us 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 NMHC.  We agree to  maintain  adequate  records for the sponsor to
determine its cost of drugs and the sponsor may review these records. While most
of our larger sponsors  negotiate other agreements with NMHC, many sponsors sign
the standard form or a modified version of the standard form. The specific terms
of  each  pharmacy  benefit  management   agreement,   including  any  incentive
arrangements,  are negotiated by NMHC on a case by case basis. While we 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, NMHC generally does not use set guidelines when determining these
terms. See Item 7 hereof.

     In October  1998,  NMHC  acquired  National  Medical  Health Card IPA, Inc.
("IPA") which is an independent practice association under the laws of New York.
NMHC acquired  PSCNY IPA, Inc.  ("PSCNY") as part of the Centrus  acquisition in
January  2002 (see  Recent  Acquisitions  and  Developments  above and Note 3 to
Consolidated  Financial Statements  comprising Item 8 hereof) and NMHC's IPA was
subsequently  dissolved.  PSCNY was used by  Centrus  to  contract  with  Health
Maintenance   Organizations  or  providers  containing  financial   risk-sharing
provisions, which represents some of Centrus' largest sponsors. PSCNY's name was
changed to National  Medical  Health Card IPA,  Inc. in September  2002.  IPA is
subject to the  regulatory  authority of the  Department of Health and the laws,
rules and  regulations  applicable to independent  practice  associations in New
York.

Significant Sponsors

     For the fiscal year ended June 30, 2005, MVP Health Plan, Inc.  ("MVP") was
the only sponsor that accounted for 10% or more of NMHC's total revenues.

     For the year ended June 30,  2005,  revenues  from MVP  represented  18% of
NMHC's  revenue.  The contract  between MVP and a subsidiary  of ours remains in
effect until December 31, 2005 and has been renewed for an additional year.

Company Operations

Sales and Marketing

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

     We  continue  to  make  significant  investments  in  sales  and  marketing
initiatives,  including the hiring of additional sales people. These efforts are
expected to yield  continuous  improvements to our  relationships  with existing
clients as well as to create access to new customers in major marketing areas.

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

Information Systems

     Information  Systems  play a critical  role in our  business.  Our  on-line
claims  management  system  depends  in large  part on  software  licensed  from
unaffiliated  third parties.  By license  agreements dated February 18, 1998 and
November 1, 1995, NMHC and PCN,  respectively,  were granted  non-exclusive  and
non-transferable  perpetual  licenses to use these  unaffiliated  third parties'
claims adjudication software systems. See "Management's  Discussion and Analysis
of  Financial  Condition  and Results of  Operations  --  Liquidity  and Capital
Resources" in Item 7 hereof.

     We maintain  extensive  preventative  measures to protect against disaster,
including redundancy in processing, telecommunications and power sources.

     Our employees  provide the required services to maintain and enhance NMHC's
information  systems   infrastructure.   Occasionally,   outside,   unaffiliated
consultants  are retained for additional  expertise.  Historically,  we received
data processing services and technology  infrastructure consulting services from
Sandata  Technologies,  Inc.  and its  subsidiaries  ("Sandata").  Sandata  is a
private company of which Bert E. Brodsky, NMHC's former Chairman and director of
the Board, is also Chairman, CEO, Treasurer and principal stockholder.  NMHC has
evaluated the services  that Sandata has  performed for it in the past,  and has
brought those services in-house by hiring employees with the needed skills. This
has virtually eliminated our expenses payable to Sandata.

Suppliers

     In July 2003,  NMHCmail  entered into a 42 month agreement with a wholesale
distributor,  AmerisourceBergen,  to be the primary supplier of  pharmaceuticals
for its mail service  operations.  We are currently  negotiating  other supplier
contracts as well. We believe that our supplier arrangements will be adequate to
fulfill  our  needs.  NMHC  Ascend  also  utilizes   AmerisourceBergen  for  its
purchases, as well as biotech firms for some of the newer drugs it provides.

Competition

     NMHC  competes with  numerous  companies  which provide the same or similar
services.  Some of our competitors  have been in existence for longer periods of
time and are better established than NMHC. Some of them also have broader public
recognition,  substantially greater financial and marketing resources than NMHC,
and more experienced management. In addition, some of our sponsors and potential
sponsors  may find it  desirable to perform for  themselves  those  services now
being  rendered  by NMHC.  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 NMHC.

     Our ability to attract and retain  sponsors is  substantially  dependent on
our capability to provide efficient and accurate claims management,  utilization
review  services and related  reporting,  auditing and consulting  services.  We
believe that the following factors help us successfully compete:

          - a  successful  record  of  delivering  lower  annual  costs  for our
            sponsors than national trends;

          - a  broad  base  of  experience  in the  information  technology  and
            pharmacy benefit management industries;

          - flexible  and  sophisticated  on-line  information  systems,  which
            integrate all of the data input, reporting,  analysis, and access
            functions provided by NMHC;

          - a focus on customer service; and

          - transparency to sponsors.

Employees

     As of September 6, 2005, NMHC and its  subsidiaries  had 484 employees.  Of
the 484 total employees,  479 are full-time and five are part-time employees. We
are not a party to any  collective  bargaining  agreement and NMHC considers its
relations with its employees to be satisfactory.

Risk Factors Affecting NMHC's Business

     We face intense competition in the pharmacy benefit management industry.

     We and  other  PBM  companies  compete  primarily  on the  basis of  price,
service,  reporting capabilities and clinical services. The PBM industry is very
competitive  and  dominated  by, in most  cases,  a few  large,  profitable  and
well-established  companies with  significantly  greater financial and marketing
resources,  purchasing power and other competitive advantages.  A limited number
of national  companies,  including PBM companies such as Medco Health  Solutions
Inc.,  Express Scripts Inc. and Caremark Rx Inc. have an aggregate  market share
of approximately 70% of prescription  volume.  Our competitors also include drug
retailers,    physician   practice   management    companies,    and   insurance
companies/health  maintenance organizations.  We may also experience competition
from new competitors in the future.  If we do not compete  effectively  with our
competitors, our business and results of operations may suffer.

     We rely on a limited number of key clients for a significant portion of our
revenues.  The loss of any of these  key  clients  as a  result  of  competitive
bidding for contracts,  consolidation  of clients or otherwise,  could adversely
affect our business, profitability and growth prospects.

     We depend on a limited  number of clients for a significant  portion of our
revenue.  Our top ten clients  generated  approximately  48%, and our top twenty
clients  generated  approximately  59%,  of the  claims  we  processed  in 2005,
although no single client accounted for greater than 20% of our revenues.

     Many of our clients put their contracts out for  competitive  bidding prior
to expiration. Competitive bidding requires costly and time-consuming efforts on
our behalf  and,  even after we have won such  bidding  processes,  we can incur
significant  expense in  proceedings  or litigation  contesting  the adequacy or
fairness of these bidding processes.  We could lose clients if they cancel their
agreements  with us, if we fail to win a competitive bid at the time of contract
renewal, if the financial condition of any of our clients deteriorates or if our
clients  are  acquired  by,  or  acquire,  companies  with  which we do not have
contracts.  Over the past several years,  self-funded employers,  TPAs and other
managed   care   companies   have   experienced    significant    consolidation.
Consolidations  by their very  nature  reduce the number of clients who may need
our services.  A client involved in a merger or acquisition by a company that is
not a client of ours may not renew,  and in some  instances may  terminate,  its
contract  with us. Our  clients  have been and may  continue  to be,  subject to
consolidation  pressures.  Our  business,  results of  operations  and financial
condition  could  be  adversely  affected  if we were to lose one or more of our
significant clients.

     Demands by our  clients for  enhanced  service  levels or possible  loss or
unfavorable  modification of contracts with our clients could negatively  affect
our profitability.

     As our clients face the continued rapid growth in prescription  drug costs,
they may demand additional services and enhanced service levels to help mitigate
the increase in spending. We operate in a very competitive PBM environment,  and
as a result,  we may not be able to increase  our fees to  compensate  for these
increased services which could negatively affect our profitability.

     Due to the term of our contracts  with clients,  if we are unable to extend
those contracts or replace any lost clients,  our future business and results of
operation would be adversely affected.

     We currently  provide PBM services to thousands of clients.  Our  contracts
with  clients  generally  do not have terms longer than three years and, in some
cases,  are  terminable  by the client on relatively  short  notice.  Our larger
clients  generally  seek  bids  from  other  PBM  providers  in  advance  of the
expiration of their contracts. In addition, we believe the managed care industry
is  undergoing  substantial  consolidation,  and  another  party that is not our
client  could  acquire  some of our  managed  care  clients.  In such case,  the
likelihood such client would renew its PBM contract with us could be reduced. If
several of these large clients elect not to extend their  relationship  with us,
and we are not successful in generating sales to replace the lost business,  our
future business and results of operations would be adversely affected.

     Our results of  operations  could  suffer if we lose our  pharmacy  network
affiliations.

     Our PBM operations are dependent to a significant  extent on our ability to
obtain  discounts on prescription  purchases from retail  pharmacies that can be
utilized by our clients and their members. Our contracts with retail pharmacies,
which are  non-exclusive,  are  generally  terminable  by either  party on short
notice.  If one or more of our top  pharmacy  chains  elects  to  terminate  its
relationship  with us or if we are only able to  continue  our  relationship  on
terms less favorable to us, access to retail pharmacies by our clients and their
health plan  members,  and our  business,  results of  operations  and financial
condition  could suffer.  In addition,  some large retail pharmacy chains either
own or have  strategic  alliances with PBMs or could attempt to acquire or enter
into these kinds of  relationships  in the future.  Ownership  of, or  alliances
with, PBMs by retail pharmacy chains,  particularly  large pharmacy chains which
together  control  over 45% of retail  pharmacy  business,  could have  material
adverse  effects  on  our  relationships  with  those  retail  pharmacy  chains,
particularly  the  discounts  they are  willing  to make  available,  and on our
business, results of operations and financial condition.

     We may be adversely  affected by the loss of our relationships  with one or
more key  pharmaceutical  manufacturers  or if rebate  payments we receive  from
pharmaceutical manufacturers decline.

     We receive rebates from numerous pharmaceutical  manufacturers based on the
use of selected  drugs by members of health plans  sponsored by our clients,  as
well as fees for other programs and services.  We believe our business,  results
of operations and financial condition may be adversely affected if:

          -  we  lose   relationships   with  one  or  more  key  pharmaceutical
     manufacturers;

          - rebates  decline due to the  failure of our health plan  sponsors to
     meet market share or other thresholds;

          - legal  restrictions  are  imposed on the  ability of  pharmaceutical
     manufacturers to offer rebates or purchase our programs or services; or

          - pharmaceutical manufacturers choose not to offer rebates or purchase
     our programs or services.

     Over the next few years,  as patents expire  covering many brand name drugs
that  currently  have  substantial  market  share,   generic  products  will  be
introduced  that may  substantially  reduce the market share of these brand name
drugs.  Historically,  manufacturers of generic drugs have not offered formulary
rebates on their drugs. Our profitability could be adversely affected if the use
of newly approved,  brand name drugs added to  formularies,  does not offset any
decline in use of brand name drugs whose patents expire.

     We may not be able to effectively manage our growth.

     Our growth in operations has placed  significant  demands on our management
and other resources, which is likely to continue. Our business has grown rapidly
since 2000, in part due to  acquisitions,  with total annual revenue  increasing
from $167.7 million in 2000 to $800.6 million in 2005. Our business  strategy is
to  continue  to seek to  expand  our  operations,  including  through  possible
acquisitions.  We have acquired seven companies in the last six years. If we are
unable to finance our continued growth or manage our future expansion,  then our
business and results of operations could be adversely affected.

     Our success depends on our ability to retain our senior  management and key
personnel.

     Our success  depends,  in part,  upon the continuing  contributions  of our
senior   management   and  key  employees,   in  particular,   those  that  have
long-standing  relationships with the PBM industry, which we depend on to obtain
new  clients.  Our  acquisition  of PCN in March 2005 gave us a presence  in the
California  marketplace as well as in the managed Medicaid market,  which we did
not previously have. Accordingly,  it is important for us to retain our existing
management  and to  attract,  hire and  retain  additional  highly  skilled  and
motivated officers,  managers and employees.  Therefore,  losing the services of
one or  more  members  of our  senior  management  or our  key  employees  could
adversely affect our business and results of operations.

     Our success depends on our ability to manage  potential  problems and risks
related to future acquisitions.

     Part of our growth  strategy  includes  making  acquisitions  involving new
markets and complementary products,  services,  technologies and businesses. Our
ability to continue to expand successfully  through acquisitions depends on many
factors,  including our ability to identify acquisition  prospects and negotiate
and close transactions. Even if we complete future acquisitions:

          - we could fail to successfully integrate the operations, services and
     products of an acquired company;

          - there could be  inconsistencies in standards,  controls,  procedures
     and policies among the companies being combined or assimilated  which would
     make it more difficult to implement and harmonize  company-wide  financial,
     accounting, billing, information technology and other systems;

          - we may experience  difficulties  maintaining the quality of products
     and services that acquired companies have historically  provided;  we would
     be required to amortize the identifiable  intangible  assets of an acquired
     business,  which  will  reduce our net  income in the years  following  its
     acquisition,  and we also  would be  required  to reduce  our net income in
     future years if we were to  experience  an  impairment of goodwill or other
     intangible assets attributable to an acquisition.

          - we  could  be  exposed  to  unanticipated  liabilities  of  acquired
     businesses;

          - our  management's  attention  could be diverted from other  business
     concerns; and

          - we could lose key employees or customers of the acquired business.

     In March 2005, we acquired PCN,  which we are in the process of integrating
into our business  operations.  There are risks  associated with integrating and
operating  newly  acquired  businesses.  We can give no  assurance  that we will
successfully  operate  this new  business  in the  future.  If we are  unable to
overcome the  potential  problems and inherent  risks  related to our recent and
future acquisitions, our business, results of operations and financial condition
could suffer.

     We may be liable for damages and other expenses that are not covered by our
insurance policies.

     Various  aspects of our business may subject us to litigation and liability
for damages,  for example,  the performance of PBM services and the operation of
our mail service and specialty pharmacies.  A successful product or professional
liability claim in excess of our insurance coverage where we are required to pay
damages,  incur legal  costs or face  negative  publicity  could have a material
adverse effect on our business,  results of operations and financial  condition,
our business  reputation and our ability to attract and retain clients,  network
pharmacies,  and employees. While we intend to maintain professional and general
liability  insurance coverage at all times, we cannot provide assurances that we
will be  able to  maintain  insurance  in the  future,  that  insurance  will be
available on acceptable terms or that insurance will be adequate to cover any or
all potential product or professional liability claims.

     We rely on third  parties  for our  point of sale  information  system  and
transaction  processing  system,  and any  disruption  in these  services  could
materially disrupt our business and results of operations.

     Our  operations  utilize an  electronic  network  connecting  approximately
53,000 retail pharmacies to process  third-party claims. This system is provided
by a third-party  adjudication  vendor.  Because claims are  adjudicated in real
time, systems availability and reliability are key to meeting customers' service
expectations.  We are also in the process of  transitioning to a new third-party
adjudication  vendor.  Any  interruption  in real time service,  either  through
systems availability or telecommunications  disruptions can significantly damage
the quality of service we provide.  Our PBM services also depend on  third-party
proprietary software to perform automated transaction  processing.  There can be
no assurance that our business and results of operations  will not be materially
harmed by service interruptions or software performance problems.

     Failure of our health  plan  clients  to pay for  prescription  claims or a
delay in payment of those  claims  could have a material  adverse  effect on our
profitability.

     Our  contracts  with retail  pharmacies  which  participate  in our network
generally  obligate us to make payments for  prescription  claims even if we are
not reimbursed by our clients. If our clients delay their reimbursement payments
or fail to make  payments  for  prescription  claims,  it could  have a material
adverse effect on our profitability.

     We could suffer civil and/or criminal penalties,  lose clients, be required
to pay substantial  damages or make significant  changes to our operations if we
fail to comply with complex and rapidly evolving laws and regulations.

     During the past  several  years,  the U.S.  health care  industry  has been
subject to an increase in governmental  regulation at both the federal and state
levels.  Numerous state and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily limited to:

          - health  care fraud and abuse laws and  regulations,  which  prohibit
     certain  types of payments  and  referrals  as well as false claims made in
     connection with health benefit programs;

          - privacy and  confidentiality  laws and regulations,  including those
     under HIPAA;

          - ERISA and  related  regulations,  which  regulate  many  health care
     plans;

          - potential  regulation  of the PBM industry by the U.S. Food and Drug
     Administration;

          - the Medicare prescription drug coverage law;

          - consumer  protection and unfair trade practice laws and regulations;

          -  various  licensure  laws,  such as  managed  care and  third  party
     administrator licensure laws;

          - pharmacy laws and regulations;

          - antitrust lawsuits challenging PBM pricing practices;

          - state  legislation  regulating PBMs or imposing  fiduciary status on
     PBMs;

          - drug pricing  legislation,  including  "most favored nation" pricing
     and "unitary pricing" legislation;

          - other Medicare and Medicaid reimbursement regulations;

          - pending legislation  regarding importation of drug products into the
     United States;

          - legislation imposing benefit plan design  restrictions,  which limit
     how our clients can design their drug benefit plans;

          - network pharmacy access laws,  including "any willing  provider" and
     "due  process"  legislation,  that affect  aspects of our pharmacy  network
     contracts; and

          - formulary development and disclosure laws.

     These and other  regulatory  matters are  discussed  in more  detail  under
"Business -- Government Regulation" below.

     If  we  fail  to  comply  with  existing  or  future  applicable  laws  and
regulations,  we  could  suffer  civil or  criminal  penalties.  We must  devote
significant  operational and managerial  resources to comply with these laws and
regulations.  Although  we  believe  that  we  are  operating  our  business  in
substantial  compliance  with all existing  legal  requirements  material to our
business,  different  interpretations and enforcement policies of these laws and
regulations could subject our current practices to allegations of impropriety or
illegality,  or could require us to make significant  changes to our operations.
In addition,  we cannot predict the impact of future  legislation and regulatory
changes on our business or assure you that we will be able to obtain or maintain
the regulatory approvals required to operate our business.

     Government  efforts  to reduce  health  care  costs and alter  health  care
financing  practices  could lead to a  decreased  demand for our  services or to
reduced rebates from manufacturers.

     Efforts to control health care costs,  including  prescription  drug costs,
are  underway  at the  federal  and state  government  levels.  Congress is also
currently  considering  proposals to reform the U.S.  health care system.  These
proposals may increase governmental  involvement in health care and PBM services
and may  otherwise  change the way our  clients do  business.  Our  clients  and
prospective clients may react to these proposals and the uncertainty surrounding
them  by  cutting  back or  delaying  the  purchase  of our  PBM  services,  and
manufacturers  may react by  reducing  rebates or  reducing  supplies of certain
products.  These proposals could lead to a decreased  demand for our services or
to reduced rebates from manufacturers.

     In addition,  both Congress and state legislatures are expected to consider
legislation to increase  governmental  regulation of managed care plans. Some of
these  initiatives  would,   among  other  things,   require  that  health  plan
participants have greater access to drugs not included on a plan's formulary and
give  health  plan  participants  the  right  to  sue  their  health  plans  for
malpractice  when they have been  denied  care.  The scope of the  managed  care
reform  proposals under  consideration  by Congress and state  legislatures  and
enacted  by states to date vary  greatly,  and we cannot  predict  the extent of
future legislation.  However, these initiatives could greatly limit our business
practices and impair our ability to serve our clients.

     The  Medicare  Modernization  Act  (MMA)  creates  a  voluntary  outpatient
prescription  drug benefit,  which will provide both new risks and opportunities
for PBMs to participate in the Medicare program.

     There are many  uncertainties  presented by the MMA,  which  influenced our
decision  not to apply to become a  prescription  drug plan  (PDP)  sponsor  for
January 1, 2006.  We may consider  bidding to become  either a PDP or a fallback
plan in one or more regions for the outpatient  prescription drug benefit in the
future. Possible effects of the MMA include:

          - New  opportunities  for PBMs  created by MMA may bring new  entrants
     into  the  PBM  industry,  thereby  increasing  competition  and  impacting
     profitability;

          - The implicit role PBMs will play in the outpatient prescription drug
     benefit program will increase governmental scrutiny on the industry;

          - PDPs will be risk-bearing entities, paid on a capitated basis, which
     may impact profitability; and

          - If we apply and are chosen as a PDP,  this will be the first time we
     are a direct contractor to the federal government and subject to the rules,
     regulations  and enforcement  authority of the federal  government over its
     contractors.

     There are many  uncertainties  about the financial and regulatory  risks of
participating  in the Medicare  prescription  drug  program,  and we can give no
assurance  that  these  risks will not be  material  to our  business  in future
periods.

     Failure to  develop  new  products,  services  and  delivery  channels  may
adversely affect our business.

     We operate in a highly competitive environment. We develop new products and
services  from time to time to assist our  clients in  managing  their  pharmacy
benefit. If we are unsuccessful in developing  innovative products and services,
our ability to attract new clients and retain existing clients may suffer.

     Technology is also an important  component of our business,  as we continue
to utilize new and better  channels,  such as the Internet,  to communicate  and
interact with our clients, members and business partners. If our competitors are
more successful than us in employing this technology, our ability to attract new
clients, retain existing clients and operate efficiently may suffer.

     Our leverage and debt service  obligations  could impede our operations and
flexibility.

     As of June 30, 2005, we had consolidated debt of approximately $1.9 million
and our debt as a percentage  of equity was 2%. In January 2005, we negotiated a
$65 million credit facility with a syndicate of commercial banks led by JPMorgan
("JPMorgan  credit  facility").  We could have substantial  interest expense and
future repayment obligations.

     Our level of debt and the limitations  imposed on us by our debt agreements
could have important consequences, including the following:

          - we will have to use a portion of our cash flow from  operations  for
     debt service rather than for our operations;

          - we may from time to time  incur  additional  indebtedness  under our
     JPMorgan  credit  facility,  which is subject to a variable  interest rate,
     making us vulnerable to increases in interest rates;

          - we could be less  able to take  advantage  of  significant  business
     opportunities,  such as acquisition opportunities,  and react to changes in
     market or industry conditions;

          - we could be more vulnerable to general adverse economic and industry
     conditions; and

          - we may be disadvantaged compared to competitors with less leverage.

     Furthermore,  our ability to satisfy our  obligations,  including  our debt
service  requirements,  will be dependent upon our future  performance.  Factors
which  could  affect  our  future  performance   include,   without  limitation,
prevailing economic conditions and financial,  business and other factors,  many
of which are beyond our control  and which  affect our  consolidated  results of
operations,  consolidated  financial position and/or consolidated cash flow from
operations.

     Our JPMorgan credit facility is secured by our consolidated  assets.  If we
are unable to meet our  obligations  under the JPMorgan credit  facility,  these
creditors  could exercise their rights as secured parties and take possession of
our assets. This would materially  adversely affect our consolidated  results of
operations and consolidated financial condition.

     Risks related to bioterrorism and mail tampering,  and mail irradiation and
other  procedures  the  government  may  implement to manage these risks,  could
adversely affect and limit the growth of our mail service business.

     Many prescription drugs are delivered directly to our consumers through the
mail. In  particular,  our mail service  pharmacies  send thousands of parcels a
week  through  the U.S.  Postal  Service  and  other  couriers.  A number of our
contracts also require us to deliver prescriptions within a designated period of
time on average following receipt of an order. We have no control, however, over
delays  caused  by  disruptions  to the  U.S.  mail or other  courier  services.
Moreover, should the risks related to bioterrorism or mail tampering increase or
mail  service  experience  interruptions  or  significant  delays,  we may  have
difficulty satisfying our contractual  performance obligations and consumers may
lose confidence in our mail service pharmacies.

     Additionally, the use of mail irradiation devices, if implemented, could be
harmful to pharmaceutical products shipped via the mail. We understand that this
technology is not in general use and the U.S.  Postal  Service has not announced
plans to use irradiation screening on prescription  medicines.  However,  should
the federal government implement mail irradiation technology to protect national
security due to the risks of bioterrorism  via the mail or for other  unforeseen
reasons,  safe and reliable delivery of prescription  drugs through the mail may
be difficult. If any of these events occur, we could be forced to temporarily or
permanently  discontinue  our  mail  service  operations  and we  would  lose an
important competitive advantage.

     Any disruption of or failure in our automated mail service  pharmacy or our
data center  could  significantly  reduce our  ability to process  and  dispense
prescriptions and provide products and services to our clients.

     Our  automated  pharmacy  and mail  service  delivery  system is located in
Miramar,  Florida.  Our main data center,  located in Port Washington,  provides
primary  support for all  applications  and systems  required  for our  business
operations, including our claims processing, billing, and communications.  These
facilities depend on the  infrastructure in the areas where they are located and
on the uninterrupted  operation of our computerized  dispensing  systems and our
electronic  data  processing  systems.  Significant  disruptions at any of these
facilities  due to failure of our  technology or any other failure or disruption
to  these  systems  or to the  infrastructure  due to fire,  electrical  outage,
natural  disaster,  acts of  terrorism  or some other  catastrophic  event could
reduce our ability to process and dispense  prescriptions  and provide  products
and services to our clients.

Government Regulation

     The  activities  of PBMs  such as NMHC are  subject  to  regulation  at the
federal and state  levels.  NMHC  believes  that its  operations,  as  currently
conducted,  substantially  comply with the laws and regulations  material to the
operation of its business.  However, the application of complex standards to the
detailed operations of our business creates areas of uncertainty.

     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. There can be no assurance
that NMHC 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.  To date,  our 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.

     Moreover,  the states  and  federal  government  continue  to  propose  new
legislation  that  may,  if  enacted,  have a  material  adverse  effect  on our
business, profitability or growth prospects. A more detailed analysis of certain
laws and regulations and proposed legislation affecting the business, operations
and relationships of NMHC is set forth below.

Anti-Kickback Statutes

     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  federally
funded health care program, including Medicare, Medicaid and the Civilian Health
and Medical Program of the Uniformed Services,  "CHAMPUS/Tricare,".  Regulations
have been adopted  under the Federal  Anti-Kickback  Statute  which provide safe
harbors for certain  remuneration  arrangements that might otherwise violate the
statute,  such  as  properly  reported  discounts  (including  certain  rebates)
received from vendors and properly  disclosed  payments made by vendors to group
purchasing  organizations.  The  failure to fall  within a safe  harbor does not
automatically  mean that an arrangement  is unlawful,  although it may result in
heightened scrutiny or challenge.  Many states,  including several in which NMHC
does business,  have adopted laws similar in scope to the Federal  Anti-Kickback
Statute (sometimes  including similar safe harbors),  and these state laws often
are  applicable to services for which  payment may be made by anyone,  including
commercial  insurers and private pay  patients,  not just  payments made under a
federal health care program. Violation of these anti-kickback laws may result in
criminal and civil penalties as well as exclusion from the Medicare and Medicaid
programs.

     The Federal  Anti-Kickback  Statute  has been  broadly  interpreted  by the
courts,  the Office of Inspector General (the "OIG") of the Department of Health
and Human Services ("HHS"),  and pertinent  administrative  bodies.  Courts have
ruled that a  violation  of the  statute  exists even if only one purpose of the
remuneration  was to induce  patient  referrals or purchases.  Also, the OIG has
identified as possibly improper under the statute so-called "product conversion"
programs,  pursuant to which pharmaceutical  manufacturers provide incentives to
physicians  and  pharmacies  to  change  a  prescription  to a drug  made by the
pharmaceutical manufacturer, or recommend such a change. We are not aware of any
instance in which the  Anti-Kickback  Statute  has been  applied (i) to prohibit
independent PBMs, such as NMHC, from receiving  rebates from drug  manufacturers
based on drug sales by  pharmacies  to plan  participants,  or (ii) to  properly
structured contractual relationships between independent PBMs and their sponsors
and participating pharmacies.

     The Federal  Anti-Kickback  statute has also been cited as a partial  basis
for investigations and multi-state  settlements relating to financial incentives
provided by drug  manufacturers to retail  pharmacies in connection with product
conversion programs. Additionally,  certain governmental entities have commenced
investigations  of companies in the  pharmaceutical  services  industry and have
identified issues concerning  development of preferred drugs lists,  therapeutic
substitution  programs,  pricing of  pharmaceutical  products and discounts from
prescription  drug  manufacturers.  Several  pharmaceutical  manufacturers  have
entered  into  settlement  agreements  with the  federal  government  concerning
marketing and pricing practices. Further, at least one state has filed a lawsuit
concerning similar issues against a health plan.

     We  believe  that  NMHC is in  compliance  with the  Federal  Anti-Kickback
Statute and similar state laws and to date, NMHC has not been the subject of any
such suit or investigation. There can be no assurance, however, that we will not
be subject to challenge or a proceeding  under the  Anti-Kickback  Statute,  the
regulations  there  under or any  similar  state  laws.  Any such  challenge  or
proceeding  could have a material  adverse  effect on our  business,  results of
operations or financial  condition,  regardless of whether NMHC is found to have
violated such statutes or regulations.

     On April 28,  2003,  the OIG issued its  Compliance  Program  Guidance  for
Pharmaceutical  Manufacturers ("OIG Guidance") aimed at advising  pharmaceutical
manufacturers  on  how  to  establish   compliance  programs  that  will  ensure
compliance  with  state  and  federal  laws and  regulations.  The OIG  Guidance
encourages pharmaceutical  manufacturers to evaluate some areas of legal risk in
structuring  their  compliance  program,   including  the  relationship  between
pharmaceutical manufacturers and PBMs. In particular, the OIG Guidance describes
the  negotiation  of  discount  rebates  and  administration  fees,  as  well as
formulary support  activities,  as areas of potential legal risk.  Although NMHC
believes that its business practices and direct arrangements with pharmaceutical
manufacturers are in compliance with the OIG Guidance,  it cannot guarantee that
the  arrangements   between  its  third  party  rebate   administrator  and  the
pharmaceutical  manufacturers  are in  compliance  with  the  OIG  Guidance.  In
addition,  if the  industry  perceives  the OIG  Guidance  as leading to greater
scrutiny of PBMs,  pharmaceutical  manufacturers and sponsors, may seek to alter
rebate arrangements, which could adversely affect our profitability.

Stark Law

     The  federal  physician  self-referral  law,  known  as  the  "Stark  Law,"
prohibits  physicians  from  referring  Medicare or Medicaid  beneficiaries  for
"designated health services,"  including  outpatient  prescription drugs, to any
entity with which the  physician or an immediate  family member of the physician
has a financial  relationship.  The law also  prohibits  the entity  receiving a
prohibited  referral  from  presenting  a claim to Medicare or Medicaid  for the
designated health service furnished under the prohibited referral.  In addition,
the Stark Law contains certain statutory and regulatory exceptions for physician
referrals  and  physician  financial  relationships.  The Centers for Medicare &
Medicaid Services published final regulations under the Stark Law which provides
guidance  on  interpretation  of the scope  and  exceptions  of the  Stark  Law.
Possible  penalties  for  violation of the Stark Law include  denial of payment,
refund  of  amounts  collected  in  violation  of the  statute,  civil  monetary
penalties,  criminal penalties and Medicare and Medicaid program exclusion.  Our
specialty and mail service pharmacies  dispense certain outpatient  prescription
drugs that may be directly or indirectly  reimbursed by the Medicare or Medicaid
programs,  potentially  making  them  subject to the Stark  Law's  requirements.
However,  we do not believe that we receive any physician  referrals  that would
violate the Stark Law.

State Self-Referral Laws

     Our mail service and specialty  pharmacy  operations may also be subject to
state  statutes  and  regulations   that  prohibit   payments  for  referral  of
individuals  from or by  physicians  to  health  care  providers  with  whom the
physicians have a financial relationship.  These state laws and their exceptions
may vary from the federal Stark Law and vary  significantly from state to state.
Some of these  state  statutes  and  regulations  apply to  items  and  services
reimbursed by private payors.  Violation of these laws may result in prohibition
of payment  for items or  services  provided,  loss of  pharmacy  or health care
provider licenses,  fines and criminal  penalties.  State self-referral laws are
often vague, and, in many cases,  have not been widely  interpreted by courts or
regulatory agencies.  Nonetheless, NMHC believes it is in substantial compliance
with such laws.

Statutes Prohibiting False Claims and Fraudulent Billing Activities

     A range of federal and state civil and  criminal  laws target  false claims
and fraudulent billing activities.  One of the most significant of these laws is
the Federal False Claims Act, which imposes civil penalties for knowingly making
a false claim or the making of a false  record or  statement  in order to secure
reimbursement  from  a  government  sponsored  program,  such  as  Medicare  and
Medicaid.  A few federal  district  courts have recently  interpreted  the False
Claims  Act  as  applying  to  claims  for   reimbursement   that   violate  the
anti-kickback  statute  or federal  physician  self-referral  law under  certain
circumstances.  In recent years,  the federal  government  has launched  several
initiatives  aimed  at  uncovering   practices  that  violate  false  claims  or
fraudulent  billing laws.  Claims under these laws may be brought  either by the
government  or by  private  individuals  on behalf of the  government  through a
"whistleblower" action. Because such actions are filed under seal and may remain
secret for years,  there can be no  assurance  that  neither NMHC nor any of its
subsidiaries  are named in a  material  action.  The False  Claims Act and other
related or similar laws generally  provide for the imposition of civil penalties
and for treble damages,  resulting in the  possibility of substantial  financial
penalties  for small  billing  errors that are  replicated  in a large number of
claims as well as  potential  criminal  penalties.  The federal  government  has
entered into settlement  agreements with several companies in the pharmaceutical
services industry  following claims by the federal  government that such parties
violated the Federal False Claims Act by: (i)  improperly  marketing and pricing
drugs; (ii) overstating the average  wholesale prices of products;  (iii) paying
illegal  remuneration  to induce the  purchase of drugs;  and/or (iv) failing to
accurately  report "best price" under the Medicaid  program.  Nonetheless,  NMHC
believes it is in substantial compliance with such laws.

Regulations Regarding Privacy and Confidentiality

     The federal  government and most states regulate the  dissemination and use
of  personally  identifiable  health  information  about a patient.  Many of our
activities  involve the receipt,  use and  disclosure by us of protected  health
information  ("PHI"),  including disclosure of PHI to a patient's health benefit
plan. In addition,  we may use  de-identified  data for research and  analytical
purposes.

     In December 2000, HHS issued final  regulations  under the Health Insurance
Portability and  Accountability  Act of 1996 ("HIPAA")  regarding the privacy of
individually  identifiable  health information (the "Privacy Rule"). The Privacy
Rule, which became effective April 14, 2003,  imposes extensive  requirements on
the way in which covered entities and their business associates use and disclose
PHI. PBMs, in general,  are not considered  covered entities when performing PBM
services.  However, our clients are covered entities,  and are required to enter
into "business associate  agreements" with vendors, such as PBMs, that perform a
function or activity for the covered  entity that involves the use or disclosure
of PHI. The business associate  agreements mandated by the Privacy Rule create a
contractual  obligation for the PBM to perform its duties for the covered entity
in compliance  with the Privacy  Rule.  We have entered into business  associate
agreements as required by our clients. We are a "covered entity" with respect to
providing service through our mail service and specialty pharmacies, and we have
entered into  business  associate  agreements  with our vendors or other parties
with  which we share  PHI and have  provided  Notice  of  Privacy  Practices  to
individuals  describing  how the relevant  pharmacy  uses and  discloses PHI for
treatment,  payment  and  healthcare  operations.  We  believe  that  we  are in
substantial   compliance   with  our  business   associate  and  covered  entity
obligations.

     In August 2000, HHS issued final  regulations  under HIPAA on standards for
electronic  transactions  and code sets to be used by health  plans,  healthcare
providers, and healthcare clearinghouses in those transactions (the "Transaction
Standards  and Code  Sets"),  with a compliance  date of October 16,  2003.  The
Transaction Standards and Code Sets adopt national,  uniform standards that must
be used if a  healthcare  provider or health plan  conducts  certain  electronic
transactions with another healthcare  provider or health plan. These regulations
also  mandate  the use of  certain  code sets in  connection  with the  standard
transactions.  NMHC has made the necessary  arrangements  to provide  electronic
transactions that are in compliance with these regulations.

     In April 2003, HHS also issued final  regulations under HIPAA governing the
security of electronic  PHI, with an initial  compliance  date of April 20, 2005
(the "Security Rule"). The Security Rule imposes general  requirements on health
care  providers,  health plans,  healthcare  clearinghouses,  and their business
associates relating to the storage,  utilization, and transmission of electronic
PHI.  To  date,   NMHC   believes   that  it  has   implemented   the  necessary
administrative, physical and technical safeguards to protect the confidentiality
of electronic PHI.

     Sanctions  for  failing to comply  with HIPAA  standards  and  requirements
include civil sanctions and criminal penalties for certain violations.

     In addition to the federal health information privacy regulations described
above,  most states have enacted  healthcare  information  confidentiality  laws
which limit the  disclosure  of health  related  confidential  information.  The
Privacy  Rule  under  HIPAA  does  not  preempt  state  laws  regarding   health
information privacy that are more restrictive than HIPAA.

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

     To date, no additional privacy legislation has been enacted that materially
restricts our ability to provide our services;  however, it is possible that new
laws  or  regulations  further  restricting  the  dissemination  or use of  such
information  could be adopted,  or that  existing laws and  regulations  will be
interpreted  in such a manner as to further  restrict  our ability to obtain and
use information about our plan  participants.  Such new laws or  interpretations
could have a material  adverse effect on our business,  results of operations or
financial condition.

ERISA

     NMHC provides services to a number of sponsors which are self-funded health
plans. These plans are subject to the Employee Retirement Income Security Act of
1974, or ERISA, which imposes certain obligations on those deemed fiduciaries of
the health plans. NMHC administers  pharmacy benefit plans according to the plan
design  choices made by the health plan sponsor.  We believe that our activities
are   sufficiently   limited  that  we  do  not  assume  any  of  the  fiduciary
responsibilities  of the sponsor and thus would not be  regulated as a fiduciary
under ERISA. In addition,  our current form agreement with sponsors specifically
identifies the scope of our services and provides that we are not a fiduciary of
the plan. Although courts have declined to extend ERISA fiduciary obligations to
managed care  companies,  there can be no assurance that the U.S.  Department of
Labor (which enforces ERISA) or a court will not assert that NMHC (or some other
PBM) has a fiduciary  obligation in connection  with our activities on behalf of
our  self-funded  sponsors.  If NMHC  is  deemed  to be a  fiduciary,  we  could
potentially  be  subject  to claims  regarding  benefit  denials  and  breach of
fiduciary duties in connection with our provision of services.  Several lawsuits
have currently been filed against other PBMs,  alleging that the relevant PBM is
a fiduciary under ERISA and is in breach of its fiduciary obligations.  To date,
one has settled and the others remain outstanding.

     On May 25, 2004, the U.S.  District Court for the Southern  District of New
York accepted a class action settlement proposed by Medco Health Solutions, Inc.
in a lawsuit that alleged that Medco was a functional  fiduciary under ERISA and
violated  its  fiduciary  obligations  by, among other  things,  failing to make
adequate disclosures regarding certain rebates from pharmaceutical manufacturers
and steering clients toward more expensive  pharmaceuticals  with higher rebates
benefiting Medco and its parent company at the time, Merck & Co., Inc.  Pursuant
to the  settlement,  Medco will pay $42.5  million into a settlement  fund to be
distributed to plan participants. In addition, Medco will implement and continue
certain  business  practices aimed at increasing  transparency  around formulary
decisions  and  therapeutic  interchanges.  Medco  has  not  admitted,  and  the
settlement  does not  require  Medco to admit,  any  wrongdoing  under  ERISA or
otherwise.

     On July 26, 2004,  private litigants filed suit against  Caremark,  Inc. in
the U.S.  District  Court for the Middle  District of  Tennessee  alleging  that
Caremark,  Inc. was a fiduciary  under ERISA and  violated  its ERISA  fiduciary
duties by, among other  things,  failing to disclose the existence and extent of
manufacturer  rebates,  concealing  the  "spread"  on  pharmacy  claims  to  the
detriment of ERISA plans and conspiring  with  pharmaceutical  manufacturers  to
inflate AWP.

     In addition to the cases discussed above, numerous other lawsuits have been
filed against various PBMs by private  litigants,  whether a Plan participant on
behalf of an ERISA plan or by the ERISA Plan sponsor, alleging that the PBMs are
ERISA  fiduciaries  and that, in such capacity,  they  allegedly  violated ERISA
fiduciary duties in connection with certain business  practices related to their
respective  contracts  with  retail  pharmacy  networks  and/or   pharmaceutical
manufacturers.

     In addition to its fiduciary  provisions,  ERISA imposes civil and criminal
liability  on service  providers to health  plans and certain  other  persons if
certain forms of illegal remuneration are made or received.  These provisions of
ERISA are similar, but not identical,  to the healthcare  anti-kickback statutes
discussed  elsewhere  in this  Government  Regulation  section,  and they do not
contain the statutory and regulatory "safe harbor" exceptions  included in other
healthcare  statutes.  These  provisions  of ERISA are broadly  written,  and we
cannot be certain of the extent to which they could be deemed  applicable to the
conduct of our business.

     Effective  January 2004,  the  Department of Labor issued claims  procedure
regulations  ("Claims Rules") that create standards  applicable to sponsors that
are regulated  under ERISA for initial and appeal level  decisions,  time frames
for decision  making,  and enhanced  disclosure  rights for claimants.  NMHC has
implemented  and will  continue  to  implement  in the  future,  changes  to its
operational  processes,  as necessary to  accommodate  its sponsors'  compliance
needs under the Claims Rules.

FDA Regulation

     The United States Food and Drug  Administration  (the "FDA")  generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf" of a pharmaceutical  manufacturer.  In January 1998, the FDA published a
Notice and Draft Guidance for Industry  regarding its intent to regulate certain
drug promotion and therapeutic  substitution  activities  performed by PBMs that
are controlled, directly or indirectly by pharmaceutical manufacturers.  The FDA
was  concerned  that  pharmaceutical  manufacturers  might  attempt to avoid FDA
regulation in connection  with the promotion of their drugs by utilizing PBMs to
conduct the marketing activity.  The FDA effectively withdrew the draft guidance
in the  fall of  1998.  NMHC is not  owned  or  controlled  by a  pharmaceutical
manufacturer, but it does have contractual relationships with them. Although the
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
the business of PBMs in the future,  which could materially adversely affect our
operations.

Medicare Prescription Drug Benefits Reforms

     The Medicare  Prescription  Drug,  Improvement,  and Modernization Act (the
"MMA"),  which was enacted in 2003,  creates a new voluntary  prescription  drug
benefit under the Social Security Act ("Medicare Drug Benefit").

     The MMA initially established a transitional  voluntary,  Medicare-endorsed
prescription drug discount card program ("Medicare Card Program"),  effective as
of June 1, 2004,  which is to remain in place until  completion of enrollment in
the  Medicare  Drug  Benefit  in 2006.  PBMs are  playing a central  role in the
Medicare Card Program,  either through direct sponsor contracts with The Centers
for Medicare and Medicaid Services ("CMS") or indirectly as a subcontractor with
an endorsed  sponsor of the  Medicare  Card  Program.  NMHC has  entered  into a
contract  with  MemberHealth,  Inc., an endorsed  sponsor,  for the provision of
rebate  administration  services to enrollees in  MemberHealth's  card  program.
Specifically,   NMHC   negotiates  and  enters  into  rebate   agreements   with
pharmaceutical manufacturers and collects rebates on behalf of the enrollees. In
return, we receive an administrative fee for our services.

     Beginning in January  2006,  Medicare  beneficiaries  entitled to Part A or
enrolled  in  Part  B, as well as  certain  other  Medicare  enrollees,  will be
eligible for outpatient prescription drug benefits under the MMA ("Medicare Part
D"). On January 21, 2005,  CMS issued final rules  implementing  the portions of
the MMA relating to the  prescription  drug plans (PDP). The MMA imposes various
requirements  on PDP  sponsors  and  Medicare  Advantage  plans  that offer drug
coverage,  including  requirements  relating to the  prescription  drug benefits
offered,  the disclosure of negotiated price  concessions made available by drug
manufacturers,  pharmacy  access  and  participation,  and the  development  and
application  of  formularies.  To the extent  that we serve as a PDP  sponsor or
provide  services to PDP  sponsors  and  Medicare  Advantage  plans,  we will be
required  to  comply  with  the  applicable   provisions  of  the  MMA  and  CMS
regulations.  Although we are continuing to assess the impact that Medicare Part
D will have on our sponsors'  decisions to continue to offer a prescription drug
benefit to their Medicare-eligible  members, our sponsors will have a variety of
options to consider for providing drug coverage to their retirees.  We intend to
assist  our  sponsors  in making  an  informative  decision  on the type of drug
coverage they will provide to their retirees.  In doing so, we intend to support
our sponsors  through  their  Medicare  Advantage  programs and to support other
sponsors  who are  applying  to be a  Medicare  Part D sponsor by serving as the
pharmacy benefit manager using CMS-approved tools and infrastructure,  assisting
employer sponsors in continuing to offer a traditional retiree prescription drug
benefit  that  qualifies  for the  federal  subsidy,  and  offering  alternative
approaches  for  employers  to save  under  the MMA.  In all  cases,  we will be
required to comply with the  extensive,  detailed  requirements  of the Medicare
laws and  regulations  which could have a significant  impact on our operations,
products and services.

Consumer Protection Laws

     The federal  government and most states have consumer  protection laws that
have been the basis for investigations and multi-state  settlements  relating to
financial  incentives provided by drug manufacturers to pharmacies in connection
with drug switching  programs.  In addition,  most states have enacted  consumer
protection  laws  relating to a broad range of managed  health care  activities,
including provider  contracting,  participant appeals and access to services and
supplies.  Although we believe we are compliant with consumer  protection  laws,
there can be no assurance that our  operations  will not be subject to challenge
or scrutiny under one or more state laws.

Regulations Applicable to Health Care Professionals

     All states regulate the practice of medicine,  nursing,  and other licensed
health  professions.  To our knowledge,  no PBM has been found to be engaging in
the practice of medicine or nursing by reason of its health management services.
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.  NMHC cannot  assure that a  regulatory  authority  in a state in which it
engages in PBM services  would not assert a contrary  position and subject it to
sanctions for the unauthorized practice of medicine,  nursing, or other licensed
health profession.

Third Party Administrator, Utilization Review Laws
   and Preferred Provider Organizations

     Many states have licensure or registration laws regulating certain types of
managed care  organizations,  including,  third party  administrators  ("TPAs"),
companies  that provide  utilization  review  services,  and preferred  provider
organizations  ("PPOs").  These  laws  differ  from  state to  state,  and their
application  to PBMs is often  unclear.  We have  registered  or are applying to
become  registered  in  those  states  in  which  we have  concluded  that  such
registration or licensure is required.  Registration and licensure  requirements
for  PBM  activities  vary  from  state  to  state  depending  on  state  agency
interpretations.  Prior to September 1998,  however, we conducted our activities
without obtaining any TPA, utilization review or PPO licenses. We may be subject
to cease and desist orders, fines and other penalties in a particular state if a
state agency changes its interpretation of licensure  requirements or if a state
agency determines that we were non-compliant  prior to the time we were required
to obtain a license. There can be no assurance that such an adverse finding by a
state agency would not have a material  adverse effect on our business,  results
of operations or financial condition.

Mail Service Pharmacy Regulation

     NMHC's mail  service and  specialty  pharmacies,  NMHCmail and NMHC Ascend,
respectively,  distribute drugs  throughout the United States.  Our mail service
fulfillment  center is located in Florida and our specialty  pharmacy is located
in Maine.  NMHCmail  and NMHC Ascend are each  licensed  to do  business  and to
deliver  controlled  substances in its respective state. Some of the states into
which  NMHCmail and NMHC Ascend deliver  pharmaceuticals  have laws that require
out-of-state  mail service  pharmacies to register  with, or be licensed by, the
board of pharmacy  or similar  regulatory  body in such state,  in order to mail
drugs into that state.  NMHCmail and NMHC Ascend have each  registered or are in
the process of registering  in every state that, to its knowledge  requires such
registration.  Some of these  states  also  require  out-of-state  mail  service
pharmacies to comply with certain pharmacy laws and regulations of their states,
as well as to employ a  pharmacist  licensed in the state to which the drugs are
shipped.  We believe that NMHCmail and NMHC Ascend are currently in  substantial
compliance  with state  laws and  regulations  that apply to their mail  service
pharmacy  operations.  In addition,  we believe that all of NMHCmail's  and NMHC
Ascend's  applications  for state  registration  or licensure  will be submitted
prior to the delivery of  pharmaceuticals  into a particular  state,  but cannot
guarantee  that we will obtain all of the required  state licenses prior to such
date.

     NMHCmail  dispenses  prescription  drugs  for  refills  pursuant  to orders
received through the internet from plan participants. Accordingly, NMHCmail will
be subject to certain  federal  and state  laws  affecting  on-line  pharmacies.
Several states have proposed  legislation to regulate  on-line  pharmacies,  and
federal  regulation by the FDA or other federal agency of on-line pharmacies has
been proposed.  NMHCmail's  pharmacy  operations  could be materially  adversely
affected if such  legislation  is enacted and restricts our ability to offer our
services.

     Other  statutes  and  regulations  may  affect the  operations  of the mail
service  pharmacies.  For example,  the Federal Trade  Commission  requires mail
service sellers of goods generally to engage in truthful advertising, to stock a
reasonable  supply of the products  sold, to fill mail service  orders within 30
days and to provide  clients  with refunds when  appropriate.  In addition,  the
United States Postal  Service  ("USPS") has statutory  authority to restrict the
delivery of drugs and medicines through the mail. However, to date, the USPS has
not imposed any such restriction  that would affect the mail service  operations
of NMHC.

     There  are also  regulations  governing  the  repacking  of drug  products,
wholesale  distribution,  dispensing  of  controlled  substances,  medical waste
disposal and clinical  trials.  In addition,  federal  statutes and  regulations
govern the labeling,  packaging,  advertising  and  adulteration of prescription
drugs and the  dispensing  of controlled  substances.  We believe that we are in
substantial  compliance with all such rules and  regulations  affecting our mail
service and specialty pharmacy operations.

Antitrust

     Numerous  lawsuits  have been  filed  throughout  the United  States  under
various  state and federal  antitrust  laws by retail  pharmacies  against  drug
manufacturers,  wholesalers  and major  PBMs,  challenging  certain  brand  drug
pricing  practices.  An adverse  outcome in any of these  lawsuits could require
defendant  drug  manufacturers  to  provide  the  same  types  of  discounts  on
pharmaceuticals  to retail  pharmacies and buying groups as are provided to PBMs
and  managed  care  entities to the extent that their  respective  abilities  to
influence market share are comparable.  This practice,  if generally followed in
the industry,  could increase competition from pharmacy chains and buying groups
and reduce or eliminate the availability of certain discounts currently received
in connection with our drug  purchases.  The loss of such discounts could have a
material  adverse  impact on our  operations.  In  addition,  to the extent PBMs
appear to have actual or potential market power in a relevant  market,  business
arrangements  and  practices  may be  subject  to  heightened  scrutiny  from an
anti-competitive   perspective  and  possible  challenge  by  state  or  federal
regulators or private parties.

Regulation of PBMs

     The federal government  currently does not directly regulate the activities
of PBMs. Several states,  however,  have introduced  legislation in recent years
which,  if enacted,  would  directly  regulate the activities of PBMs. To date a
handful of jurisdictions have enacted such statutes,  which vary widely in their
requirements.  In Maine in particular, the statute requires PBMs that derive any
payments  from  rebates and other  discounts to pass such amounts in full to the
sponsors  or  their  members  and  imposes   fiduciary   duties  and  disclosure
obligations upon PBMs. The industry's  trade  association,  Pharmaceutical  Care
Management Association ("PCMA") has filed suit in federal courts in Maine and in
the District of Columbia  (whose law is similar to the Maine statute)  alleging,
among other things,  that these  statutes are preempted by ERISA with respect to
welfare plans that are subject to ERISA.  In the Maine case the  magistrate  has
recommended  that  the  District  Court  judge  find  that  the  statute  is not
pre-empted by ERISA.  That decision is not final.  The District of Columbia case
is still  pending.  North  Dakota and South  Dakota  have also  recently  passed
legislation  regulating PBMs,  Gerogia has a law in place primarily  relating to
the  practice of pharmacy,  and  Maryland  has PBM  specific  laws that are less
onerous than the Maine and District of Columbia  laws.  Widespread  enactment of
such statutes could have a material adverse effect upon our financial condition,
results of  operations  and cash flows.  We believe  that we are in  substantial
compliance  with such laws and  requirements  where  required  and  continue  to
monitor legislative and regulatory  developments.  However, to the extent states
in which we do business  enact bills that  regulate the  activities of PBMs in a
comprehensive manner, such bills could materially adversely affect our business.

     In addition,  statutes have been introduced in several states which purport
to declare that a PBM is a fiduciary with respect to its sponsors. The fiduciary
obligations that such statutes would impose would be similar, but not identical,
to the scope of fiduciary  obligations  under ERISA. To date no such statute has
been enacted.

     In addition, several influential bodies, including the National Association
of Insurance Commissioners,  the National Association of Boards of Pharmacy, and
the  National  Committee  on Quality  Assurance,  are  considering  proposals to
regulate PBMs and certain of their activities, such as formulary and utilization
management  and  downstream  risk  assumption.  If these or other similar bodies
adopt model acts which would  regulate  the  activities  of PBMs,  states may be
influenced to incorporate such model acts into their statutes.  If laws directly
regulating  PBMs are  passed in states in which  NMHC does  business,  such laws
could materially affect our operations.

Legislation and Regulation Affecting Drug Prices

     Some states have  adopted  legislation  and  regulations  requiring  that a
pharmacy  participating  in the state Medicaid  program provide program patients
the best price that the pharmacy makes  available to any third party plan ("most
favored nation pricing" legislation).  Such legislation and regulations may have
a material  adverse  effect on our ability to negotiate  discounts in the future
from  network  pharmacies  and on the  reimbursement  we receive  from  Medicaid
programs.  Other  states  have  enacted  "unitary  pricing"  legislation,  which
mandates that all wholesale purchasers of drugs within the state be given access
to the same  discounts  and  incentives.  A number of states have also  recently
introduced  legislation seeking to control drug prices through various statutory
limits,  rebates or discounts extending to one or more categories of the state's
population.  This legislation,  if enacted, could have a material adverse effect
on our ability to negotiate discounts on the purchase of prescription drugs from
our network  pharmacies or manufacturers or otherwise  discourage the use of the
full range of our services by current or future  customers.  In  addition,  some
manufacturers  may view these laws and  policies  as a  disincentive  to provide
discounts to private  purchasers,  such as our customers,  which could adversely
affect our ability to control plan costs.

     Several  states have  introduced  bills for broad drug price  controls that
would extend price  controls  beyond the Medicaid  program.  Some bills impose a
ceiling on drug prices  based on the Federal  Supply  Schedule  and require that
pharmacies  extend  this  pricing  to  one  or  more  segments  of  the  state's
population, such as to all Medicare beneficiaries. If enacted, these bills could
adversely affect our reimbursement rate for  prescriptions.  Several states have
introduced   legislation   that  would  require  state  agencies  that  purchase
prescription  drugs to consolidate  their  purchasing  activities under a single
contract.  The  State of Maine  has  adopted  legislation  known as the Maine Rx
program,  through  which the  state  acts as a bulk  purchaser  of drugs for its
non-Medicaid  population.  A  number  of  states  have  proposed  similar  bills
supporting  use of  non-profit  PBMs  to  leverage  their  purchase  volume  for
prescription drugs. To the extent these bills are enacted,  they could adversely
affect our ability to effectively do business in such states.

     The federal and state government has increased their scrutiny on the method
used by drug manufacturers in developing pricing  information,  which in turn is
used in setting payments under the Medicare and Medicaid  programs.  One element
that is common in the pricing  information is the average  wholesale  price,  or
AWP, which is the standard pricing measure used by the  pharmaceutical  industry
and PBMs in calculating drug prices. If the method of calculating AWP is changed
by the  government,  it  could  adversely  affect  our  ability  to  effectively
negotiate discounts with pharmaceutical manufacturers,  pharmacies and sponsors.
In addition,  it could affect the  reimbursement the mail service pharmacy would
receive from managed care  organizations  that contract with  government  health
programs to provide prescription drug benefits.

     Under the MMA,  effective  January 1, 2005, AWP will no longer serve as the
basis for  Medicare  Part B Drug  reimbursement,  except for  certain  vaccines,
infusion drugs furnished  through  durable  medical  equipment and for blood and
blood products (other than clotting factors).  Rather,  with certain exceptions,
Part B drugs  generally  will be reimbursed  on an average  sales price,  "ASP,"
methodology.  ASP means a manufacturer's  total dollar sales of a product in the
United States to all purchasers  (excluding certain sales exempted from Medicaid
Best Price  reporting and "nominal"  sales)  divided by the total number of such
units of such  drug or  biological  products  sold by the  manufacturer  in such
quarter.  Manufacturers  are required to include in ASP  calculations all volume
discounts,  prompt pay discounts, cash discounts, free goods that are contingent
on any  purchase  requirement,  chargebacks,  and rebates  (other than  Medicaid
rebates).  Additionally,   beginning  in  2005,  HHS  may  include  other  price
concessions in the ASP calculation.

     The extent to which ASP will be used in pricing outside the Medicare Part B
context or changes to how AWP is  determined  and  reported to state and federal
programs  could alter the  calculation  of drug prices for federal  and/or state
programs. We are unable to predict whether any such changes will be adopted, and
whether  such  changes  would have a material  adverse  effect on our  business,
results of operations and financial condition.

     Further,  the federal Medicaid rebate program requires  participating  drug
manufacturers  to  provide  rebates  on all drugs  purchased  by state  Medicaid
programs.  Manufacturers of brand name products must provide a rebate equivalent
to the greater of (a) 15.1% of the "average  manufacturer  price ("AMP") paid by
wholesalers  for products  distributed to the retail pharmacy class of trade and
(b) the difference between AMP and the "best price" available to essentially any
customer other than the Medicaid  program,  with certain  exceptions.  Some drug
manufacturers  may see these policies as a disincentive  to offering  rebates or
discounts to private purchasers, including the sponsors NMHC represents.

     In addition,  certain state Medicaid  programs only allow for reimbursement
to pharmacies  residing in the state or in a border state. While we believe that
we can service our current Medicaid  customers through our existing  pharmacies,
there  can be no  assurance  that  additional  states  will not  enact  in-state
dispensing requirements for their Medicaid programs.

     Congress has introduced new legislation to permit reimportation of approved
drugs, originally manufactured in the United States, back into the United States
from other  countries where the drugs were sold at a lower price.  However,  the
FDA must certify to Congress that this program will not pose any additional risk
to the public's health and safety and that it will result in a significant  cost
reduction.  This  section  of the MMA is  effective  only if the FDA  gives  its
certification,  and the FDA has  refused to provide  such a  certification  when
requested  to do so in the  past.  We have no  assurance  that  the FDA will not
change  its  position  and permit the  importation  of drugs from  Canada in the
future or that new legislation or regulations will not permit the importation of
drugs from the European Union or other countries in the future.  Whether and how
such a policy  will be  implemented  is  unclear.  The  ultimate  impact of such
legislation on our business is not known.

     Several States have also recently passed laws and regulations  facilitating
and encouraging the importation of drugs into the United States.  At this point,
we cannot predict the ultimate impact of such laws on our business.

Legislation Affecting Plan Design

     Some states have enacted  legislation  that  regulates  various  aspects of
managed care plans,  including  provisions  relating to pharmacy  benefits.  For
example,  some  states  have  adopted  "freedom  of choice"  legislation,  which
provides  that  members of a plan may not be required to use network  providers,
but  must  instead  be  provided  with  benefits  even  if  they  choose  to use
non-network  providers,  or provide that a plan  participant  may sue his or her
health  plan if care is  denied.  Certain  states  have  introduced  or  enacted
legislation regarding plan design mandates, including legislation that prohibits
or  restricts  therapeutic  drug  substitution,  requires  coverage of all drugs
approved by the FDA or prohibits  denial of coverage for non-FDA  approved uses.
Other states mandate  coverage of certain  benefits or  conditions.  In addition
some states  have  enacted  legislation  purporting  to prohibit  HMOs and other
health plans from requiring or offering members financial  incentives for use of
mail service  pharmacies.  To date, there have been no formal  administrative or
judicial  efforts to enforce any such laws.  Although such  legislation does not
generally apply to us, it may apply to certain of our customers, HMOs and health
insurers. If such legislation were to be enacted on a broad scope, it could have
the effect of limiting the economic benefits achievable by our customers through
pharmacy benefit management.

     Additionally,  in late 2000, the Equal  Employment  Opportunity  Commission
issued a decision  holding  that two ERISA plans  discriminated  in violation of
Title  VII  of  the  Civil   Rights  Act  of  1964  by  failing  to  cover  oral
contraceptives   when  other  preventive   medications  were  covered.  As  with
legislation imposing plan design mandates, this decision may apply to certain of
our  customers  and could  have the effect of  limiting  the  economic  benefits
achievable through pharmacy benefit management if it is applied broadly.

Network Access Limitations

     A majority of states have adopted  legislation  restricting  the ability of
health plan sponsors to limit  participation in their pharmacy  provider network
or to remove a  provider  from the  network.  These  laws may  require us or our
sponsors to accept for  participation in the network any retail pharmacy willing
to meet the  applicable  plan's  price and other  terms,  and may  restrict  our
ability and our sponsors'  ability to remove a pharmacy from the network without
certain  "due  process"  protections.  To date,  these  statutes  have not had a
significant  impact  on our  business  because  for  most of our  customers,  we
administer  large  networks  of retail  pharmacies  and will admit any  licensed
pharmacy that meets the network's terms, conditions and credentialing criteria.

Formulary Restrictions

     Many states have also begun to enact laws that regulate the development and
use of  formularies by insurers,  HMOs and other third party payors.  These laws
have  included   requirements  on  the  development,   review  and  updating  of
formularies,  the role and composition of pharmacy and therapeutics  committees,
the disclosure of formulary information to health plan members and a process for
allowing members to obtain  non-preferred drugs without additional  cost-sharing
where they are medically  necessary and the formulary drugs are determined to be
inappropriate. Additionally, the National Association of Insurance Commissioners
is  developing  a model drug  formulary  statute,  known as the  Health  Carrier
Prescription  Benefit  Management  Model  Act,  that,  if  widely  enacted,  may
eventually  provide  more  uniformity  for health  plans and PBMs.  Among  other
things,  the model act would address the disclosure of formulary  information to
health plan members,  members' access to  non-preferred  drugs,  and the appeals
process available to members when coverage of a non-preferred  drug is denied by
the health plan or PBM.  Increasing  regulation of  formularies  by states could
significantly affect our ability to develop and administer formularies on behalf
of our sponsors.

Future Legislation

     We cannot accurately  predict what additional  federal or state legislation
or regulatory  initiatives may be enacted in the future relating to our business
or the health care industry in general,  or the effect any such  legislation  or
regulation  may have on it. There can be no assurance  that the federal or state
governments will not impose additional  restrictions or adopt interpretations of
existing  laws  that  could  have a  material  adverse  effect  on our  business
operations or profitability.

Company Information

Address and Availability of Information.

     Our principal  executive  offices are located at 26 Harbor Park Drive, Port
Washington,  NY 11050.  Its telephone  number is (800)  251-3883 and web site is
www.nmhcrx.com.  We  electronically  file or furnish  our annual  report on Form
10-K,  quarterly  reports  on  Form  10-Q,  current  reports  on Form  8-K,  all
amendments  to those  reports  (where  applicable)  and other  filings  with the
Securities  and Exchange  Commission  (the "SEC")  pursuant to Section  13(a) or
Section  15(d)  of the  Securities  Exchange  Act of  1934.  These  filings  are
available, free of charge, through our website as soon as reasonably practicable
after they are electronically filed with the SEC. In addition, the SEC maintains
its  web  site,   www.sec.gov  that  contains  reports,  proxy  and  information
statements  and  other  information  regarding  issuers  filing  electronically,
including  NMHC.  You may also read and copy any materials that we file with the
SEC at the SEC's Public  Reference  Room at 450 Fifth Street,  N.W.,  Room 1024,
Washington,  D.C.  20549.  You may obtain  information  on the  operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.

Code of Ethics

     As of September  19, 2003,  we have adopted a code of ethics for all of our
senior  officers.  In  addition,  we have  adopted  a code of  business  conduct
applicable to all employees.  Upon request by contacting  NMHC at the address or
number above, a copy of the code of ethics will be mailed to such person free of
charge.


Item 2.           DESCRIPTION OF PROPERTY.

     NMHC occupied  approximately  26,500 square feet of office space located at
26 Harbor Park Drive,  Port  Washington,  New York 11050 up until April 30, 2004
(the "Leased  Premises").  NMHC  subleases the Leased  Premises from BFS Realty,
LLC, an affiliate of our former Chairman (the "Affiliate"). The Affiliate leases
the  Leased  Premises  from the  Nassau  County  Industrial  Development  Agency
("NCIDA")  pursuant to a lease that was entered into by NCIDA and the  Affiliate
in December 2004, which expires in December 2015. The Affiliate has the right to
purchase the Leased  Premises  upon  termination  of that lease for the purchase
price of one dollar. The Affiliate subleases a portion of the Leased Premises to
NMHC (the "Lease").  As of November 1, 2001, NMHC and the Affiliate  amended the
Lease.  The Lease provided that,  effective  August 1, 2001, the rent payable by
NMHC would be an aggregate  annual rent of $308,305.  We make estimated  monthly
real estate tax, utility and maintenance-expense  payments to the Affiliate. The
annual rent would increase by 5% per year during the term of the Lease.

     Additional  space was built in the  Leased  Premises  which  allowed  us to
reconfigure  our  existing  space  and to  move  all of our  employees  in  Port
Washington into contiguous  space.  NMHC and our Affiliate amended the Lease for
the space on October 23, 2003 and April 26,  2004.  Effective  on the  occupancy
date of the new space, as of May 1, 2004, the Affiliate leased additional square
footage  in the  Leased  Premises  to NMHC.  The total  space  leased by NMHC is
currently  37,108 square feet. The Lease  provides that,  effective May 1, 2004,
the rent  payable by NMHC shall be an aggregate  annual rent of $594,678  over a
ten year  term,  plus  expenses  related to real  estate  taxes,  utilities  and
maintenance  which are paid  directly to the  entities to whom  payment  must be
made.  Annual rent  increases  will be based upon the Consumer  Price Index plus
2.5% subject to a maximum  annual cap of 3.5%.  The Lease expires ten years from
the occupancy date of May 1, 2004. In addition, we have early termination rights
which we may exercise by delivery of a notice to the  Affiliate 60 days prior to
the end of the April  30,  2009  lease  year.  In  consideration  of such  early
termination  rights, we would pay to the Affiliate the rent that would otherwise
be payable by us to the Affiliate for the  succeeding 30 months,  and subject to
adjustments  if the  Affiliate  is able to lease the Leased  Premises to another
party during said 30 month period.

     Additionally,   we  lease  office  and/or   warehouse   space  through  our
subsidiaries in Little Rock, Arkansas; Sacramento,  California; Tulsa, Oklahoma;
Portland,  Maine;  Miramar,  Florida;  Latham, New York; and Dallas,  Texas. The
aggregate   annual  rental   payments  for  leased  space  in  Little  Rock  are
approximately  $154,000;  for  Sacramento   approximately  $605,000;  for  Tulsa
approximately   $24,000;  for  Miramar  approximately   $151,000;  for  Portland
approximately  $129,000;  for  Latham  approximately  $383,000;  and for  Dallas
approximately  $72,000.  In addition,  upon  completion  of the build-out of the
office space which is  anticipated  to be in October 2005, we will occupy rental
office  space  in  Pittsburgh,   Pennsylvania  with  aggregate  annual  rent  of
approximately  $74,320 and annual  increases  thereafter  over a five year term.
While the space is being built-out,  we are currently occupying temporary office
space in the same office building.

     In addition, we rent a two family house in Port Washington,  New York (near
our  offices)  from P.W.  Capital,  LLC, (a company  affiliated  with our former
Chairman of the Board and  Director)  which is used for  out-of-town  employees.
NMHC  evaluated the cost of hotels for these  individuals  and determined it was
more cost efficient to rent the house at an annual rate of $66,000. For the same
reasons, we rent two houses from Living In Style, LLC, an entity owned partially
by an  executive  officer  and our current  Chairman  of the Board.  Pursuant to
leases  dated May 1, 2002 and expiring  April 30, 2007,  we paid an aggregate of
$140,000 in rent for these two facilities  during the fiscal year ended June 30,
2005. The annual rent for each of the facilities increases by 5% per year.


Item 3.         LEGAL PROCEEDINGS.

     NMHC is involved in various legal  proceedings,  including  the  proceeding
described below,  incidental to the conduct of its business.  While there can be
no assurance,  we do not expect that any such  proceedings  will have a material
adverse effect on our business, operations or financial condition.

     An action was commenced against us on April 30, 2002 by Midwest Health Plan
Inc.  ("MHP") in the United States  District  Court for the Eastern  District of
Michigan.  The amended complaint alleged,  among other things,  that the parties
entered into a contract dated July 1999 (the  "Agreement"),  and further alleged
that we overcharged MHP for the administration of prescription  benefit services
in contravention to the terms of the Agreement and breached our fiduciary duties
by making a profit.  MHP was seeking $3 million dollars in damages.  We filed an
answer  and  counterclaim  on June 12,  2002.  In the  counterclaim,  we claimed
damages  in  excess  of $2.8  million  based on  MHP's  failure  to pay  under a
contract.  In late June 2002,  MHP agreed to make two  payments in the amount of
$1.34 million and $1.36 million to partially  settle our claims against MHP. MHP
then added a fiduciary duty claim. We continued to have  counterclaims  totaling
over $200,000  against MHP for MHP's failure to pay the amounts it had agreed to
pay us for goods and services.  As of August 10, 2005, in complete settlement of
all outstanding claims by both parties, NMHC paid MHP $2 million in cash and the
case was dismissed with prejudice.


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

     Not applicable.




<PAGE>


                                     PART II


Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY; RELATED
          STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

     NMHC's  common stock is traded on The Nasdaq  National  Market System under
the symbol "NMHC"  ("NASDAQ").  The table below sets forth high and low reported
sale prices per share of the common stock,  as reported on NASDAQ,  which prices
are believed to represent actual transactions.

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


                                                             Fiscal Years ended June 30,
                                                         2005                            2004
                                                         ----                            ----
                                                   High      Low                   High       Low

First Quarter (July-Sept.)                        $29.99    $19.48               $14.00     $  8.96
Second Quarter (Oct.-Dec.)                        $24.97    $18.73               $26.00     $  8.00
Third Quarter (Jan.-March)                        $24.48    $19.40               $30.30     $ 17.35
Fourth Quarter (April-June)                       $26.36    $21.40               $41.72     $ 23.64

</TABLE>



Holders

     NMHC 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 7, 2005 was 32.

Dividend Policy

     NMHC has not declared or paid any cash  dividends in the past on its common
stock.  Our series A preferred  stock provides for an annual cash dividend equal
to 7% of the  investment  amount,  which  decreases  to  3.5%  after  the  fifth
anniversary from the issuance date. A dividend of approximately $5.6 million was
paid out on the  preferred  stock  for the year  ended  June  30,  2005.  We are
otherwise  prohibited,  under the terms of the JPMorgan  credit  facility,  from
making any  distributions  to  shareholders or declaring or paying any dividend.
Even if such prohibition  were not in effect,  we currently intend to retain any
earnings to finance its growth.  Any future  payments of dividends other than as
set forth above will be at the  discretion  of the Board of  Directors  and will
depend upon such factors as the Board of Directors deems relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

     Information relating to compensation plans under which equity securities of
NMHC are  authorized  for issuance is set forth under Part III,  Item 12 of this
Form 10-K and such information is incorporated herein by reference.

Recent Sales of Unregistered Securities

     No unregistered  shares of NMHC's  securities were issued during the fourth
fiscal quarter of 2005.

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,  2005 and  provide
certain  supplemental data. The selected  consolidated income statement data for
the years ended June 30,  2005,  2004,  and 2003 and the  selected  consolidated
balance  sheet  data as of June 30,  2005 and 2004  have been  derived  from the
audited consolidated financial statements of NMHC included in Item 8 hereof. The
selected  consolidated  income  statement data for the years ended June 30, 2002
and 2001 and the selected  consolidated  balance sheet data as of June 30, 2003,
2002 and 2001 have been derived from audited  consolidated  financial statements
of NMHC that are not included in this Form 10-K.  The  information  contained in
this  table  should  be read in  conjunction  with  our  consolidated  financial
statements  and notes  thereto,  and  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations"  included in Item 7 hereof.  All
amounts are in thousands, except per share amounts.


<PAGE>

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


                                                             Year Ended June 30,
                                  ---------------------------------------------------------------------------

                                        2005            2004            2003           2002           2001
                                      ----------     -----------      ---------     -----------     ---------
                                      ----------     -----------      ---------     -----------     ---------
Income Statement Data:/1
Revenues                          $    800,592    $    651,098     $  573,266    $   459,832     $  272,119
Cost of claims                         713,883         587,055        525,472        424,733        249,572
                                      ----------     -----------      ---------     -----------    ---------
                                      ----------     -----------      ---------     -----------    ---------
Gross profit                            86,709          64,043         47,794         35,099         22,547
Selling, general and
administrative expenses                 67,786          50,606         35,974         27,230         21,423
                                      ----------     -----------      ---------     -----------     ---------
                                      ----------     -----------      ---------     -----------     ---------
Operating income                        18,923         13,437          11,820          7,869          1,124
Other income (expense)                   1,489             40            (804)          (502)           877
                                      ----------     -----------      ---------     -----------     ---------
                                      ----------     -----------      ---------     -----------     ---------
Income before provision for
income taxes                            20,412         13,477          11,016          7,367           2,001
Provision for income taxes               8,031          5,524           4,602          2,900             843
                                      ----------     -----------      ---------     -----------     ---------
                                      ----------     -----------      ---------     -----------     ---------
Net income                              12,381          7,953           6,414          4,467           1,158
Beneficial conversion feature                -         80,000              -               -              -
Preferred stock cash dividend            5,600          1,596              -               -              -
Accretion of transaction expenses          475            135              -               -              -
                                      ----------     -----------      ---------     -----------     ---------
                                      ----------     -----------      ---------     -----------     ---------
Net (loss) income available to
  common stockholders             $      6,306    $   (73,778)     $   6,414     $     4,467     $    1,158
                                      ==========     ===========      =========     ===========     =========
                                      ==========     ===========      =========     ===========     =========

Earnings (loss) per common share:
  Basic                           $       1.39    $     (11.14)    $     0.85    $       0.62    $     0.16
  Diluted                         $       1.03    $     (11.14)    $     0.80    $       0.56    $     0.16

Weighted average number of
shares outstanding:
   Basic                                 4,542           6,622          7,590           7,213         7,101
   Diluted                              11,983           6,622          8,036           7,909         7,200

Balance Sheet Data:
Cash and cash equivalents         $      7,272    $      3,388     $    5,222    $      1,768    $   10,877
Working capital (deficit)              (24,437)        (27,706)       (32,567)        (42,653)       (7,091)
Total assets                           283,931         226,149        156,740         149,895        79,110
Long term debt including
current portion                          1,905           2,272         16,491          24,065         1,875
Redeemable convertible preferred
  stock                                 75,864          75,389              -               -             -
Total common stockholders'
equity (deficit)                         9,854          (6,623)        28,426          21,277        15,472
Supplemental Data/2
Retail pharmacy claims processed        31,107          22,407         17,330          14,371         7,403
Mail pharmacy claims processed           1,236           1,173            902             767           487
Estimated plan participants
  (at year end)/3                        8,000           7,200          5,800           4,500         3,200

</TABLE>

________________

1      Reference is made to Item 1 hereof,  (Description  of  Business),  Item 7
hereof (Management's Discussion & Analysis of Financial Condition and Results of
Operations) and Item 8 hereof (Note 3 - Business  Acquisitions) for descriptions
of the various  acquisitions that have been consummated in the last 4 years, and
the financing  arrangements  that have been set in place;  such acquisitions and
financings affect the comparability of the information provided in the foregoing
tables for fiscal years 2001 through 2005.

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

3      Represesnts  plan  participants  based upon the number of participants to
whom NMHC provides some level of services.

<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 NMHC
and its wholly owned subsidiaries, Pharmacy Associates, Inc.("PAI"), Interchange
PMP, Inc. ("PMP"),  Centrus  Coorporation  ("Centrus"),  National Medical Health
Card, IPA, Inc. ("IPA"),  Specialty  Pharmacy Care, Inc.  ("Specialty"),  NMHCRx
Contracts,  Inc. ("Contracts"),  PBM Technology,  Inc. ("PBM Tech"), NMHCRX Mail
Order,  Inc.  ("NMHCmail"),   Integrail,   Inc.  ("NMHC  Integrail"),   Portland
Professional    Pharmacy   and   Portland   Professional   Pharmacy   Associates
(collectively  "NMHC  Ascend"),  Inteq  Corp.  and Inteq TX Corp.  (collectively
"Inteq") and Pharmaceutical Care Network ("PCN"). Also included are the accounts
of NMHC  Funding,  Inc.  ("Funding").  Unless the  context  otherwise  requires,
references  herein to NMHC refer to National  Medical Health Card Systems,  Inc.
and its  subsidiaries  on a  consolidated  basis.  The results of operations and
balance sheet of NMHC's  acquisitions and subsidiaries have been included in the
consolidation  as of the effective  date that NMHC acquired or  established  the
entity as follows: PAI - July 20, 2000, PMP - March 5, 2001, Centrus and Funding
- January 29, 2002,  NMHCmail - September 1, 2002,  NMHC Integrail - November 1,
2002,  NMHC  Ascend - July 31,  2003,  Inteq - April 1,  2004 and PCN - March 7,
2005. All material  intercompany  balances and transactions have been eliminated
in the consolidation.

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

     Revenue  for  the  PBM  division  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 end of the month. The amount
of revenue  related to the drugs  dispensed by pharmacies  participating  in our
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 we share with our sponsors.  The specific  terms of the  contracts  that we
enter into with our  sponsors  will  determine  whether we  recognize  the gross
revenue related to the cost of the prescriptions filled. In certain cases, we do
not recognize the gross  revenue or cost related to  prescriptions  filled for a
specific  sponsor.  This has no impact on our gross  profit  since  neither  the
prescription revenue nor the related cost of the prescriptions is recorded.

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

                                                       Years Ended June 30,
                                                       --------------------
                                      2005              2004            2003
                                      ----              ----             ----
Revenues relating to:
Pharmaceuticals                     $775,351         $630,356         $555,168
Administrative fees and other         25,241           20,742           18,098
                                    --------         --------         ---------

  Total Revenues                    $800,592         $651,098         $573,266
                                    --------         --------         --------

     NMHC does not take  possession  or legal  ownership of the  pharmaceuticals
dispensed  by the  retail  pharmacy  network  or its  out-sourced  mail  service
facilities, although NMHC assumes the legal responsibility and financial risk of
paying  for  dispensed  pharmaceuticals  whether  or not  NMHC  is  paid  by its
sponsors. NMHC does take possession and dispenses  pharmaceuticals from our mail
service facility and specialty pharmacy.

     NMHC  utilizes  its  comprehensive  pharmacy  benefit  database  to perform
outcome  studies and to develop disease  information  programs which are used to
reduce overall  healthcare costs. Our NMHC Integrail  division uses its software
tools to analyze and predict  outcomes for both medical and pharmacy data. These
programs  currently  produce a small  amount of  revenue,  but are  starting  to
attract  interest  in  the  marketplace.  We  believe  that  these  value  added
information  based services are becoming a more  important  component of managed
care as well as management of the overall healthcare dollar, and therefore these
services may provide an increasing source of revenue for us in the future.

     NMHCmail  recognizes  revenue at the point of shipment  for both the co-pay
collected  from  the  individual  member,  as  well  as for  the  "sale"  of the
prescription to the PBM at specified prices. Revenue from this intercompany sale
is eliminated in consolidation.  To date,  NMHCmail only fills prescriptions for
NMHC plan sponsors.

     Revenue  is  recognized  by NMHC  Ascend  at the point of  shipment  to the
member. NMHC Ascend invoices individual members,  insurance companies,  Medicare
and Medicaid,  and the PBM.  Revenue from  intercompany  sales are eliminated in
consolidation.

     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 is
recognized as follows: the contractual obligation of NMHC 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 NMHC receives.
Rebates  are earned  from drug  manufacturers  based on drugs  utilized  by plan
participants  at the time of dispensing.  These rebates,  which vary by sponsor,
are recorded monthly based upon the claims adjudicated in that month.

     The amount of rebates recognized as reductions to revenue or cost of claims
is based on estimates  tied to actual  claims data.  NMHC  processes  its rebate
claims either  directly with the drug  manufacturers,  through its  wholly-owned
subsidiary,  Specialty,  for which it receives administrative fees, or through a
third party rebate  administrator.  Effective July 1, 2001, we have entered into
an agreement with a third party rebate  administrator (the  "Administrator")  to
handle all of our  consolidated  rebate claims which we do not otherwise  submit
directly to the drug manufacturers.

     The  Administrator  provides  estimates  to us based on its analysis of the
amount of rebates that our claims should generate.  These estimates are prepared
based on  estimates  of how our 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 our contract with the Administrator,
we  receive a  specified  minimum  amount  per claim 150 days after the end of a
quarter. Amounts above the minimum are shared between the Administrator and NMHC
with final settlement twelve months after a quarter-end. We accrue rebates based
upon an estimate provided by the Administrator.

     NMHC 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 us for earned rebates within a specified  period of time.
We reconcile  our  estimates to amounts  received  from the  manufacturers  on a
quarterly basis.

     Certain  of our  sponsors  are  entitled  to all or a  portion  of  rebates
received  by  NMHC,  which  portion  varies   contractually   by  sponsor.   The
manufacturer  rebates  retained  by  NMHC,  after  the  sponsors  receive  their
contractual amounts, have historically had a significant impact on our financial
performance. For the fiscal years ended June 30, 2005, 2004 and 2003 the rebates
retained by NMHC have equaled 15%, 16% and 11%, respectively, of our total gross
profit.  Due  to  the  expected  continued  growth  and  diversification  of our
business,  we expect  rebates to  continue  to account  for a  significant,  but
declining, percentage of our total gross profit.

     If such rebate  programs were to be  discontinued  or adversely  altered by
drug  manufacturers,  or  government  action,  or if the terms of NMHC's  rebate
sharing  arrangements  with its  sponsors  were  adversely  altered  when  these
arrangements  expire,  there could be a material adverse effect on our 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 plus
our collection  history.  The drug  manufacturers  contracted with are primarily
Fortune 500 companies  and NMHC has not had a history of  write-offs  related to
rebate receivables. We do not believe a credit risk reserve is necessary.

     The  pharmacy  benefit  management   industry  is  intensely   competitive,
generally  resulting in continuous  pressure on our 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, NMHC expects this competitive  environment to continue for the
foreseeable future.

     We plan to continue our organic growth through  increased  marketing of our
services and by expanding the range of services  offered,  including value added
consulting and  information-based  services through our NMHC Integrail division,
home delivery services through NMHCmail, and specialty pharmacy services through
our NMHC Ascend  division.  NMHC believes these services to be in growing demand
within the healthcare industry. In addition,  NMHC intends to continue to pursue
an acquisition  program to supplement our organic growth by making  acquisitions
of other  pharmacy  benefit  management  service  providers,  as well as related
services providers.



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


                                                     OPERATING INCOME
                                                     ($ in thousands)
                                                                     Year ended June 30,
                                                         Increase/                             Increase/
                                        2005            (Decrease)             2004            (Decrease)          2003
                                   ---------------    ----------------    ---------------    ---------------    ------------

Revenue                                  $800,592               23.0%           $651,098              13.6%        $573,266
Cost of Claims                            713,883               21.6%            587,055              11.7%         525,472
Gross profit                               86,709               35.4%             64,043              34.0%          47,794
Selling, general, and
  administrative expense                   67,786               33.9%             50,606              40.7%          35,974
  administrative expense                 --------                               --------                           ---------
Operating Income                          $18,923               40.8%            $13,437              13.7%         $11,820
                                         ========                               ========                           =========

</TABLE>

Results of Operations

Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30, 2004

     Revenue increased $149.5 million, or approximately 23%, from $651.1 million
for the fiscal year ended June 30, 2004,  to $800.6  million for the fiscal year
ended June 30,  2005.  Revenue  recognized  for  contracts  recorded  on a gross
revenue  basis was $794.8  million  for the fiscal  year ended June 30, 2005 and
$648.5 million for the fiscal year ended June 30, 2004.  Revenue  recognized for
contracts  recorded on a net revenue  basis was $5.8 million for the fiscal year
ended June 30, 2005 and $2.6  million  for the fiscal year ended June 30,  2004.
The specific terms of the contracts that NMHC enters into with its sponsors will
determine  whether NMHC  recognizes the gross revenue related to the cost of the
prescriptions  filled.  For those  contracts  that NMHC  recognizes net revenue,
there is no impact on gross profit since  neither the  prescription  revenue nor
the related costs of the  prescriptions is recorded.  We include in revenue only
those co-payments collected from NMHCmail.  For the twelve months ended June 30,
2005, there were approximately $15.1 million of co-payments  included in revenue
versus  approximately  $2.3  million for the twelve  months ended June 30, 2004.
Co-payments  retained by pharmacies on prescriptions  filled for our members and
not  included in our revenue  were $280.9  million and $203.4  million,  for the
twelve months ended June 30, 2005 and 2004, respectively.

     Of the $149.5 million increase in revenue in fiscal 2005, $25.0 million was
due to the  inclusion  of revenues  from PCN,  which was included in the revenue
from March 7, 2005, but not in the year ended June 30, 2004. In addition,  $39.0
million was due to the  inclusion of revenue  from Inteq,  which was included in
the revenue for the year ended June 30,  2005,  but was only  included for three
months in the year  ended  June 30,  2004.  Co-payments  received  from the Mail
Service  operations  accounted  for  $12.9  million  of this  increase.  Another
approximately  $96.9 million of the overall  gross  revenue  increase was due to
revenue  related to new  sponsors or new  services  offered  during  fiscal 2005
excluding  contracts recorded on a net revenue basis. An additional  increase of
approximately  $49.4 million was  attributable  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.  These  increases were partially
offset by revenue  decreases  related to the  termination  of existing  customer
contracts  throughout  the fiscal  year,  leading to a  reduction  in revenue of
approximately $73.7 million.

     Cost of claims increased $126.8 million,  or approximately 22%, from $587.1
million  for the fiscal  year ended June 30,  2004,  to $713.9  million  for the
fiscal year ended June 30, 2005.  PCN  accounted for $21.7  million,  of the net
increase,  while Inteq accounted for another $35.2 million. New sponsors and the
growth in existing sponsors  accounted for $140.9 million of the increase.  This
increase  was  partially  offset by the loss of sponsors  which  reduced cost of
claims by $71.0  million  (including  a $1.1  million  adjustment  for  previous
pharmacy  claims).  As a percentage of revenue,  cost of claims  decreased  from
90.2% to 89.2% for the  fiscal  years  ended  June 30,  2004 and June 30,  2005,
respectively.  The  contracts  that  NMHC  recognized  on a  net  revenue  basis
decreased  NMHC's  overall  costs as a percentage of revenue due to the cost not
being  recognized  on the  contracts  recorded  on the  net  revenue  basis.  In
addition, the receipt of an additional $12.9 million in co-payments for NMHCmail
operations resulted in a lower cost of claims as a percent of revenue,  since no
additional cost of claims are incurred related to these fees.

     Gross profit  increased  from $64.0  million for the fiscal year ended June
30,  2004 to $86.7  million  for the fiscal  year ended June 30,  2005;  a $22.7
million, or 35%, increase.  In addition to the revenue volume increase described
above, PCN accounted for $3.3 million, or 15%, of the increase.  Inteq accounted
for another $3.8 million,  or 17% of the increase.  The increase in rebates (and
administrative  fees related to the collection of rebates) after  accounting for
the amount of rebates that are shared with sponsors,  accounted for another $2.5
million,  or 11%. The balance of the increase  relates to the margins on the new
business  that  replaced the lost  business and growth in the existing  business
from additional  services  provided.  Gross profit,  as a percentage of revenue,
increased  from 9.8% to 10.8% for the twelve months ended June 30, 2004 and June
30, 2005,  respectively.  The contracts  NMHC  recognizes on a net revenue basis
have the effect of improving  the gross margin as a percentage of revenue due to
the fact that recorded revenue and costs are lower since only the administrative
fees related to these  contracts  are  recorded.  The  increased  activities  at
NMHCmail  and NMHC Ascend also led to an  increase in gross  profit  percentage,
year-over-year.  Partially  offsetting  the  impact of the net  revenue  and new
activities,  NMHC has seen some  decline in profit  margins  due to  competitive
pressures.

     Selling,  general, and administrative  expenses increased $17.2 million, or
approximately 34%, from $50.6 million for the fiscal year ended June 30, 2004 to
$67.8  million  for the fiscal  year ended June 30,  2005.  Included in selling,
general and administrative expenses for the fiscal year ended June 30, 2004 were
approximately $2.6 million of non-recurring expenses related to the New Mountain
Transaction  (see - "Liquidity and Capital  Resources")  and for the fiscal year
ended June 30, 2005 was an approximately $1.7 million  non-recurring  charge for
the  settlement  of  the  Midwest  Health  Plan  lawsuit  ("Legal  Settlement").
Excluding  these  non-recurring  items,  the  increase in  selling,  general and
administrative  expenses was $18.1 million.  Approximately $7.6 million, or 42%,
of this increase in selling,  general, and administrative expenses is related to
new  entities  which were part of NMHC in the twelve  months ended June 30, 2005
which were not part of NMHC during all of the twelve months ended June 30, 2004.
The major  components  of the $7.6 million  increase in expenses  related to the
acquisitions  were: 1) salaries and benefits -  approximately  $3.6 million,  2)
commissions  and fess to outside  brokers and sales  consultants - approximately
$1.5 million,  3) depreciation and amortization - approximately $0.9 million, 4)
rent and  related  expenses  -  approximately  $0.7  million,  5) IT  expenses -
approximately  $0.4 million,  6) professional fees - approximately $0.2 million,
and 7) other - approximately  $0.3 million.  Non-acquisition  related  increases
included: 1) salaries and benefits (from increased headcount) - $3.8 million, 2)
commissions and fees to outside brokers and sales consultants - $2.2 million, 3)
professional fees (much as a result of compliance with the Sarbanes-Oxley Act) -
$2.1 million, 4) IT expenses - $2.0 million and 5) other - $0.4 million.

     Selling,  general,  and  administrative  expenses  as a percent  of revenue
increased  from 7.8% for the fiscal  year  ended  June 30,  2004 to 8.5% for the
fiscal year ended June 30,  2005.  The main  reasons for the  increase  were the
impact of recognizing more contracts on a net revenue basis.

     For the fiscal year ended June 30, 2005, NMHC earned other income,  net, of
approximately  $1.5 million.  For the fiscal year ended June 30, 2004, we earned
other  income,  net, of  approximately  $40,000.  The primary  component  of the
increase in other  income was the  realization  of a $1.7  million  gain from an
insurance claim which represented the excess of the insurance  proceeds over the
carrying value of the assets covered by the claim.

     Income before the provision for income taxes increased  approximately  $6.9
million,  or 51%, from  approximately  $13.5 million,  for the fiscal year ended
June 30, 2004, to approximately $20.4 million for the fiscal year ended June 30,
2005.  The  primary  factors  leading to this  increase  were the rises in gross
profit  and other  income,  offset  by the  increase  in  selling,  general  and
administrative expenses related to the new activities.

     The  effective  tax rate  decreased  from 41.0% for the twelve months ended
June 30,  2004 to 39.3% for the  twelve  months  ended June 30,  2005.  The main
reason for the decrease was a reduction in NMHC's state income taxes.

     Net income for the fiscal year ended June 30, 2005 was approximately  $12.4
million as compared to approximately $8.0 million for the fiscal year ended June
30, 2004; a 56% increase. The increase in net income is attributable to the same
factors  causing the increase in income before income taxes,  in addition to the
lower effective tax rate.

     In addition,  there were three other charges  recorded to determine  income
(loss) available to common stockholders related to the New Mountain Transaction.
The first of these  charges  relates to preferred  stock cash  dividends,  which
amounted to  approximately  $5.6 million for the fiscal year ended June 30, 2005
and $1.6 million for the fiscal year ended June 30, 2004.  The  preferred  stock
provides  for an initial  cash  dividend  equal to 7% of the  investment  amount
(currently $80 million),  which decreases to 3.5% after the fifth anniversary of
issuance.  All dividends accrued in each fiscal year were paid by the end of the
given fiscal year.  The second charge during the fiscal year ended June 30, 2004
was the $80 million beneficial conversion feature. This non-recurring,  non-cash
charge  represents  the  difference  between the fair market value of our common
stock  on the  date of the  closing  of the  New  Mountain  Transaction  and the
effective  conversion  price of $11.29,  and which is limited to the $80 million
purchase  price for the series A preferred  stock.  The third  charge is for the
accretion of transaction  expenses.  Certain  transaction costs of approximately
$4.7 million related to the New Mountain Transaction  preferred stock investment
are deducted from net proceeds and the carrying  value of the series A preferred
stock.  These  transaction  costs are  accreted to the series A preferred  stock
carrying value over the ten-year life of the preferred  stock  investment.  Such
accretion amounted to approximately  $475,000 for the fiscal year ended June 30,
2005 and $135,000 for the fiscal year ended June 30, 2004. After deducting these
three  charges  from net income there  remained  net income  available to common
stockholders  of  approximately  $6.3 million for the fiscal year ended June 30,
2005,  as  compared  to  a  net  loss  available  to  common   stockholders   of
approximately $73.8 million for the fiscal year ended June 30, 2004.

     While net income and net income available to common stockholders  excluding
the  non-recurring  Legal Settlement and New Mountain  Transaction items are not
measures of  financial  performance  under U.S.  generally  accepted  accounting
principles, they are provided as information for investors for analysis purposes
in  evaluating  the effect of the  non-recurring  Legal  Settlement  and the New
Mountain   Transaction  on  net  income  and  net  income  available  to  common
stockholders.  Net  income  and net  income  available  to  common  stockholders
excluding the non-recurring Legal Settlement and New Mountain  Transaction items
are not meant to be considered a substitute or replacement for net income or net
income (loss)  available to common  stockholders  as prepared in accordance with
U.S.  generally accepted  accounting  principles.  The  reconciliation  from net
income  to  net  income   available  to  common   stockholders   excluding   the
non-recurring Legal Settlement and New Mountain Transaction items, is as follows
(all amounts are in thousands, except per share amounts):

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

                                                                       Twelve Months Ended
                                                           ---------------------------------------------
                                                           --------------------- -----------------------
                                                              June 30, 2005              June 30, 2004
                                                           ----------------------------------------------

Net income, as reported                                         $    12,381                   $ 7,953

Add back:
Legal Settlement, net of income tax benefits                          1,008                         -
Transaction bonuses and severance payment,
  net of income tax benefit                                               -                       910
Compensation charge related to stock option
  issued in lieu of transaction bonus, net of
  income tax benefit                                                      -                       406
Compensation charge related to the
  acceleration of directors options, net of
  income tax benefit                                                      -                       200

Net income excluding non-recurring
Legal Settlement and  New Mountain Transaction
 items ( C )                                                         13,389                     9,469
                                                                -----------                ----------

Less:
Preferred dividends                                                   5,600                     1,596
Accretion of transaction expenses                                       475                       135
                                                                -----------                 ---------


Net income available to common
  shareholders excluding non-recurring Legal
  Settlement and New Mountain Transaction items ( A )            $    7,314                $    7,738
                                                                 ==========                ==========

Earnings per share excluding non-recurring
  Legal Settlement and New Mountain Transaction items:
  Basic ( ( A ) / ( B ) )                                        $     1.61                 $    1.17
  Diluted ( ( C ) / ( D ) )                                      $     1.12                 $    0.98

Weighted average number of shares outstanding:
   Basic ( B )                                                        4,542                     6,622
   Diluted ( D )                                                     11,983*                    9,633*


_______________
     *Diluted  weighted  average  number of shares assumes the conversion of the
6,957 shares of redeemable convertible preferred stock and dilutive common stock
options and warrants.

</TABLE>


     NMHC has no off balance sheet transactions.

Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003

     Revenue increased $77.8 million,  or approximately 14%, from $573.3 million
for the fiscal year ended June 30, 2003,  to $651.1  million for the fiscal year
ended June 30,  2004.  Revenue  recognized  for  contracts  recorded  on a gross
revenue  basis was $648.5  million  for the fiscal  year ended June 30, 2004 and
$572.0 million for the fiscal year ended June 30, 2003.  Revenue  recognized for
contracts  recorded on a net revenue  basis was $2.6 million for the fiscal year
ended June 30, 2004 and $1.3  million  for the fiscal year ended June 30,  2003.
The specific terms of the contracts that NMHC enters into with its sponsors will
determine  whether NMHC  recognizes the gross revenue related to the cost of the
prescriptions  filled.  For those  contracts  that NMHC  recognizes net revenue,
there is no impact on gross profit since  neither the  prescription  revenue nor
the related  costs of the  prescriptions  is recorded.  NMHC includes in revenue
only those co-payments collected from NMHCmail. For the twelve months ended June
30,  2004,  there were  approximately  $2.3 million of  co-payments  included in
revenue  versus  zero for the twelve  months  ended June 30,  2003.  Co-payments
retained  by  pharmacies  on  prescriptions  filled for NMHC's  members  and not
included in NMHC's  revenue  were $203.4  million  and $168.5  million,  for the
twelve months ended June 30, 2004 and 2003, respectively.

     Of the $77.8 million  increase in revenue in fiscal 2004, $33.3 million was
due to the inclusion of revenues  from Ascend and Inteq,  which were included in
the revenue for the twelve  months  ended June 30,  2004,  but not in the twelve
months ended June 30, 2003.  Another  approximate  $77.3  million of the overall
gross  revenue  increase  was due to  revenue  related  to new  sponsors  or new
services  offered  during  fiscal  2004  excluding  contracts  recorded on a net
revenue  basis.  An  additional  increase  of  approximately  $77.5  million was
attributable 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.  These increases were partially offset by revenue decreases related
to three factors:  1) the termination of existing customer contracts  throughout
the fiscal year  including  one major sponsor which  terminated  their  contract
effective  December 31, 2002, leading to a reduction in revenue of approximately
$93.3 million, and 2) there was one contract during the twelve months ended June
30, 2004 that NMHC  recognized on a net revenue  basis that was  recognized on a
gross  revenue  basis for four months  during the twelve  months  ended June 30,
2003. Due to a change in the contract  terms  effective  November 1, 2002,  this
customer's  revenue was  recognized on a net basis from that point.  The revenue
impact of this  change  was a year  over  year  reduction  of gross  revenue  of
approximately  $9.0 million.  The third decrease occurred as a result of rebates
payable to NMHC's  sponsors  increasing  by $8.0  million for the twelve  months
ended June 30, 2004 as compared to the twelve months ended June 30, 2003.  Since
these rebates are treated as a reduction in revenue,  this led to a reduction in
the overall year-over-year revenue increase.

     Cost of claims increased $61.6 million,  or approximately  12%, from $525.5
million  for the fiscal  year ended June 30,  2003,  to $587.1  million  for the
fiscal year ended June 30, 2004.  Ascend and Inteq  accounted for $28.4 million,
of the net increase.  New sponsors and the growth in existing sponsors accounted
for $144.8  million of the increase.  This increase was partially  offset by the
three factors described in the previous paragraph,  namely, the loss of sponsors
which  reduced cost of claims by $89.1  million,  the  recognizing  of a certain
contract on a net revenue  basis which  reduced cost of claims by $9.0  million,
and an increase of $13.5 million in gross rebates received,  which is treated as
a  reduction  in cost of claims.  As a  percentage  of  revenue,  cost of claims
decreased  from 91.7% to 90.2% for the fiscal years ended June 30, 2003 and June
30, 2004, respectively. The same factors contributed to the declining costs as a
percentage of revenue.  The major sponsor,  which terminated its contract,  is a
managed care  organization.  Industry-wide,  managed care clients have a greater
cost of claims,  and  consequently  a lower  gross  margin,  than other types of
business in the PBM industry. The new business NMHC brought on during the fiscal
year  ended  June  30,  2004,  for the  most  part  was  not  managed  care,  so
consequently  the cost of  claims  on the new  business  was  lower  than on the
business it replaced.  In addition,  the  contracts  recognized on a net revenue
basis  decrease the overall  Company costs as a percentage of revenue due to the
cost not being recognized on the contracts recorded on the net revenue basis.

     Gross profit  increased  from $47.8  million for the fiscal year ended June
30,  2003 to $64.0  million  for the fiscal  year ended June 30,  2004;  a $16.2
million, or 34%, increase.  In addition to the revenue volume increase described
above, Ascend and Inteq accounted for $4.9 million, or 30%, of the increase. The
increase  in rebates  (and  administrative  fees  related to the  collection  of
rebates)  after  accounting  for the  amount of  rebates  that are  shared  with
sponsors,  accounted  for  another  $5.5  million,  or 34%.  The  balance of the
increase  relates to the  margins on the new  business  that  replaced  the lost
business and growth in the existing business from additional  services provided.
Gross profit,  as a percentage of revenue,  increased  from 8.3% to 9.8% for the
twelve months ended June 30, 2003 and June 30, 2004, respectively. The contracts
NMHC  recognizes  on a net revenue  basis have the effect of improving the gross
margin as a percent of revenue due to the lower revenue base. The new activities
at NMHC mail and Ascend  also led to an  increase  in gross  profit  percentage,
year-over-year.  Partially  offsetting  the  impact of the net  revenue  and new
activities,  NMHC has seen some  decline in profit  margins  due to  competitive
pressures.

     Selling,  general,  and  administrative  expenses,  which  include  amounts
charged by affiliates, increased $14.6 million, or approximately 41%, from $36.0
million for the fiscal year ended June 30, 2003 to $50.6  million for the fiscal
year ended June 30, 2004.  Approximately $8.5 million,  or 73%, of this increase
in selling,  general,  and  administrative  expenses is related to new  entities
which were part of NMHC in the twelve  months ended June 30, 2004 which were not
part of NMHC during all of the twelve  months ended June 30, 2003.  The services
provided by these  entities  include  specialty  pharmacy  distribution  through
NMHC's acquisition of PPP,  predictive  modeling and consulting services through
NMHC's  acquisition  of Integrail,  and mail order  distribution  through NMHC's
owned facility in Miramar,  Florida. In addition, PBM services were complemented
and  enhanced by the  acquisition  of Inteq.  The major  components  of the $8.5
million  increase  in expenses  related to new  services  was:  1) salaries  and
benefits -  approximately  $4,046,000,  2) postage and supplies -  approximately
$461,000,  3)  equipment  rental  -  approximately   $505,000,  4)  insurance  -
approximately  $339,000, 5) marketing - approximately  $229,000, 6) depreciation
and amortization - approximately  $556,000,  7) commissions to outside brokers -
approximately $599,000, and 8) postage and shipping - approximately $589,000.

     Included in selling,  general and  administrative  expenses  for the twelve
months  ended  June 30,  2004 were  approximately  $2,569,500  of  non-recurring
expenses  related to the New  Mountain  Transaction  including:  1)  transaction
bonuses and a severance payment totaling $1,542,500,  2) a non-cash compensation
charge of  approximately  $339,000  related to the acceleration of stock options
for two directors who resigned upon the closing of the New Mountain  Transaction
and 3) a non-cash  compensation  charge and related  expenses  of  approximately
$688,000 related to stock options issued in lieu of a transaction bonus.

     Of the remaining approximate $3.5 million increase in selling,  general and
administrative  expenses  during the twelve  months  ended  June 30,  2004,  the
majority of the increase is related to the  increased  revenue and volume in the
PBM.  Salary  and  benefits  related to new hires,  temporary  help,  travel and
entertainment,  and  commissions  to internal  sales  people as well as external
brokers  have all  increased  year  over  year due to the  increased  volume  of
activity.

     Selling,  general,  and  administrative  expenses  as a percent  of revenue
increased  from 6.3% for the fiscal  year  ended  June 30,  2003 to 7.8% for the
fiscal  year ended June 30,  2004.  The main  reasons for the  increase  are the
impact of recognizing  more  contracts on a net revenue  basis,  as that has the
effect of dividing  these same expenses  over a smaller gross revenue base,  the
$2.6 million of  non-recurring  expenses  related to New Mountain which added 40
basis points, and the start-up of NMHCmail.

     For the fiscal year ended June 30, 2004, NMHC earned other income,  net, of
approximately  $40,000.  For the fiscal year ended June 30, 2003,  NMHC incurred
other expense, net, of approximately $804,000. The components of the approximate
$844,000 increase in other income, net were an approximate  $506,000 decrease in
interest expense, an approximate $342,000 increase in interest income,  slightly
offset by an approximate $4,000 reduced gain on assets sold. The primary reasons
for the net  increase  in income were 1) interest  expense  declined  due to the
reduced  borrowings  under NMHC's  revolving  credit  facility due to increasing
profitability and additional cash flow from operations (see Item 1, "Description
of   Business-Recent   Acquisitions  and   Developments,"  and  Note  3  to  the
Consolidated  Financial  Statements  comprising Item 8 hereof),  and 2) interest
income  increased due to the interest  portion of a settlement,  with an outside
party,  related  to past due  rebates  owed to NMHC,  and excess  cash  balances
related to some of NMHC's  acquisitions.  NMHC entered into a new sale leaseback
with an  unrelated  third party in  November  2003.  This led to an  approximate
$35,000 gain on the sale of assets during the twelve months ended June 30, 2004.
The total  gain from  this  transaction  was  approximately  $147,000  which was
recorded as deferred revenue and is being recognized over the life of the lease,
which is  thirty-six  (36) months.  (See Note 11 to the  Consolidated  Financial
Statements  comprising  Item 8 hereof.)  This gain was  offset by  approximately
$41,000  related to assets  written-off  when Ascend  moved to a new facility in
Portland.

     Income before the provision for income taxes increased  approximately  $2.5
million,  or 22%, from  approximately  $11.0 million,  for the fiscal year ended
June 30, 2003, to approximately $13.5 million for the fiscal year ended June 30,
2004.  The primary reason for the increase was the improving  efficiencies  that
come with  scale  arising  from the  integration  of the  acquisitions  NMHC has
completed.  The  start-up of the mail order  facility had the impact of reducing
overall profitability in the year ended June 30, 2004.

     The  effective  tax rate  decreased  from 41.8% for the twelve months ended
June 30,  2003 to 41.0% for the  twelve  months  ended June 30,  2004.  The main
reason for the decrease was a decline in NMHC's federal statutory rate.

     Net income for the fiscal year ended June 30, 2004 was  approximately  $8.0
million as compared to approximately $6.4 million for the fiscal year ended June
30, 2003; a 24%  increase.  Net income for the twelve months ended June 30, 2004
includes  the $1.5  million  after tax  impact of the New  Mountain  Transaction
items.

Liquidity and Capital Resources

     NMHC's primary cash requirements are for capital expenditures and operating
expenses, including cost of pharmaceuticals,  software and hardware upgrades and
the funding of accounts  receivable.  Effective July 2003, NMHC requires cash to
carry inventory in our mail service  facility and specialty  pharmacy.  Also, we
require cash for potential  acquisitions  of other pharmacy  benefit  management
companies or of companies  providing related  services.  As of June 30, 2005, we
had a working  capital deficit of $24.4 million as compared to a working capital
deficit  of $27.7  million  as of June 30,  2004.  The  primary  reason  for the
improvement in working  capital was the  profitability  generated by NMHC during
the fiscal year ended June 30, 2005 offset by the  acquisition  of PCN. NMHC has
now acquired seven companies since July 2000 utilizing  primarily cash. This has
had the effect of  increasing  our working  capital  deficits  until  sufficient
profitability is earned to offset these deficits.

     Net cash provided by operating  activities was $10.3 million for the fiscal
year ended June 30,  2005,  compared to $24.1  million for the fiscal year ended
June 30, 2004. The primary factor contributing to this $13.8 million decrease in
cash provided by operations was the timing of the PCN  acquisition.  On March 7,
2005, the date of the acquisition, PCN had cash on hand exceeding $16.7 million,
the vast majority of which was earmarked for payment within the next few days to
the various  dispensing  pharmacies.  Generally accepted  accounting  principles
require  that all  acquisitions  be reported net of cash  acquired.  Because the
$16.7  million of cash on hand exceeded the  acquisition  price of $13.0 million
and related acquisition costs of $0.6 million,  the PCN acquisition was reported
as a $3.2 million cash source of funds.  The timing of this event caused  NMHC's
cash provided by operations  for the fiscal year ended June 30, 2005 to be $10.3
million. Whereas, had the PCN Acquisition not occurred, NMHC would have reported
net cash provided by operating  activities of $22.5 million and net cash used in
investing  activities of $7.3 million, and net cash used in financing activities
of $2.3 for the fiscal year ended June 30, 2005.

     While cash flow from  operating  and  investing  activities  excluding  the
impact of the PCN  acquisition are not measures of financial  performance  under
U.S. generally accepted accounting principles,  they are provided as information
for  investors  for  analysis  purposes  in  evaluating  the  effect  of the PCN
acquisition on cash flow from operating and investing activities. Cash flow from
operating and investing  activities  excluding the impact of the PCN acquisition
is not meant to be  considered a substitute  or  replacement  for cash flow from
operating and investing activities as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from cash flow from operating
and investing  activities to cash flow from  operating and investing  activities
excluding the impact of the PCN acquisition, is as follows:

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

                                                                                For the fiscal year ended
                                                                            June 30, 2005        June 30, 2004
                                                                            -------------        -------------
                                                                             (unaudited)          (unaudited)
                                                                            -------------        -------------
Net cash provided by operating activities, as reported                     $      10,322         $      24,060
Impact of PCN on cash flow from operations
  for the period March 7 - June 30, 2005                                          12,218                     -
                                                                           -------------          ------------
Net cash provided by operating activities, excluding the
  impact of the PCN Acquisition                                            $      22,540         $      24,060
                                                                           =============         =============

Net cash used in investing activities, as reported                         $     (4,142)         $    (39,361)
Impact of PCN acquisition at March 7, 2005 on cash
  flow from investing activities                                                 (3,129)                     -
                                                                           -------------         -------------
Net cash used in investing activities, excluding the
  impact of the PCN Acquisition                                            $     (7,271)         $    (39,361)
                                                                           =============         =============
Net cash (used in) provided by financing activities, as reported           $     (2,296)         $     13,467
Impact of PCN on cash flow (used in) provided by
 financing activities for the period March 7 - June 30, 2005                         32                     -
                                                                           ------------          -------------
Net cash (used in) provided by financing activities,
 excluding the impact of the PCN Acquisition                               $     (2,264)          $    13,467
                                                                           ============          ==============

Cash and cash equivalents at end of period, as reported                    $      7,272          $      3,388
Impact of PCN acquisition at March 7, 2005 and PCN's
  operations for the period March 7 - June 30, 2005                               9,121                     -
                                                                           -------------         -------------
Cash and cash equivalents at end of period, excluding
  the impact of the PCN Acquisition                                        $     16,393          $      3,388
                                                                           =============         =============
</TABLE>

     Historically, the timing of NMHC'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
our  pharmacy  network on the other  hand.  These  terms  generally  lead to our
payments  to  participating  pharmacies  being  slower  than  our  corresponding
collections from plan sponsors. NMHC 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,  we could require additional working capital financing.  We have put
in place a $65 million  revolving  credit facility for  acquisitions and working
capital  financing.  However,  if such terms of trade were to change materially,
and/or if NMHC were unable to obtain additional working capital financing, there
could be a material  adverse  effect on our business,  financial  condition,  or
results of operations.

     Net cash used in  investing  activities  was $4.1  million  for the  twelve
months ended June 30, 2005,  as compared to $39.4  million for the twelve months
ended  June 30,  2004.  This  decrease  of  $35.2  million  in net cash  used in
investing  activities  was  primarily  the result of a decrease in cash paid for
acquisitions. Total cash expenditures in the fiscal year ended June 30, 2004 for
acquisitions, primarily PPP and Inteq, amounted to $34.7 million, as compared to
cash generated from  acquisitions of $1.7 million for the fiscal year ended June
30, 2005.  Also during the fiscal year ended June 30, 2004, $2.8 million of cash
was  generated  from the  repayment of  affiliate  and officer  loans.  Finally,
capital  expenditures  were $7.4 million  (including $2.3 millino of capitalized
internal  use  software)  for the fiscal year ended June 30, 2004 as compared to
$5.8 million  (including $3.2 million of capitalized  internal use  software)for
the fiscal year ended June 30, 2005, a reduction of $1.6 million when  comparing
the two fiscal years.

     During the fiscal year ended June 30,  2005,  NMHC used $2.1  million  from
financing  activities as compared to receiving  $13.6 million in the fiscal year
ended  June 30,  2004.  This  decrease  of $15.7  million is the result of $75.3
million  from the  issuance  of  NMHC's  series A  preferred  stock net of $51.1
million for the purchase of NMHC's shares in the tender offer in the fiscal year
ended June 30, 2004.  Further,  in the fiscal year ended June 30, 2004, cash was
reduced by a $15.6 net repayment under the revolving credit facility compared to
no net activity in the fiscal year ended June 30, 2005.  Finally,  an additional
$4.0 million was paid for dividends on the  convertible  preferred  stock during
the fiscal  year ended June 30,  2005 as  compared to the fiscal year ended June
30, 2004 offset by $2.8  million  less in  proceeds  from the  exercise of stock
options as compared to the prior year.

     On January 28, 2005,  NMHC entered into a five-year $65.0 million cash flow
based, line of credit with a syndicate of commercial banks led by JPMorgan Chase
Bank, N.A. ("JPMorgan").  Subject to certain conditions,  the new line of credit
may be increased by an aggregate of $35.0 million.  The line of credit  facility
contains various  covenants that,  among other things,  require NMHC to maintain
certain financial ratios,  which are consolidated net worth,  consolidated fixed
charge ratio and  consolidated  debt to EBITDA ratio. As of June 30, 2005, there
was no principal balance outstanding under the line of credit facility, and NMHC
was in compliance with its financial covenants.

     Two of these financial covenants are based upon the EBITDA (earnings before
interest, taxes, depreciation and amortization) generated by NMHC over specified
periods  of  time.  These  covenants,   consolidated   fixed  charge  ratio  and
consolidated  debt to EBITDA ratio,  are evaluated by the lender as a measure of
NMHC's liquidity and its ability to meet all of its obligations under the credit
facility. EBITDA is presented as cash flow from operations plus or minus the net
changes  in  assets  and  liabilities  and  the  changes  in  certain   non-cash
reconciling  items from net cash from operations to net income over the reported
periods.  While  EBITDA is not a measure of financial  performance  or liquidity
under generally accepted  accounting  principles,  it is provided as information
for  investors  for  analytical  purposes  in light of the  financial  covenants
referred  to  above.  EBITDA  is not  meant to be  considered  a  substitute  or
replacement  for  net  income  or cash  flow  from  operations  as  prepared  in
accordance with accounting  principles  generally accepted in the United States.
EBITDA, which increased by approximately $7.7 million or 40%, from $19.3 million
for the fiscal  year ended June 30,  2004 to $27.0  million  for the fiscal year
ended June 30, 2005, is calculated as follows:
<TABLE>
<S>                                                                <C>    <C>    <C>    <C>    <C>    <C>

                                                                    Year Ended June 30,
                                                                    -------------------
                                                  2005                      2004                       2003
                                        ------------------------- -------------------------- -------------------------
                                        ------------------------- -------------------------- -------------------------
Cash flow from operations                      $   10,322                 $   24,060                $   15,868
Provision for income taxes                          8,031                      5,524                     4,602
Interest (income) expense,
  Net                                                 299                        109                       957
Net change in assets and
  liabilities                                      11,988                     (7,823)                   (4,613)
Non-cash items to reconcile
  net cash from operations to
  net income                                       (3,630)                    (2,578)                     (404)
                                        ------------------------- -------------------------- -------------------------
EBITDA                                         $   27,010                 $   19,292                $   16,410
                                        ========================= ========================== =========================
-----------------
See Consolidated Statement of Cash Flows comprising Item 1 hereof for more
details.


</TABLE>

     NMHC has entered into various capital lease  transactions  for hardware and
software. NMHC has also assumed various capital leases through its acquisitions.
The  principal   balance  of  all  capital  leases  as  of  June  30,  2005  was
approximately $45,000.

     NMHC has  entered  into  various  real  estate  operating  leases with both
related and unrelated  parties.  NMHC has entered into various  operating leases
with unrelated third parties for office  equipment.  These leases have different
payment terms and  expirations  dates.  NMHC also entered into a  sale-leaseback
operating lease of certain fixed assets (principally mail service equipment. See
Note 11 to the Consolidated  Financial Statements comprising Item 8 hereof for a
further description of these various real estate and operating leases.

     The total future  payments under these  contractual  obligations as of June
30, 2005 iare as follows:


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

                                                                 Payments Due by Period
Contractual Obligations                                             ($ in thousands)

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

Long Term Debt                        $      -          $      -       $       -        $       -        $        -

Capital Lease Obligations                   45                29              16                -                 -

Operating Leases                        24,183             7,153           9,446            4,558             3,026

Sale-leaseback                             210               140              70                -                 -
                                    ------------    ---------------    ------------    --------------    -------------
                                    ------------    ---------------    ------------    --------------    -------------
Total Contractual Cash
  Obligations                           $24,438           $7,322          $9,532            $4,558            $3,026
                                    ============    ===============    ============    ==============    =============

</TABLE>


     The   shareholders   of  the  PCN  are   eligible  to  receive   additional
consideration of up to $30,000,000, if certain financial and performance targets
are met over the three year period beginning March 1, 2005. As of June 30, 2005,
$225,000 has been accrued based upon the tentative  achievement of the financial
and performance targets.

     The  shareholders  of the Inteq Group are  eligible  to receive  additional
consideration of up to $4,200,000,  if certain  financial targets are met during
the  year  ending  April 1,  2005.  Of this  potential  amount,  $3,000,000  was
deposited  into escrow at the time of closing.  As of June 30, 2005,  $1,024,000
has been earned,  of which $957,000 was released from escrow on October 5, 2004,
with an additional $67,000 released in January 2005.

     The shareholders of PPP are eligible to receive additional consideration of
up to  $7,000,000,  if  certain  financial  targets  are met over the three year
period  beginning August 1, 2003. Such amounts earned are payable within 45 days
after the first,  second,  and third anniversary of the date of acquisition.  In
the sole  discretion of NMHC, up to 50% of any amounts earned can be paid in the
form of our  stock in lieu of cash.  For the first  year  ended  July 31,  2004,
$716,000 was earned and was paid on September 15, 2004. Of this amount, $358,000
was paid in cash and $358,000 was paid in the form of our common stock.  For the
second year through June 30, 2005,  $795,000 has been earned and will be paid on
September  15,  2005.  Up to 50% of this  amount  may be paid in the form of our
stock in lieu of cash.

     The   shareholders   of  Centrus  were   eligible  to  receive   additional
consideration  of up  to  $4,000,000,  payable  over  three  years,  if  certain
financial  targets were met over the first two years. The financial  performance
targets were achieved and $4 million has been earned. Of this amount, $1 million
was paid in May 2003,  $2 million  was paid in May 2004,  and another $1 million
was paid in May 2005.

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

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

     We used the  remaining  proceeds from the issuance and sale of the series A
preferred stock of approximately $24 million,  excluding expenses related to the
closing of the New Mountain  Transaction,  for the Inteq Acquisition and working
capital purposes.

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

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

     NMHC  anticipates  that current cash positions,  together with  anticipated
cash flow from operations,  will be sufficient to satisfy our 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 our  stated  goals  to  acquire  other  pharmacy  benefit
management companies and companies providing related services.  Depending on our
evaluation of future  acquisitions,  additional cash may be required to complete
these acquisitions.  In addition,  we will require cash to acquire inventory for
our mail service and specialty distribution operations. In the event that NMHC's
plans change or its assumptions prove to be inaccurate, or the proceeds from the
JPMorgan  credit  facility  and  the  New  Mountain   Transaction  prove  to  be
insufficient to fund operations and  acquisitions,  we 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 us, if at
all.

Supplemental Quarterly Financial Data

     Unaudited  quarterly  financial  data ($ in  thousands,  except  per  share
amounts) for the fiscal years 2005 and 2004 are summarized as follows:

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


                                                                             Fiscal Year 2005
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Quarters ended                                                June 30      March 31       December 31    September 30
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------

Revenue                                                     $ 215,858  $    199,342         $ 200,550       $ 184,842

Income before provision for income taxes                        3,913         5,538             6,442           4,519

Net Income                                                      2,647         3,267             3,801           2,666

Net income (loss) available to common
  Stockholders                                                  1,132         1,769             2,270           1,135

Earnings (loss) per common share:
  Basic                                                          0.24          0.39              0.51            0.26
  Diluted                                                        0.22          0.27              0.32            0.22

Weighted-average number of common shares outstanding:
  Basic                                                         4,764         4,584             4,424           4,400
  Diluted                                                      12,085        11,997            11,865          11,904


                                                                             Fiscal Year 2004
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Quarters ended                                                June 30      March 31       December 31    September 30
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------

Revenue                                                     $ 176,647  $   159,725          $ 163,896       $ 150,830

Income before provision for income taxes                        4,277        2,641              3,769           2,790

Net Income                                                      2,525        1,564              2,218           1,646

Net income (loss) available to common
  Stockholders                                                  1,010      (78,652)*            2,218           1,646

Earnings (loss) per common share:
 Basic                                                           0.25       (11.17)              0.29            0.22
 Diluted                                                         0.21       (11.17)              0.25            0.19


Weighted-average number of common shares outstanding:
  Basic                                                         4,013        7,044              7,764           7,641
  Diluted                                                      11,831        7,044              8,888           8,473


----------------------
*Includes an $80,000 non-recurring, non-cash charge for a beneficial conversion
feature related to the New Mountain transaction.

</TABLE>


Other Matters

Inflation

     Management  does not  believe  that  inflation  has had a material  adverse
impact on NMHC's net income for the three most recent fiscal years.

Critical Accounting Policies and Estimates

General

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

     NMHC  believes  that of its  significant  accounting  policie,s  which  are
described in Note 1 to the Consolidated  Financial Statements  comprising Item 8
hereof,  the following  may involve a higher  degree of judgment and  complexity
than others:

Revenue Recognition

(a)      Since January 1, 2000, services provided by NMHC have been on a fee for
         service basis. Under the fee for service arrangement, we are paid by
         our sponsors for our contractually agreed upon rates based upon actual
         claims adjudicated, plus a fixed transaction fee.

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

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

(c)      NMHC includes in revenue only those co-payments collected from
         individual members by NMHCmail. Co-payments retained by pharmacies on
         the remainder of the prescriptions filled for our members are not
         included in our reported revenue. We disclose these amounts
         parenthetically on the face of our Consolidated Statement of Income.

(d)      Rebates are recognized when we are entitled to them in accordance with
         the terms of our arrangements with drug manufacturers, third party
         rebate administrators, and sponsors, and when the amount of the rebates
         is determinable. NMHC 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 our rebate experience, and are adjusted as additional
         information becomes available.

Bad Debt

     We maintain allowances for doubtful accounts for estimated losses resulting
from the liability of our sponsors to make required  payments.  If the financial
condition of our sponsors  were to  deteriorate,  resulting in an  impairment of
their ability to make payments, additional allowances may be required.

Goodwill and Intangible Asset Impairment

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

Deferred Taxes

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

Capitalized Software

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

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

     Not applicable.


Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The audited  financial  statements  of NMHC as of June 30,  2005,  2004 and
2003, and the related Schedules, are set forth at the pages indicated in Item 15
hereof.


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

         Not applicable.


Item 9A. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

     Disclosure controls and procedures are the controls and procedures designed
to ensure  that  information  that NMHC is  required  to disclose in its reports
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time  periods  required.  They  include,  without  limitation,  controls and
procedures  designed to ensure that  information is accumulated and communicated
to the officers who certify  NMHC's  financial  reports and to other  members of
senior  management  in  order  to  allow  timely  decisions  regarding  required
disclosure.

     Under the supervision and with the participation of management, chiefly our
chief  executive  officer and chief  financial  officer,  NMHC has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules  13a-15(e) and  15d-15(e))  under the Exchange Act as of the end of the
period covered by this Form 10-K. Based on such evaluation,  our chief executive
officer and chief financial  officer concluded that, as of the end of the period
covered by this Form 10-K, our disclosure  controls and procedures are effective
in that they provide reasonable  assurances that the information we are required
to disclose in the reports we file or submit under the Exchange Act is recorded,
processed,  summarized and reported in accordance with U.S.  generally  accepted
accounting  principles  within the time periods  required by the SEC's rules and
forms.

Changes to Internal Control Over Financial Reporting

     In the course of our ongoing preparations for making management's report on
internal  control over financial  reporting  included in this annual report,  as
required by Section 404 of the  Sarbanes-Oxley  Act of 2002, we have  identified
areas in need of improvement  and have taken remedial  actions to strengthen the
affected  controls as  appropriate.  From time to time,  we make these and other
changes to our internal  control over  financial  reporting that are intended to
enhance the  effectiveness of our internal control over financial  reporting and
which do not have a material  effect on our overall  internal  control.  We will
continue to evaluate the effectiveness of our disclosure controls and procedures
and internal control over financial  reporting on an ongoing basis and will take
action as appropriate.  There have been no changes to our internal  control over
financial  reporting,  as such term is defined in Rules  13a-15(f) and 15d-15(f)
under the Exchange Act,  during the fourth  quarter for fiscal year 2005 that we
believe materially affected,  or will be reasonably likely to materially affect,
our internal control over financial reporting.

Management's Report on Internal Control Over Financial Reporting

     Our management is responsible for  establishing  and  maintaining  adequate
internal control over financial  reporting,  as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f).  Our internal  control system was designed to
provide reasonable  assurance to our management and Board of Directors regarding
the preparation and fair presentation of published financial statements.

     Our internal control over financial  reporting  includes those policies and
procedures that:

          (i) pertain to the maintenance of records that, in reasonable  detail,
     accurately  and fairly reflect the  transactions  and  dispositions  of our
     assets;

          (ii) provide  reasonable  assurance that  transactions are recorded as
     necessary to permit preparation of financial  statements in accordance with
     generally  accepted  accounting  principles,  and  that  our  receipts  and
     expenditures are being made only in accordance with  authorizations  of our
     management and directors; and

          (iii)  provide  reasonable  assurance  regarding  prevention or timely
     detection of  unauthorized  acquisition,  use or  disposition of our assets
     that could have a material effect on the financial statements.

     All internal  control systems,  no matter how well designed,  have inherent
limitations.  Therefore,  even those  systems  determined  to be  effective  can
provide  only   reasonable   assurance  with  respect  to  financial   statement
preparation and presentation.

     In making the assessment of internal control over financial reporting,  our
management used the criteria issued by the Committee of Sponsoring Organizations
of the  Treadway  Commission  (COSO) in Internal  Control-Integrated  Framework.
Based on that  assessment  and  those  criteria,  management  believes  that our
internal  control over  financial  reporting was  effective as of June 30, 2005.

     NMHC acquired PCN on March 7, 2005 and has excluded PCN from our assessment
of and  conclusion  on the  effectiveness  of internal  control  over  financial
reporting.  For the year ended June 30,  2005,  PCN  accounted  for 3% of NMHC's
total net revenue.  As of June 30, 2005,  PCN  accounted for 11% of NMHC's total
assets,  excluding $12.0 million of goodwill and other  intangible asset amounts
that were recorded in connection with this acquisition.

     Our  management's  assessment of the  effectiveness of our internal control
over  financial  reporting as of June 30, 2005 has been audited by Ernst & Young
LLP,  an  independent  registered  public  accounting  firm,  as stated in their
attestation report on management's assessment of internal control over financial
reporting, which is included in this annual report below.


             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
National Medical Health Card Systems, Inc. and Subsidiaries

     We have  audited  management's  assessment,  included  in the  accompanying
Management's Report on Internal Control over Financial Reporting,  that National
Medical Health Card Systems,  Inc. and Subsidiaries  (the "Company")  maintained
effective  internal control over financial  reporting as of June 30, 2005, based
on criteria established in Internal Control--Integrated  Framework issued by the
Committee  of  Sponsoring  Organizations  of the Treadway  Commission  (the COSO
criteria).  The Company's  management is responsible for  maintaining  effective
internal  control  over  financial  reporting  and  for  its  assessment  of the
effectiveness of internal control over financial  reporting.  Our responsibility
is to  express  an  opinion  on  management's  assessment  and an opinion on the
effectiveness of the Company's  internal control over financial  reporting based
on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a  reasonable  basis for our
opinion.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

     Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

     As indicated in the  accompanying  Management's  Report on Internal Control
over Financial Reporting in Item 9A,  management's  assessment of and conclusion
on the  effectiveness  of internal  control  over  financial  reporting  did not
include the internal  controls of  Pharmaceutical  Care Network ("PCN") which is
included  in the Fiscal  2005  consolidated  financial  statements  of  National
Medical Health Card Systems,  Inc. and Subsidiaries and constituted 11% of total
assets  on June  30,  2005,  excluding  $12.0  million  of  goodwill  and  other
intangible  asset amounts recorded in connection with this acquisition and 3% of
revenues  for the fiscal year then ended.  Our audit of  internal  control  over
financial   reporting  of  National  Medical  Health  Card  Systems,   Inc.  and
Subsidiaries  also did not include an  evaluation  of the internal  control over
financial reporting of PCN.

     In our opinion,  management's  assessment that National Medical Health Card
Systems,  Inc.  and  Subsidiaries  maintained  effective  internal  control over
financial  reporting  as of June 30,  2005,  is fairly  stated,  in all material
respects,  based on the COSO criteria.  Also, in our opinion,  National  Medical
Health Card Systems, Inc. and Subsidiaries maintained, in all material respects,
effective  internal control over financial  reporting as of June 30, 2005, based
on the COSO criteria.

     We also have  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight Board (United States),  the consolidated  balance
sheet of National Medical Health Card Systems,  Inc. and Subsidiaries as of June
30,  2005  and  2004  and  the  related   consolidated   statements  of  income,
stockholders'  equity  (deficit),  and cash flows for each of the three years in
the period ended June 30, 2005 and our report dated September 19, 2005 expressed
an unqualified opinion thereon.

                                                         Ernst & Young LLP

Melville, New York
September 19, 2005


<PAGE>


                                    PART III


Item 10. Directors and Executive Officers of the Registrant.

     The information  required is incorporated herein by reference to the fiscal
year 2005 definitive Proxy Statement under the caption  "Election of Directors,"
which NMHC anticipates will be filed by October 28, 2005.


Item 11. Executive Compensation.

     The information  required by this item is incorporated  herein by reference
to the  information  in the fiscal 2005  Definitive  Proxy  Statement  under the
caption  "Executive  Compensation,"  which  NMHC  anticipates  will be  filed by
October 28, 2005.


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

     The information  required by this item is incorporated  herein by reference
to the  information  in the fiscal 2005  Definitive  Proxy  Statement  under the
captions  "Security  Ownership  of  Certain  Beneficial  Owners"  and  "Security
Ownership of Management,"  which NMHC  anticipates  will be filed by October 28,
2005.


Item 13. Certain Relationships and Related TransactionS.

     The information  required by this item is incorporated  herein by reference
to the  information  in the fiscal 2005  Definitive  Proxy  Statement  under the
caption "Certain Relationships and Related Transactions," which NMHC anticipates
will be filed by October 28, 2005.


Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

     The information  required by this item is incorporated  herein by reference
to the  information  in the fiscal 2005  Definitive  Proxy  Statement  under the
caption "Principal Accountant Fees and Services," which NMHC anticipates will be
filed by October 28, 2005.

<PAGE>


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


Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

     1. Financial Statements                                                              Page No.

          The following Consolidated Financial Statements of NMHC are
included herein:

      Report of Independent Registered Public Accounting Firm                               F-2

     Consolidated Balance Sheet as of June 30, 2005 and 2004                                F-3

      Consolidated Statement of Income for each of the years ended
       June 30, 2005, 2004 and 2003                                                         F-4

      Consolidated Statement of Stockholders' Equity (Deficit) for each
       of the years ended June 30, 2005, 2004 and 2003                                      F-5

      Consolidated Statement of Cash Flows for each of the years ended
       June 30, 2005, 2004 and 2003                                                         F-6

     Notes to Consolidated Financial Statements                                          F-7 - F-30


   2.    Financial Statement Schedule

                  Schedule II:  Valuation and Qualifying Accounts                           S-1

     All other information and financial statement schedules are omitted because
they are not applicable, or not required, or because the required information is
included in the financial statements or notes thereto.

         3.       Exhibits

Exhibit
Number       Description of Exhibit

2.1      Stock Purchase Agreement dated July 31, 2003, among NMHC and Portland
         Professional Pharmacy, Portland Professional Pharmacy Associates and the individuals
         listed on Schedule I thereto (3)
2.2      Amended and Restated Stock Purchase Agreement dated November 26, 2003 by and
         between NMHC and New Mountain Partners, L.P. (8)
2.3      Asset Purchase Agreement among NMHC, Inteq PBM, LP, Inteq-RX Group, LLP,
          and  the  individuals  named therein dated April 1, 2004 (6)
2.4      Stock Purchase Agreement dated March 7, 2005 among NMHC, PCN Acquisition Corp.,
         Pharmaceutical Care Network and California Pharmacists Association (13)
3.1      Certificate of Incorporation of NMHC (2)
3.2      Certificate of Amendment to the Certificate of Incorporation of NMHC (7)
3.3      Amended and Restated By-Laws of NMHC (9)
3.4      Amended and Restated Audit Committee Charter (7)
4.1      Form of Warrant Agreement, including form of Representatives' Warrants (1)
4.2      Certificate of Designation, Preferences and Rights of Series A 7% Convertible
          Preferred Stock of NMHC (7)
10.1     Credit Agreement dated January 28, 2005 among NMHC, the Lenders party thereto
         and JPMorgan Chase, as Administrative Agent (12)
10.2     Stock Option Agreement between NMHC and James Bigl dated July 22, 2003 (3)
10.3     Stock Option Agreement between NMHC and Agnes Hall dated August 1, 2003 (3)
10.4     Stock Option Agreement between NMHC and David Gershen dated August 1, 2003 (3)
10.5     Stock Option Agreement between NMHC and Tery Baskin dated August 1, 2003 (3)
10.6     Stock Option Agreement between NMHC and Patrick McLaughlin dated August 1, 2003 (3)
10.7     Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between NMHC
         and James J. Bigl  (5)
10.8     Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam
         Development Corporation and NMHCRx Mail Order, Inc. (3)
10.9     AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail
         Order, Inc. d/b/a NMHCmail and AmerisourceBergen Drug Corporation (3)
10.10    Release, dated October 30, 2003, by Sandata Technologies, Inc. and Sandsport, Inc. (5)
10.11    Amendment to Lease Agreement, dated as of October 23, 2003, by and among BFS Realty, LLC and NMHC (5)
10.12    Amendment to Lease Agreement (30 Sea Cliff), dated as of October 30, 2003, between Living in Style, LLC and NMHC (5)
10.13    Amendment to Lease Agreement (32 Sea Cliff), dated as of October 30, 2003, between Living in Style, LLC NMHC (5)
10.14    Second Amendment to Employment Agreement, dated October 30, 2003, by and between NMHC and Bert E. Brodsky (5)
10.15    Amended and Restated Employment Agreement dated June 14, 2004 between NMHC and James J. Bigl (9)
10.16    Form of Stock Option Agreement between NMHC and Non-Employee Directors dated May 4, 2004
         for a grant of 15,000 shares of common stock (9)
10.17    Form of Stock Option Agreement between NMHC and Non-Employee Directors dated May 4, 2004
         for a grant of 20,000 shares of common stock (9)
10.18    Employment Agreement dated August 30, 2004 between NMHC and James F. Smith (11)
10.19    Employment Agreement dated October 4, 2004 between NMHC and Bill Masters (11)
10.20    Stock Option Agreement dated August 31, 2004 between NMHC and James F. Smith (11)
10.21    Stock Option Agreement dated October 4, 2004 between NMHC and Bill Masters (11)
10.22    Form of Stock Option Agreement between NMHC and Senior Management dated December 20, 2004 (14)
10.23    Form of Stock Option Agreement between NMHC and Non-Employee Directors dated December 21, 2004 (14)
14.1     Amended and Restated Code of Ethics (10)
21.1     List of Subsidiaries
23.1     Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
31.1     Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the
         Sarbanes-Oxley Act
31.2     Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the
         Sarbanes-Oxley Act
32.1     Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
32.2     Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act

</TABLE>


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

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

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

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

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

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

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

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

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

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

     (11)  Denotes  document  filed as an  exhibit  to NMHC's  Form 10-Q for the
quarter ended September 30, 2004 and incorporated herein by reference.

     (12)  Denotes  document  filed as an  exhibit  to NMHC's  Form 8-K filed on
February 3, 2005 and incorporated herein by reference.

     (13) Denotes document filed as an exhibit to NMHC's Form 8-K filed on March
11, 2005 and incorporated herein by reference.

     (14)  Denotes  document  filed as an  exhibit  to NMHC's  Form 10-Q for the
quarter ended December 31, 2004 and incorporated herein by reference.


<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/ James J. Bigl
   -----------------------------------------------------------
        James J. Bigl, Chairman of the Board
Date: September 22, 2005

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/ James J. Bigl
   ---------------------------------------------------------------
        James J. Bigl, Chairman of the Board
Date: September 22, 2005

By         /s/ James F. Smith
  -----------------------------------------------------------------
        James F. Smith, Chief Executive Officer,
        Principal Executive Officer and Director
Date: September 22, 2005

By         /s/ Gerald Angowitz
  -----------------------------------------------------------------
        Gerald Angowitz, Director
Date: September 22,  2005

By         /s/ Paul J. Konigsberg
  ----------------------------------------------------------------
        Paul J.Konigsberg, Director
Date: September 22, 2005

By          /s/ Steven B. Klinsky
   ----------------------------------------------------------------
       Steven B. Klinsky, Director
Date: September 22, 2005

By         /s/ Michael Ajouz
   ----------------------------------------------------------------
        Michael Ajouz, Director
Date: September 22, 2005

By         /s/ Robert R. Grusky
   ----------------------------------------------------------------
        Robert R. Grusky, Director
Date: September 22, 2005

By        /s/ G. Harry Durity
   -----------------------------------------------------------------
        G. Harry Durity, Director
Date: September 22, 2005

By      /s/ Michael T. Flaherman
   ----------------------------------------------------------------
        Michael T. Flaherman, Director
Date: September 22, 2005

By      /s/ David E. Shaw
   ---------------------------------------------------------------
        David E. Shaw, Director
Date: September 22, 2005

By       /s/ Stuart Fleischer
   -----------------------------------------------------------------
        Stuart Fleischer, Principal Financial and Accounting Officer
Date: September 22, 2005

<PAGE>




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
                                                                       Page No.

Report of Independent Registered Public Accounting Firm                   F-2

Consolidated Financial Statements:

   Balance Sheet                                                          F-3
   Statement of Income                                                    F-4
   Statement of Stockholders' Equity (Deficit)                            F-5
   Statement of Cash Flows                                                F-6
   Notes to Consolidated Financial Statements                        F-7 - F-30

<page>


             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
National Medical Health Card Systems, Inc. and Subsidiaries

     We have audited the  accompanying  consolidated  balance  sheet of National
Medical Health Card Systems,  Inc. and  Subsidiaries  (the "Company") as of June
30,  2005  and  2004  and  the  related   consolidated   statements  of  income,
stockholders'  equity  (deficit),  and cash flows for each of the three years in
the period ended June 30, 2005. Our audits also included the financial statement
schedule  listed in the index at Item  15(a).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  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 financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of National
Medical Health Card Systems,  Inc. and  Subsidiaries  at June 30, 2005 and 2004,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended June 30, 2005,  in  conformity  with U.S.
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight Board (United States),  the  effectiveness of the
Company's  internal control over financial  reporting as of June 30, 2005, based
on criteria established in Internal Control-Integrated  Framework issued by the
Committee of Sponsoring  Organizations of the Treadway Commission and our report
dated September 19, 2005, expressed an unqualified opinion thereon.

                                                     Ernst & Young LLP
Melville, New York
September  19, 2005

<PAGE>

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


                     NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
----------------------------------------------------------------------------------------------------------------------------------
                                ($ in thousands)
----------------------------------------------------------------------------------------------------------------------------------
                                                                                       June 30,                  June 30,
Assets                                                                                   2005                      2004
                                                                                         ----                      ----
Current:

  Cash and cash equivalents (including cash equivalent investments of $193
          and $1,191, respectively)                                                   $    7,272              $    3,388
  Restricted cash                                                                          3,994                   1,695
  Accounts receivable, less allowance for doubtful accounts of $1,953
            and $2,312, respectively                                                     103,129                  73,162
  Rebates receivable                                                                      40,377                  34,764
  Inventory                                                                                4,119                   3,252
  Due from affiliates                                                                         31                      18
  Deferred tax assets                                                                      2,117                   2,711
  Other current assets                                                                     5,759                   2,093
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                               166,798                 121,083

  Property, equipment and software development costs, net                                 12,177                  10,597
  Intangible assets, net of accumulated amortization of $3,273 and $2,106,
            respectively                                                                   3,951                   3,788
  Goodwill                                                                                99,710                  86,964
  Other assets                                                                             1,295                   3,717
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      Total Assets                                                                      $283,931                $226,149
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Liabilities, Redeemable Preferred Equity, and Common Stockholders'
             Equity (Deficit)
Current Liabilities:

  Accounts payable and accrued expenses                                                 $188,843                $147,572
  Revolving credit facility and loans payable-current                                      1,860                      53
  Current portion of capital lease obligations                                                29                     327
  Income taxes payable                                                                         -                     837
  Other current liabilities                                                                  503                       -
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                           191,235                 148,789

  Capital lease obligations, less current portion                                             16                      13
  Long term loans payable and other liabilities                                              998                   3,877
  Deferred tax liability                                                                   5,964                   4,704
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                   198,213                 157,383
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies
Redeemable Preferred Equity:

  Redeemable convertible preferred stock $.10 par value; 15,000,000
          shares authorized, 6,956,522 issued and outstanding                             75,864                  75,389

Common Stockholders' Equity (Deficit):

  Common  Stock, $.001 par value, 35,000,000 shares authorized, 9,461,826 and
          8,969,694 shares issued, 4,821,926 and 4,329,794 outstanding,
          respectively                                                                         9                       9
  Additional paid-in-capital                                                             115,061                 104,890
  Retained deficit                                                                       (53,337)                (59,643)
  Treasury stock at cost, 4,639,900 shares                                               (51,879)                (51,879)
---------------------------------------------------------------------------------------------------------------------------
     Total common stockholders'  equity (deficit)                                          9,854                  (6,623)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total Liabilities, Redeemable Preferred Equity, and Common Stockholders'
         Equity (Deficit)                                                               $283,931                $226,149
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
                               See accompanying notes to consolidated financial statements

</TABLE>


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
                        CONSOLIDATED STATEMENT OF INCOME
               (All amounts in thousands, except per share amount)
------------------------------------------------------------------------------

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

                                                                                      Years ended June 30,
                                                                           2005              2004               2003
                                                                           ----              ----               ----

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

Revenue (includes co-payments collected of $15,134, $2,274,
 and $0, respectively, and excludes co-payments retained by the
 pharmacies of $280,946, $203,420, and $168,475, respectively)        $  800,592       $   651,098         $   573,266

-------------------------------------------------------------------------------------------------------------------------------
Cost of claims (excludes co-payments retained by the
  pharmacies of $280,946, $203,420, and $168,475,
  respectively)                                                          713,883           587,055             525,472

Gross profit                                                              86,709            64,043              47,794

Selling, general and administrative expenses                              67,786            50,606              35,974

--------------------------------------------------------------------------------------------------------------------------------
Operating income                                                          18,923            13,437              11,820
--------------------------------------------------------------------------------------------------------------------------------

Other income (expense):
Interest expense                                                            (610)             (703)             (1,209)
Interest income                                                              311               594                 252
Other income, net(includes insurance gain of $1,702 in 2005)               1,788               149                 153
---------------------------------------------------------------------------------------------------------------------------------
                                                                           1,489                40                (804)
---------------------------------------------------------------------------------------------------------------------------------

Income before provision for income taxes                                  20,412            13,477              11,016
Provision for income taxes                                                 8,031             5,524               4,602

----------------------------------------------------------------------------------------------------------------------------------
Net income                                                           $    12,381        $    7,953          $    6,414
==================================================================================================================================

Beneficial conversion feature                                                  -            80,000                   -
Preferred stock cash dividend                                              5,600             1,596                   -
Accretion of transaction expenses                                            475               135                   -

----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders                   $     6,306        $  (73,778)         $    6,414
==================================================================================================================================

Earnings (loss) per common share:
  Basic                                                              $      1.39        $  (11.14)          $     0.85

  Diluted *                                                          $      1.03        $  (11.14)          $     0.80

Weighted-average number of common shares outstanding:
  Basic                                                                    4,542             6,622               7,590
=================================================================================================================================
  Diluted *                                                               11,983             6,622               8,036
=================================================================================================================================

           See accompanying notes to consolidated financial statements

</TABLE>

____________
*  For the year ended June 30, 2005, the number of weighted average diluted
shares was calculated using the "as if converted" method for the redeemable
preferred stock.


<PAGE>



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

  <TABLE>
<S>                                                                <C>    <C>    <C>    <C>    <C>    <C>
                                                                                                                          Total
                                                                                                                         Common
                                                     Common Stock                      Retained      Treasury Stock    Stockholders'
                                                     ------------       Additional     Earnings      --------------       Equity
                                                   Shares   Amount   Paid-in-Capital   (Deficit)     Shares   Amount    (Deficit)
                                                  ----------------    ---------------  ---------     ------- -------   ------------
Balance at June 30, 2002                          7,550   $    8      $ 14,292        $ 7,721        191     $ (744)     $ 21,277

  Exercise of stock options                         221        -           485             -           -          -           485
  Stock issued - PAI acquisition - additional         -      250             -             -           -          -           250
                                                     42
  Net income                                          -        -             -         6,414           -          -         6,414
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003                          7,813        8        15,027        14,135         191       (744)      28,426

  Accretion of transaction expenses related to        -        -             -          (135)          -          -         (135)
     preferred stock offering
  Purchase of treasury stock in tender offer          -        -             -             -       4,449    (51,135)     (51,135)
    including related expenses
  Exercise of stock options                       1,092        1         7,022             -           -          -        7,023
  Shares issued related to outstanding warrants      65        -             -             -           -          -            -
  Payment of preferred dividends                      -        -             -        (1,596)          -          -       (1,596)
  Beneficial conversion feature                       -        -        80,000       (80,000)          -          -            -
  Stock option income tax benefit                     -        -         1,878             -           -          -        1,878
  Compensation component of employee stock
     options                                          -        -           963             -           -          -          963
  Net income                                          -        -             -         7,953           -          -        7,953

-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004                          8,970        9       104,890       (59,643)      4,640    (51,879)      (6,623)

  Accretion of transaction expenses related to
     preferred stock offering                        -         -             -          (475)          -          -         (475)
  Exercise of stock options                        418         -         4,188             -           -          -        4,188
  Shares issued related to outstanding warrants     61         -             -             -           -          -            -
  Shares issued related to PPP earnout              13         -           358             -           -          -          358
  Payment of preferred dividends                     -         -             -        (5,600)          -          -       (5,600)
  Stock option income tax benefit                    -         -         5,625             -           -          -        5,625
  Net income                                         -         -             -        12,381           -          -       12,381
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005                         9,462     $   9     $ 115,061     $ (53,337)      4,640   $(51,879)     $  9,854
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

           See accompanying notes to consolidated financial statements


<PAGE>


           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
  ---------------------------------------------------------------------------
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                ($ in thousands)
<TABLE>
<S>                                                                <C>    <C>    <C>    <C>    <C>    <C>


                                                                                            Years Ended June 30,
                                                                                   ---------------------------------------
                                                                                   ------------ ------------ -------------
                                                                                      2005         2004          2003
                                                                                      ----         ----          ----
Cash flows from operating activities:
             Net income                                                          $   12,381    $   7,953    $   6,414
               Adjustments to reconcile net income to net cash
                 provided by operating activities:
                 Depreciation and amortization                                        6,300        5,706        4,437
                 Amortization of deferred gain                                         (100)        (455)        (153)
                 Amortization of deferred financing costs                               167          181          183
                 Net loss (gain) on disposal of capital assets                            -          310          (13)
                 Provision for doubtful accounts                                        651          692          164
                 Compensation expense accrued to officer/stockholder                      -           37          821
                 Deferred income taxes                                                2,912        1,813         (433)
                 Interest accrued on stockholders'/affiliate's loans                      -            -         (165)
             Changes in assets and liabilities, net of effect from acquisitions:
                 Restricted cash                                                        435          688          270
                 Accounts receivable                                                (27,425)     (13,005)       7,486
                 Rebates receivable                                                     488       (8,139)      (8,809)
                 Inventory                                                             (867)      (2,714)           -
                 Other current assets                                                (3,867)        (330)      (1,028)
                 Due to/from affiliates                                                 (13)         225         (276)
                 Other assets                                                         2,694         (514)         (19)
                 Accounts payable and accrued expenses                               12,196       28,246        6,844
                 Income taxes payable and other current liabilities                   5,289        1,934         (163)
                 Other long term liabilities                                           (919)       1,432          308
------------ -------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                            10,322       24,060        15,868
--------------------------------------------------------------------------------------------------------------------------
------------ -------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
             Capital expenditures                                                    (5,795)      (7,379)        (2,468)
             Repayment of loan from affiliate                                             -        2,660             -
             Repayment of loan from officer                                               -          107             -
             Acquisition of PCN, net of cash required                                 3,150            -             -
             Acquisition of Integrail, net of cash acquired                               -          (13)       (1,482)
             Acquisition of Centrus, net of cash acquired                            (1,000)      (2,000)       (1,070)
             Acquisition of PAI                                                           -            -        (1,000)
             Acquisition of Inteq, net of cash acquired                                (139)     (29,078)            -
             Acquisition of PPP, net of cash acquired                                  (358)      (3,658)            -
             Proceeds from disposal of capital assets                                     -            -            22
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                (4,142)     (39,361)       (5,998)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:

             Proceeds from exercise of stock options                                  4,188        7,023           485
             Proceeds from issuance of preferred stock, net of offering costs             -       75,254             -
             Purchase  of  treasury  stock  in  tender  offer  including  related         -      (51,135)            -
             expenses
             Repayment of convertible note offering                                       -            -        (8,000)
             Proceeds from revolving credit facility                                724,758      871,869       688,750
             Repayment of revolving credit facility                                (724,811)    (887,477)     (686,901)
             Payment of preferred dividends                                          (5,600)      (1,596)            -
             Deferred financing costs                                                  (459)           -             -
             Repayment of debt and capital lease obligations                           (372)        (471)         (750)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities                                  (2,296)      13,467        (6,416)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                  3,884       (1,834)        3,454
Cash and cash equivalents at beginning of period                                      3,388        5,222         1,768
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                        $   7,272    $   3,388     $   5,222
--------------------------------------------------------------------------------------------------------------------------
           See accompanying notes to consolidated financial statements
</TABLE>
                                                                             F-6

<PAGE>

================================================================================
                     NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (All $ in thousands, except per  share amounts)
================================================================================

 1.  PRINCIPAL BUSINESS ACTIVITY AND SUMMARY
     OF SIGNIFICANT ACCOUNTING POLICIES:

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

     The audited  consolidated  financial  statements  include  the  accounts of
National Medical Health Card Systems,  Inc., and its wholly owned  subsidiaries,
Pharmacy  Associates,  Inc.  ("PAI"),  Interchange  PMP, Inc.  ("PMP"),  Centrus
Corporation  ("Centrus"),  National  Medical  Health  Card  IPA,  Inc.  ("IPA"),
Specialty   Pharmacy  Care,   Inc.   ("Specialty"),   NMHCRX   Contracts,   Inc.
("Contracts"),  PBM  Technology  Inc.  ("PBM  Tech"),  NMHCRX Mail  Order,  Inc.
("NMHCmail"),  Portland Professional Pharmacy and Portland Professional Pharmacy
Associates  (collectively  "NMHC  Ascend"),  Inteq  Corp.  and  Inteq  TX  Corp.
(collectively "Inteq"), Pharmaceutical Care Network ("PCN"), and Integrail, Inc.
("NMHC  Integrail").  Also included on a consolidated  basis are the accounts of
NMHC Funding, LLC ("Funding"),  a limited liability company of which the Company
and some of its subsidiaries are the owners of all of the membership  interests.
Unless the context  otherwise  requires,  references  herein to the "Company" or
"NMHC" refer to the Company and its subsidiaries,  on a consolidated  basis. All
material  intercompany  balances and  transactions  have been  eliminated in the
consolidation.

     In October 1998, the Company acquired IPA, which is an independent practice
association  under the laws of New York.  The Company  acquired  PSCNY IPA, Inc.
("PSCNY")  as  part  of  the  Centrus   Acquisition   (see  Note  3  -  Business
Acquisitions).  NMHC's  IPA was  dissolved.  PSCNY was  utilized  by  Centrus to
contract with Health Maintenance Organizations or providers containing financial
risk-sharing  provisions  which  represents some of Centrus'  largest  sponsors.
PSCNY's  name was  changed  to IPA in  September  2002.  IPA is  subject  to the
regulatory  authority  of the  Department  of  Health  and the  laws,  rules and
regulations applicable to independent practice associations in New York.

     Specialty was  incorporated in January 2000.  This wholly owned  subsidiary
was established to provide manufacturer rebate administration  services to NMHC.
Effective as of April 2000, NMHC began to enter into rebate agreements  directly
with drug manufacturers.  Although some of these agreements are between NMHC and
drug  manufacturers,  Specialty  administers  these  contracts  on behalf of the
Company.  Specialty is paid administrative fees by the drug manufacturers and/or
retains a percentage of rebates  collected.  Currently,  Specialty does not have
any full-time employees.  Specialty reimburses NMHC for the use of its employees
on an as-needed basis.

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

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

     NMHCmail,  Inc. was  incorporated  in August 2002 to provide home  delivery
pharmacy  services  to the  Company's  existing  sponsors as well as other small
regional  PBMs.  Prior to opening its own  facility in  Miramar,  Florida,  NMHC
outsourced all its mail order business. The subsidiary has its own employees and
rents the  facility,  including a  warehouse,  from an  unrelated  third  party.
Currently,  all  intercompany  revenue  generated by NMHCmail for fulfillment of
prescriptions on behalf of the PBM, is eliminated in consolidation.

 Cash and Cash Equivalents

     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 money market  funds.  Restricted  cash balances at June 30, 2005 and 2004
includes approximately $3,994 and $1,695, respectively,  which are restricted as
to  their  use as  related  to the  maintenance  of  minimum  cash  balances  in
accordance with Ohio statute and other customer restrictions.

 Revenue Recognition

     The Company enters into a fee for service (per claim  charges)  arrangement
with its  sponsors  for the payment of  administrative  fees.  Under the fee for
service  arrangement,  the  Company is paid by its  sponsors  for the  Company's
contractually  agreed  upon rates based upon actual  claims  adjudicated  plus a
fixed transaction fee. Revenue under the fee for service  arrangement 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
excluding its own mail service and specialty facilities. The Company assumes the
legal responsibility and financial risk of paying for dispensed  pharmaceuticals
whether or not the Company is paid by its  sponsors.  There are several  factors
from EITF 99-19 that led the Company to recognize the majority of its revenue on
a gross basis.  These include:  the Company acts as a principal and not an agent
and is the  primary  obligor  in the  relationship  among  the  pharmacies,  the
sponsors and the Company,  the Company has credit risk,  the Company has certain
latitude in  establishing  price,  and the Company  has  discretion  in supplier
selection.

     The specific  terms of the contracts  that Health Card enters into with its
sponsors will determine whether NMHC recognizes the gross revenue related to the
cost  of the  prescriptions  filled.  In  certain  cases,  the  Company  has not
recognized  the gross  revenue  or cost  related to  prescriptions  filled for a
specific  sponsor.  The primary factor in recognizing  these  contracts on a net
basis is that the amount that the Company earns is fixed. The Company receives a
fixed charge per claim and a fixed  percentage of rebates and all other pharmacy
costs are charged to the plan sponsor. This has no impact on the Company's gross
profit  since  neither the  prescription  revenue  nor the  related  cost of the
prescriptions is recorded.

     The Company  follows the  provisions of EITF 00-14,  Accounting for Certain
Sales  Incentives  - Coupons,  Rebates  and  Discounts  in  connection  with the
Company's rebates to sponsors.  These rebates are recognized when the Company is
entitled to them in accordance with the terms of the Company's arrangements with
drug  manufacturers,  third  party  rebate  administrators,  and  the  Company's
sponsors,  and when the  amount of the  rebates  is  determinable.  The  Company
records the gross rebate receivable and the appropriate  payable to the sponsors
based on  estimates,  which are subject to final  settlement.  The estimates are
based upon the claims  submitted and the Company's  rebate  experience,  and are
adjusted as additional information becomes available. Currently some rebates are
processed by a third party rebate  administrator  and the remaining  rebates are
submitted directly to the drug  manufacturers for  reimbursement.  For the years
ended June 30,  2005,  2004 and 2003,  the rebates  retained by the Company were
approximately $12,835, $10,314 and $5,398, respectively.

     NMHCmail began filling prescriptions out of the Miramar facility on July 1,
2003.  NMHCmail  maintains an inventory of  pharmaceuticals,  which it purchases
from drug wholesalers or direct from the manufacturers.  Mail Service recognizes
revenue  at the  point  of  shipment  for  both the  co-pay  collected  from the
individual  member,  as well as for the "sale" of the prescription to the PBM at
specified  prices.   Revenue  from  this  intercompany  sale  is  eliminated  in
consolidation.  To  date,  NMHCmail  only  fills  prescriptions  for  NMHC  plan
sponsors.

     NMHC  Ascend also  maintains  an  inventory  of  pharmaceuticals,  which it
purchases  from  drug  wholesalers  or direct  from  manufacturers.  Revenue  is
recognized  by NMHC Ascend at the point of  shipment to the member.  NMHC Ascend
invoices individual members, insurance companies, Medicare and Medicaid, and the
PBM. Revenue from intercompany sales are eliminated in consolidation.

     The  inventory  balance for  NMHCmail  and NMHC Ascend at June 30, 2005 was
$4,119.  Inventory  which  consists  entirely of finished goods is stated at the
lower of cost (first in, first out method) or market.

     NMHC  Integrail  invoices  its  customers  quarterly  primarily  for annual
license fees.  Annual  license fees are billed equally over the quarters and are
based on a per member amount charge.  Connectivity  charges,  analytical support
and  implementation  charges are also  invoiced  quarterly as incurred.  License
revenue for each customer is recognized ratably over the quarter that it relates
to. Other revenue is  recognized  when  invoiced and  professional  services are
recognized when the services are provided.

 Property and Equipment

     Property and equipment is recorded at cost. Depreciation is provided for by
the  straight-line  method over the  estimated  useful lives of the property and
equipment  (generally 3 to 8 years).  Leasehold  improvements are amortized on a
straight-line  basis over the shorter of the term of the lease or the  estimated
useful lives of the assets.

 Internal Use Software

     The costs of  software  developed  for  internal  use  incurred  during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application  development  stage are  capitalized.  Costs incurred during the
post-implementation/operation   stage  are  expensed  as  incurred.  Capitalized
software  development  costs are amortized on a  straight-line  basis over their
estimated  useful  lives.  During  the  years  ended  June 30,  2005  and  2004,
approximately  $3,239 and $2,333,  respectively,  in software  development costs
related to internal programming time were capitalized.

     Amortization of capitalized  amounts  commences on the date the software is
placed  into  use and is  computed  using  the  straight-line  method  over  the
estimated economic life of the software, which prior to June 2001 was five years
and  subsequently  has been  primarily  three  years.  Amortization  expense was
approximately $3,110, $2,971, and $2,245 for the years ended June 30, 2005, 2004
and 2003, respectively.

     A significant  portion of the Company's computer software for its reporting
system was previously developed by a company affiliated by common ownership (see
Note 5 - Related Party Transactions).  Currently,  the Company's  development is
performed  by its  own  employees  or  occasionally  by  unrelated  third  party
consultants.   The  cost   includes   development   of  software   programs  and
enhancements,  which may either expand or modify existing programs, which allows
the Company to do customized reporting from its claims adjudication system.

Goodwill and Other Intangibles

     The  Company  follows the  provisions  of SFAS Nos.  141 and 142,  Business
Combinations and Goodwill and Other Intangibles.  FASB 141 requires all business
combinations  initiated  after  June 30,  2001 to be  accounted  for  using  the
purchase method.  Under FASB 142,  goodwill is no longer subject to amortization
over its  estimated  useful  life.  Rather,  goodwill  is subject to at least an
annual   assessment  for  impairment  by  applying  a  fair-value   based  test.
Additionally,  an acquired  intangible asset should be separately  recognized if
the benefit of the  intangible  asset is obtained  through  contractual or other
legal rights,  or if the intangible  asset can be sold,  transferred,  licensed,
rented or exchanged,  regardless of the acquirer's  intent to do so. The Company
has  adopted  SFAS  Nos.  141 and 142 as of July 1, 2001 and has  performed  the
requisite  impairment testing. As of June 30, 2005 there is no impairment to the
goodwill recorded on the accompanying balance sheet.

Long-Lived Assets

     The Company  follows the  provisions  of SFAS No. 144,  Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets,  that is applicable to financial
statements  issued for fiscal years  beginning  after  December  15, 2001,  with
transition provisions for certain matters.  FASB's new rules on asset impairment
supersede SFAS No. 121,  Accounting for the Impairment of Long-Lived  Assets and
for Long-Lived  Assets to be Disposed of, and provide a single  accounting model
for  long-lived  assets  to be  disposed  of.  Although  retaining  many  of the
fundamental  recognition  and  measurement  provisions  of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as  held-for-sale.  The new rules  supersede the  provisions of Accounting
Principals  Board  Opinion No. 30 ("APB No. 30") with  regard to  reporting  the
effects of a disposal  of a segment of a business  and require  expected  future
operating  losses from  discontinued  operations to be displayed in discontinued
operations in the period in which the losses are incurred  rather than as of the
measurement  date  as  presently  required  by APB No.  30.  In  addition,  more
dispositions  will qualify for discontinued  operations  treatment in the income
statement.  The  implementation  of SFAS No. 144 had no impact on the  Company's
financial statements as of and for the year ending June 30, 2005 and 2004.

Income Taxes

     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.

 Earnings Per Share

     Basic  earnings  per share have 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,  warrants, and preferred stock in the periods in
which such options,  warrants,  and preferred stock have a dilutive effect under
the  treasury  stock  method.  For the year ended June 30,  2005,  the number of
weighted  average  diluted  shares was  calculated  using the "as if  converted"
method for the redeemable preferred stock.

 Stock Compensation

     The  Company  accounts  for  stock  option  grants to  employees  under the
recognition  and  measurement  principles of APB No. 25,  "Accounting  for Stock
Issued to Employees," and related Interpretations. Under APB No. 25, because the
exercise  price of the Company's  employee stock options equals the market price
of the  underlying  stock on the  date of  grant,  no  compensation  expense  is
recorded.

     Pro  forma   information   regarding   net  income   applicable  to  common
stockholders is required by SFAS 123, "Accounting for Stock-Based Compensation,"
which also  requires  that the  information  be determined as if the Company has
accounted for its stock  options under the fair value method of that  statement.
For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the  options'  vesting  period.  The fair value for
these options was estimated using the  Black-Scholes  option-pricing  model with
the  following  weighted-average  assumptions  used for all  grants in the years
ended  June 30,  2005,  2004,  and 2003:  no  dividend  yield,  weighted-average
expected life of the option of 6.9, 4.0, and 4.0 years, respectively,  risk-free
interest  rate  ranges  of 3.4%  to  4.4%,  2.9%  to  3.7%,  and  0.8% to  2.5%,
respectively, and volatility ranges of 70.8% to 74.4%, 75.5% to 76.9%m and 78.8%
to 84.6%,  respectively,  for all grants. The weighted-average  value of options
granted is $23.24,  $18.24,  and $8.45 for the years ended June 30, 2005,  2004,
and 2003, respectively.

     The  Company  follows  the  provisions  of SFAS No.  148,  "Accounting  for
Stock-Based  Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123,  "Accounting  for  Stock-Based  Compensation,"  to provide  alternative
methods of  transition  to SFAS No.  123's fair value method of  accounting  for
stock-based  employee  compensation.  SFAS No. 148 also  amends  the  disclosure
provisions of SFAS No. 123 to require  disclosure in the summary of  significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee  compensation on reported net income.

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

Year ended June 30,                    2005              2004              2003
--------------------------------------------------------------------------------
Reported net income (loss)
available to common
stockholders                           $6,306        $(73,778)          $6,414
Stock compensation expense
included in net income
(loss) available to
common stockholders                        -              200                -
Pro forma compensation expense        (2,436)          (4,234)          (2,405)
Pro forma net income (loss)
 available to common
 stockholders                       $  3,870         $(77,812)          $4,009
Pro forma earnings(loss) per share:
 Basic                              $   0.85         $ (11.75)          $  .53
 Diluted                            $   0.83         $ (11.75)          $  .50
================================================================================

     The  stock-based  employee  compensation  expense and  pro-forma net income
amounts  in the three  years  presented  above  have been  adjusted  to  reflect
corrections relating to the historical stock option grants.

     On December 16,  2004,  the  Financial  Accounting  Standards  Board (FASB)
issued FASB Statement No. 123 (revised 2004),  Share-Based  Payment,  which is a
revision of FASB  Statement No. 123,  Accounting for  Stock-Based  Compensation.
Statement 123(R)  supersedes APB Opinion No. 25,  Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the  approach  in  Statement  123(R) is similar  to the  approach  described  in
Statement 123.  However,  Statement 123(R) requires all share-based  payments to
employees,  including grants of employee stock options,  to be recognized in the
income  statement based on their fair values.  Pro forma disclosure is no longer
an alternative.

     Statement 123(R) must be adopted by the Company no later than July 1, 2005.

     Statement 123(R) permits public  companies to adopt its requirements  using
one of two methods:

          A  "modified   prospective"  method  in  which  compensation  cost  is
     recognized  beginning with the effective date (a) based on the requirements
     of  Statement  123(R)  for  all  share-based  payments  granted  after  the
     effective date and (b) based on the  requirements  of Statement 123 for all
     awards granted to employees prior to the effective date of Statement 123(R)
     that remain unvested on the effective date.

          A "modified  retrospective"  method which includes the requirements of
     the modified  prospective method described above, but also permits entities
     to restate based on the amounts  previously  recognized under Statement 123
     for  purposes  of pro  forma  disclosures  either  (a)  all  prior  periods
     presented or (b) prior interim periods of the year of adoption.

     The  Company  has  adopted  Statement  123(R)  on July 1,  2005,  using the
"modified prospective" method.

     As  permitted  by  Statement  123,  the  Company  currently   accounts  for
share-based payments to employees using Opinion 25's intrinsic value method and,
as such,  generally  recognizes no compensation cost for employee stock options.
Accordingly,  the adoption of Statement  123(R)'s  fair value method will have a
significant impact on our result of operations,  although it will have no impact
on our overall  financial  position.  The impact of adoption of Statement 123(R)
cannot  be  determined  at  this  time  because  it will  depend  on  levels  of
share-based  payments granted in the future.  However,  had we adopted Statement
123(R) in prior periods, the impact of that standard would have approximated the
impact of Statement  123 as described in the  disclosure of pro forma net income
and earnings per share in this Note to our  consolidated  financial  statements.
Statement  123(R) also  requires  the  benefits of tax  deductions  in excess of
recognized  compensation  cost to be reported as a financing  cash flow,  rather
than as an  operating  cash flow as  required  under  current  literature.  This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption.  The Company cannot estimate what those amounts
will be in the  future,  because  they  depend  on,  among  other  things,  when
employees  exercise  stock options and the fair value of the Company's  stock on
the date of exercise.

Concentration of Credit Risk

     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, 2005 and 2004, were approximately $32,505 and $10,810, respectively.

     The carrying  amounts of financial  instruments,  including cash,  accounts
receivable,  inventory,  accounts payable,  accrued  liabilities,  and revolving
credit  facility,  approximate fair value because of the current nature of these
instruments.

 Use of Estimates

     The preparation of financial  statements in conformity with U.S.  generally
accepted  accounting  principles  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.

 Reclassification

     For  comparability,  certain 2004 and 2003 amounts have been  reclassified,
where appropriate,  to conform to the financial  statement  presentation used in
2005 and 2004.


 2.  NEW MOUNTAIN TRANSACTION:

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

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

     The Company used the  remaining  proceeds from the issuance and sale of the
series A preferred stock of approximately $24,000, excluding expenses related to
the closing of the New Mountain Transaction, for the Inteq acquisition described
in Note 3 - Business Acquisitions and for working capital purposes.

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

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

     Upon the closing of the New Mountain  Transaction,  the Company  recorded a
non-recurring,  non-cash  charge  to net  income  available  to  holders  of the
Company's common stock for a beneficial conversion feature related to the series
A preferred  stock,  which is  convertible  into the  Company's  common stock at
$11.50 per share. Such non-cash charge reflects the difference  between the fair
market value of the Company's common stock on the date of the closing of the New
Mountain  Transaction  and the  effective  conversion  price  of  $11.29  (after
deducting  the  closing  payment  of $1,450  payable to New  Mountain  Partners)
multiplied by 6,956,552, the number of shares of the Company's common stock into
which the series A preferred stock held by New Mountain Partners is convertible.
The maximum amount of the beneficial  conversion feature was limited to $80,000,
which is the purchase price of the series A preferred stock.


  3.  BUSINESS ACQUISITIONS:

     On March 7, 2005,  the Company  acquired  all of the  outstanding  stock of
Pharmaceutical  Care  Network,  a California  corporation,  from the  California
Pharmacists Association (the "PCN Acquisition"). The aggregate purchase price of
the PCN Acquisition was $13,000 in cash. In addition,  the Company has agreed to
pay the California  Pharmacists  Association  ("CPhA") earn-outs,  as additional
purchase price, up to $30,000 over a period of three years if certain  financial
and performance targets are achieved.  The funds for the payment of the purchase
price in connection with the PCN Acquisition  were obtained out of the Company's
working  capital  and  JPMorgan  credit  facility  (See Note 7 - Debt).  The PCN
operations  complement the Company's business while  strengthening the Company's
presence in the California  marketplace as well as in the Medicaid  managed care
market.

     In addition to the $13,000  purchase price for the PCN  Acquisition,  there
were $561 of  acquisition  related  expenses  incurred  by the  Company.  Of the
$13,000,  $10,500  was paid to CPhA and  certain  of PCN's  current  and  former
employees  who  participated  in its Long Term  Incentive  Plan,  and $2,500 was
deposited into escrow to secure CPhA's obligations under the purchase agreement.
At the time of the acquisition,  PCN had  approximately  $30,942 of assets which
included  $16,711  of cash,  $2,734  of  restricted  cash,  $3,204  of  accounts
receivable,  $6,090 of rebates receivable, $1,139 of other assets, and $1,064 of
property and equipment. They also had approximately $27,040 of liabilities which
included  $26,848  of  claims  and  accounts  payable,   $97  of  other  current
liabilities  and $95 of other  long-term  liabilities.  As a  result  of the PCN
Acquisition, $2,842 of severance and exit costs have been accrued as of June 30,
2005 with  $1,213  recorded  as a  deferred  tax asset and  $1,629  recorded  as
additional goodwill. The acquisition was accounted for under the purchase method
of  accounting  and  the  results  of  PCN's  operations  were  included  in the
consolidated  financial statements  commencing as of the closing date of the PCN
Acquisition.  The  excess  of the  acquisition  costs  over  the  fair  value of
identifiable  net assets  acquired was $12,501,  which consists of the following
components:  "know-how"  and  computer  software  valued at $850,  which will be
amortized over ten (10) years, customer relationships valued at $350, which will
be amortized  over ten (10) years,  and  goodwill of $10,803,  which will not be
amortized  for book  purposes per SFAS 142. As of June 30,  2005,  $225 has been
accrued based upon the tentative  achievement  of the financial and  performance
targets.

     On April 1, 2004, the Company entered into an Asset Purchase Agreement with
Inteq PBM,  LP, a Texas  limited  partnership  (the  "Purchaser"),  The INTEQ-RX
Group,  LLP and certain other owners named therein  (together  with The INTEQ-RX
Group,  LLP,  the "The Inteq  Group"),  pursuant to which the Company  agreed to
acquire certain assets of the The Inteq Group relating to their pharmacy benefit
management business (the "Inteq  Acquisition").  The aggregate purchase price of
the Inteq  Acquisition was $31,500 in cash. In addition,  the Company has agreed
to pay The Inteq Group, as additional purchase price, up to $4,200 over a period
of one year if the acquired PBM business achieves certain financial  performance
targets during the one-year  period  following the closing.  Funds for the Inteq
Acquisition  were supplied from proceeds from the New Mountain  Transaction (See
Note 2 - New  Mountain  Transaction)  and from the  Company's  revolving  credit
facility (See Note 7 - Debt). In connection with the Inteq Acquisition,  several
members of Inteq's  management  remained with the Company as consultants  during
the transition  period.  The Inteq business  complements the Company's  business
while strengthening the Company's presence in the Texas marketplace.

     The purchase  price for the acquired  assets of The Inteq Group was $31,500
of which  $29,640 was paid in cash at closing and $1,860 was paid in the form of
a promissory note. In addition,  there was $702 of acquisition  related expenses
incurred by the Company.  Of the  $29,640,  $24,900 was paid to The Inteq Group,
and $4,740 was  deposited  into escrow to secure The Inteq  Group's  obligations
under the Purchase  Agreement.  In addition,  another $3,000,  out of the $4,200
potential  to be paid to The Inteq  Group,  was  placed in escrow to secure  the
Company's  obligations  to pay The  Inteq  Group  additional  purchase  price if
certain targets were achieved during the first year, and such escrowed amount is
included in other assets in the consolidated  balance sheet. The promissory note
plus accrued  interest at four percent (4%) per annum is due and payable in full
on  October  1,  2005.  At the time of the  acquisition,  The  Inteq  Group  had
approximately  $14,200  of  assets  which  included  $4,134  of cash,  $7,938 of
accounts receivable,  $2,041 of rebates receivable, $47 of other assets, and $40
of property and equipment.  They also had  approximately  $11,151 of liabilities
which included  $11,138 of claims and accounts  payable and $13 of miscellaneous
payables.  The  acquisition  was  accounted  for  under the  purchase  method of
accounting  and  the  results  of  Inteq's   operations  were  included  in  the
consolidated  financial  statements  commencing with the  acquisition  date. The
excess of the acquisition  costs over the fair value of identifiable  net assets
acquired was  $29,153,  which  consists of the  following  components:  customer
relationships  valued at $1,800, which will be amortized over ten (10) years and
goodwill of $27,353, which will not be amortized for book purposes per SFAS 142.
In addition,  the $3,000  placed in escrow will be released  quarterly if earned
and will be  recorded as  additional  goodwill.  To date,  $1,024 out of a total
potential of $4,200,  of additional  consideration  has been earned and released
from escrow. For tax purposes,  the Company will amortize the goodwill and other
intangibles over fifteen years.

     On July 31, 2003, the Company entered into a Stock Purchase  Agreement with
Portland   Professional   Pharmacy  ("PPRX"),   Portland  Professional  Pharmacy
Associates  ("PRXA",  and together  with PPRX,  "PPP" or `NMHC  Ascend") and the
individual  shareholders (the "PPP  Shareholders") to purchase all of the shares
of PPP for  $3,150  (the "PPP  Acquisition").  PPP  provides  specialty-pharmacy
services in a broad range of areas,  including  women's health,  pediatric care,
men's health and transplant.  Funds for the PPP Acquisition were supplied by the
Company's  revolving  credit  facility  (See  Note  7  Debt).  The  Company  has
positioned PPP as a preferred  provider with PPP's target markets while focusing
on the extension of their specialty services to the Company's PBM division.

     The purchase price for the stock of PPP was $3,150. In addition,  there was
$77 of acquisition  related expenses incurred by the Company. At the time of the
acquisition, PPP had approximately $1,664 of assets which included $177 of cash,
$889  of  accounts  receivable,  $539  of  inventory  and  $59 of  property  and
equipment.  PPP also had approximately $1,423 of liabilities which included $609
of bank debt, which was paid off at closing, and $814 of miscellaneous payables.
The  acquisition  was accounted for under the purchase  method of accounting and
the results of PPP's  operations  were  included in the  consolidated  financial
statements  commencing with the acquisition  date. The excess of the acquisition
costs over the fair value of identifiable net assets acquired was $2,986,  which
consists of the following components: (i) customer relationships valued at $295,
which will be amortized over seven (7) years;  (ii)  employment and  non-compete
agreements  valued at $100 each,  which will be  amortized  over four (4) years;
(iii) the Portland Professional Pharmacy trade name valued at $100 which will be
amortized  over four (4) years;  and (iv) goodwill of $2,391,  which will not be
amortized for book purposes per SFAS 142. For tax purposes, the Company has made
an election  which will allow it to amortize the goodwill and other  intangibles
over  fifteen  years.  In  addition,  the  Company  agreed  to pay  to  the  PPP
Shareholders up to $7,000 over a three-year  period if the PPP business achieved
certain financial targets.  At the Company's sole discretion,  as much as 50% of
the $7,000 can be paid in the form of  company  stock.  For the first year ended
July 31, 2004,  $716 was earned ($666 had been earned through June 30, 2004) and
was paid on September 15, 2004.  Of this amount,  $358 was paid in cash and $358
was paid in the form of the Company's  common stock (12,650 shares at $28.30 per
share).  For the second year,  through  June 30, 2005,  $795 has been earned and
will be settled in September 2005.

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

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

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

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

     The following  summarized  unaudited  pro forma  results of operations  set
forth below for the years  ended June 30,  2005 and 2004 assume the PPP,  Inteq,
and PCN acquisitions had occurred as of the beginning of these periods:


 June 30,                                                2005             2004
--------------------------------------------------------------------------------
 Revenue                                               $855,624         $798,981
 Net income (loss)
  available to common stockholders                       $4,826        $(73,903)
 Net earnings (loss) per common share:
  Basic                                                   $1.06         $(11.16)
  Diluted                                                 $0.91         $(11.16)
 Pro forma weighted-average number
 of common shares outstanding:
  Basic                                                   4,542           6,622
  Diluted                                                11,983           6,622
--------------------------------------------------------------------------------

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

     The change in the carrying  amount of goodwill for the years ended June 30,
2005 and June 30, 2004 is as follows:

  Balance as of July 1, 2003                                           $53,669
  Centrus additional consideration earned                                3,000
  Integrail additional expenses incurred                                    15
  PPP acquisition                                                        2,391
  PPP additional consideration earned                                      666
  Inteq acquisition                                                     27,223
  Balance as of July 1, 2004                                            86,964
  PPP additional consideration earned                                      845
  Inteq acquisition                                                         74
  Inteq additional consideration earned                                  1,024
  PCN acquisition                                                       10,578
  PCN additional consideration earned                                      225
                                                                     ----------
  Balance as of June 30, 2005                                          $99,710
                                                                     ==========

     Approximately $81,034 of the Company's June 30, 2005 goodwill is deductible
for income tax purposes on a straight-line basis over 15 years.

     Acquired  intangible  assets  subject  to  amortization  consisted  of  the
following as of June 30:

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

                                            2005                                 2004
                             =================================    =================================
                                Gross                                   Gross
                               Carrying         Accumulated            Carrying       Accumulated
     Asset Class                Amount         Amortization             Amount        Amortization
   ---------------             ---------       ------------        -------------      ------------

   Customer
   relationships             $   5,296          $  2,410              $ 4,946            $ 1,694
   Non-compete agreements          220               156                  220                105
   Employment agreements           186               133                  186                109
   Trade name                      100                37                  100                 10
   Company know how              1,422               537                  572                318
                             ----------       -----------         ------------        ------------
                             ----------       -----------         ------------        ------------
                             $   7,224         $   3,273              $ 6,024           $  2,236
                             ==========       ===========         ============        ============

</TABLE>


     The  weighted  average  remaining  amortization  period for all  intangible
assets is  approximately  6.9  years at June 30,  2005.  Amortization  period by
intangible asset class is as follows:

     Asset Class                                   Amortization Period
-------------------------                         ---------------------
Customer relationships                                 1 - 10 years
Non-compete agreements                                 4 -  5 years
Employment agreements                                  2 -  4 years
Trade name                                                  4 years
Company know how                                       3 - 10 years

     The aggregate  amortization  expense was approximately  $1,036 for the year
ended June 30, 2005, and the estimated  amortization for future years ended June
30 is as follows:

Year ending June 30,
     2006                                                                 $975
     2007                                                                  699
     2008                                                                  348
     2009                                                                  342
     2010                                                                  342
   Thereafter                                                            1,245
--------------------------------------------------------------------------------
                                                                        $3,951
================================================================================


4.    PROPERTY, EQUIPMENT AND
      SOFTWARE DEVELOPMENT COSTS


Property, equipment and software development costs consist of the following:

                                                                     Estimated
   June 30,                          2005              2004         Useful Life
   -----------------------------------------------------------------------------
    Equipment                    $   5,988         $   5,407        3 to 5 years
    Software                        19,172            14,825        3 to 5 years
    Leasehold improvements           5,159             3,614       Term of lease
    Automobile                          44                44             5 years
    Equipment acquired under         2,697             2,575        5 to 8 years
     capital leases
--------------------------------------------------------------------------------
                                    33,060            26,465
 Accumulated depreciation
  and amortization                  20,883            15,868

--------------------------------------------------------------------------------
                                   $12,177          $ 10,597
================================================================================
     Accumulated   depreciation  on  equipment   acquired  under  capital  lease
obligations was $2,071 and $1,613 as of June 30, 2005 and 2004, respectively.

     Depreciation and amortization  expense on property,  equipment and software
development  costs  for the years  ended  June 30,  2005,  2004,  and 2003,  was
approximately $5,264, $4,810, and $3,634, respectively.


5.  RELATED PARTY TRANSACTIONS:

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

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

     Due from  affiliates  included a note from another  company  affiliated  by
common  ownership.  As of June 30, 2004, the balance had been paid.  Such amount
bore interest at 8.5% per annum, payable quarterly.  The note was collateralized
by 1,022,758 shares of $.001 par value common stock of the Company registered in
the name of the  Company's  former  Chairman of the Board and was subject to his
personal  guarantee.  The note  was  payable  in  annual  installments  of $400,
consisting  of principal and interest at the rate of 8 1/2% per annum on each of
the first and second  anniversary  dates,  with the total  remaining  balance of
principal  and  interest  due and payable on July 31,  2003.  The first two $400
payments  due under  the note as of July 31,  2001 and 2002  were  satisfied  by
offsetting  an equal  amount owed by the  Company to the former  Chairman of the
Board. The balance of the note, including accrued interest,  was paid in full on
July 31, 2003.  The note was satisfied  through a combination  of monies owed by
the Company to the former  Chairman of the Board and a cash  payment made by the
affiliate to 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, 2005,  2004, and 2003, the amount of interest income accrued related to
this note was approximately $0, $9, and $163, respectively.

     In  connection  with  a  potential  bonus,  to  be  earned  pursuant  to an
employment  agreement dated September 30, 2002,  between the former president of
the Company's mail order operations and the Company, the Company loaned him $250
as an  advance  against  the  potential  bonus.  The  loan  was  evidenced  by a
promissory  note  executed  by the former Mail Order  President  in favor of the
Company.  The  loan  bore an  interest  rate of 9% and  was due and  payable  on
September 30, 2003 in the event the bonus was not earned.  A bonus has been paid
and the loan repaid as of January 2004.

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

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


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


 Year ended June 30,                       2005           2004             2003
--------------------------------------------------------------------------------

  Management and consulting fees (a)        171             35               84
  Administrative, accounting
   services and supplies (b)                198            260              236
   Rent and utilities (c)                   961            634              542

--------------------------------------------------------------------------------
                                        $ 1,330          $ 929             $862
================================================================================


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

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

          (c) See Note 11 for information regarding leases with related parties.


     For the years  ended June 30, 2004 and 2003,  the  Company  paid the annual
premium of  approximately  $60 on behalf of the Company's former Chairman of the
Board for a life insurance  policy.  The aggregate amount of premiums paid, $330
to date, for such policy was to be repaid to the Company upon the payment of the
policy's benefits to the beneficiary.  In November 2004, this policy was sold to
the former Chairman of the Board for $330.

6.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

     Accounts payable and accrued expenses consist of the following:




  June 30,                                          2005                 2004
--------------------------------------------------------------------------------
  Claims payable to pharmacies                  $118,660             $102,259
  Rebates payable to sponsors                     45,436               33,451
  Trade payables and accrued expenses             22,220                8,179
  Other payables                                   2,527                3,683

--------------------------------------------------------------------------------
                                                $188,843             $147,572
================================================================================

7. DEBT:

     On January 29, 2002,  the Company and certain of its  subsidiaries  entered
into  a  $40,000  secured  revolving  credit  facility  (the  "revolving  credit
facility") with HFG Healthco-4 LLC, a specialty finance company. The term of the
revolving  credit facility expired on January 28, 2005 and there is no remaining
obligation  outstanding.

     On January 28, 2005,  the Company and certain of its  subsidiaries  entered
into a new five-year  $65,000 cash flow based line of credit with a syndicate of
commercial  banks led by JPMorgan  Chase  Bank,  N.A.  ("JPMorgan").  Subject to
certain conditions  including the consent of the existing lenders,  the new line
of credit (the "JPMorgan  credit  facility") may be increased by an aggregate of
$35,000.

     Depending on the timing and dollar amount of each loan request, the Company
will either borrow at a spread above LIBOR, the overnight  Federal Funds rate or
JPMorgan's  prime rate.  The initial  spread will be 1.75% for LIBOR and Federal
Funds  loans and 0.75% for prime rate  loans.  After  receipt  of the  Company's
financial  statements  for the period  ended June 30,  2005,  the  spreads  will
increase or decrease  based on an interest  rate grid that is tied to a ratio of
debt to annual EBITDA.

     The  JPMorgan  credit  facility  is secured by the  Company's  consolidated
assets.  The JPMorgan credit  facility  requires the Company to be in compliance
with  financial  and other  covenants.  The three  defined  financial  covenants
include:   consolidated  net  worth;   consolidated   fixed  charge  ratio;  and
consolidated  debt to EBITDA  ratio.  The  Company  was in  compliance  with all
covenants at June 30, 2005.

     The Company provided a promissory note in the amount of $1,860 to The Inteq
Group related to the acquisition of Inteq (see Note 3 - Business  Acquisitions).
The note  accrues  interest at 4% per annum and is due and  payable  October 31,
2005.

 8.   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, 2005:


  Payments for the year ending June 30,

  2006                                                                  $31
  2007                                                                   17
  -----------------------------------------------------------------------------

  Total minimum lease payments                                          $48

  Less amount representing interest                                       3
--------------------------------------------------------------------------------

  Present value of net minimum lease payments                           $45
  Less current portion                                                   29

--------------------------------------------------------------------------------
  Long-term lease obligations                                        $   16
================================================================================


 9.   MAJOR CUSTOMERS AND PHARMACIES:

     For the year ended June 30, 2005, approximately 18% of revenue was from one
plan  sponsor.  For the year ended June 30, 2004,  approximately  30% and 10% of
revenue  was  from  two  plan  sponsors.  For the  year  ended  June  30,  2003,
approximately  28% of revenue  was from one plan  sponsor.  Amounts due from the
respective  sponsors at June 30, 2005 and 2004 approximated  $9,205 and $12,301,
respectively. One of the Company's former major sponsors terminated its contract
as of December 31, 2002.

     For the year ended June 30, 2005, no pharmacy  chain  accounted for greater
than 10% of the  total  cost of  claims.  For the  year  ended  June  30,  2004,
approximately  21% and 12%,  respectively,  of the cost of claims  were from two
pharmacy chains.  For the year ended June 30, 2003,  approximately  21% and 11%,
respectively,  of the cost of claims  were  from two  pharmacy  chains.  Amounts
payable to the two pharmacy chains at June 30, 2004 were approximately $18,478.

 10.  TAXES ON INCOME:

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

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

    Year ended June 30,                2005               2004           2003
     Current:
     Federal                         $4,237            $ 2,806        $ 3,953
     State                              882                905          1,085
--------------------------------------------------------------------------------
                                      5,119              3,711          5,038
--------------------------------------------------------------------------------
 Deferred:
  Federal                             1,704              1,496           (356)
  State                               1,208                317            (80)

--------------------------------------------------------------------------------
                                      2,912              1,813           (436)
================================================================================
 Total provision                     $8,031             $5,524         $4,602
================================================================================
     Differences  between the federal statutory rate and the Company's effective
tax rate are as follows:


--------------------------------------------------------------------------------
  Year ended June 30,                         2005           2004        2003

   Statutory rate                             34.0%         34.0%         35.0%
   State taxes - net of federal taxes          5.3           6.8          6.7
   Permanent differences                       0.6           -            0.1
   Other                                      (0.6)          0.2            -

--------------------------------------------------------------------------------
                                              39.3%         41.0%          41.8%
================================================================================

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

 June 30,                                        2005                    2004
-------------------------------------------------------------------------------

 Accounts receivable allowances                    $   766            $   952
 Vacation expense accrual                              207                196
 Management/stockholder bonus accrual                   44                912
 Deferred revenue/gains                                300                492
 Acquisition related severance and restructuring       712                  -
  Other                                                 88                159

--------------------------------------------------------------------------------
                                                    $2,117              $2,711
================================================================================

     Deferred  income tax  liabilities of $5,964 and $4,704 at June 30, 2005 and
2004, respectively, resulted from temporary differences between depreciation and
amortization of property and equipment and goodwill.

11.    COMMITMENTS AND CONTINGENCIES:


     The Company  occupied  approximately  26,500  square  feet of office  space
located at AND 26 Harbor Park Drive,  Port  Washington,  New York up until April
30, 2004 (the "Leased Premises"). The Company subleases the Leased Premises from
BFS  Realty,   LLC,  an  affiliate  of  the  Company's   former   Chairman  (the
"Affiliate").  The Affiliate  leases the Leased  Premises from the Nassau County
Industrial  Development  Agency  ("NCIDA")  pursuant to a lease that was entered
into by NCIDA and the  Affiliate  in December  2004,  which  expires in December
2015.  The  Affiliate  has the  right  to  purchase  the  Leased  Premises  upon
termination  of that lease for the purchase  price of one dollar.  The Affiliate
subleases a portion of the Leased  Premises to the Company (the "Lease").  As of
November 1, 2001,  the Company and the  Affiliate  amended the Lease.  The Lease
provided that,  effective  August 1, 2001, the rent payable by the Company would
be an aggregate  annual rent of $308. The Company makes monthly real estate tax,
utilities and  maintenance-expense  payments to the  Affiliate.  The annual rent
would increase by 5% per year during the term of the Lease.

     Additional space was built in the Leased Premises which allowed the Company
to  reconfigure  its  existing  space and to move all of its  employees  in Port
Washington  into  contiguous  space.  The Company and the Affiliate  amended the
Lease for the space on October 23,  2003 and April 26,  2004.  Effective  on the
occupancy  date  of the new  space,  as of May 1,  2004,  the  Affiliate  leased
additional square footage in the Leased Premises to the Company. The total space
leased by the Company is currently  37,108 square feet. The Lease provides that,
effective  May 1, 2004,  the rent  payable by the Company  shall be an aggregate
annual rent of $595 over a ten year term,  plus expenses  related to real estate
taxes,  utilities and maintenance.  Annual rent increases will be based upon the
Consumer  Price  Index plus 2.5%  subject to a maximum  annual cap of 3.5%.  The
Lease expires ten years from the occupancy date of May 1, 2004. In addition, the
Company  has early  termination  rights  which it may  exercise by delivery of a
notice to the  Affiliate  60 days  prior to the end of the April 30,  2009 lease
year. In consideration of such early termination  rights,  the Company would pay
to the Affiliate the rent that would  otherwise be payable by the Company to the
Affiliate  for the  succeeding  30 months  and  subject  to  adjustments  if the
Affiliate is able to lease the Leased  Premises to another  party during said 30
month period.  Leasehold  improvements made to this space during the years ended
June 30, 2005 and 2004 were approximately $953 and $1,906, respectively.

     In addition,  the Company rents a two family house in Port Washington,  New
York (near the Company's offices) from P.W. Capital,  LLC, (a company affiliated
with  NMHC's  former  Chairman  of the  Board)  which  is used  for  out-of-town
employees.  The Company  evaluated the cost of hotels for these  individuals and
determined  it was more cost  efficient  to rent the house at an annual  rent of
$66. For the same  reasons,  the Company  rents two houses from Living In Style,
LLC, an entity owned by three of NMHC's current and former  executive  officers.
Pursuant to leases  dated May 1, 2002 and expiring  April 30, 2007,  the Company
paid an  aggregate  of $140 in rent for these two  facilities  during the fiscal
year ended June 30, 2005. The annual rent for each of the  facilities  increases
by 5% per year.

     Additionally,  the Company leases office and/or warehouse space through its
subsidiaries in Little Rock, Arkansas; Sacramento,  California; Portland, Maine;
Miramar,  Florida;  Latham,  New York; and Dallas,  Texas.  The aggregate annual
rental  payments for leased  space in Little Rock are  approximately  $154;  for
Sacramento  approximately  $605;  for Miramar  approximately  $151; for Portland
approximately $129; for Latham  approximately $383; and for Dallas approximately
$72. In addition,  upon completion of the build-out of the office space which is
anticipated  to be in  October  2005,  we will  occupy  rental  office  space in
Pittsburgh, Pennsylvania with aggregate annual rent of approximately $74,320 and
annual  increases  thereafter  over a five year  term.  While the space is being
built-out,  we are currently occupying temporary office space in the same office
building.

     Real estate rental expense,  including utilities,  for the years ended June
30,  2005  2004,  and  2003,  was  approximately  $2,858,  $2,147,  and  $1,792,
respectively.   Of  these   amounts,   approximately   $865,   $634,  and  $542,
respectively, were charged by affiliates under operating leases.

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

     Future minimum payments under the  noncancelable  operating leases for real
estate and office  equipment with related and other parties at June 30, 2005 are
as follows:

     Year ending June 30,
                    2006                                             $  7,153
                    2007                                                6,097
                    2008                                                3,349
                    2009                                                2,614
                    2010                                                1,944
                Thereafter                                              3,026

-------------------------------------------------------------------------------
                                                                      $24,183
===============================================================================

     In addition to the operating  leases above,  the Company has entered into a
sale leaseback operating lease of certain fixed assets (principally mail service
equipment).  The minimum future operating lease payments at June 30, 2005 are as
follows:


 Year ending June 30,

              2006                                                      $ 140
              2007                                                         70
-------------------------------------------------------------------------------
                                                                        $ 210
===============================================================================

     NMHC is involved in various legal  proceedings,  including  the  proceeding
described below,  incidental to the conduct of its business.  While there can be
no assurance,  we do not expect that any such  proceedings  will have a material
adverse effect on our business, operations or financial condition.

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plan Inc.  ("MHP") in the United  States  District  Court for the Eastern
District of Michigan.  The amended complaint alleged,  among other things,  that
the  parties  entered  into a contract  dated July 1999 (the  "Agreement"),  and
further alleged that the Company has overcharged MHP for the  administration  of
prescription benefit services in contravention to the terms of the Agreement and
breached its fiduciary  duties by making a profit.  MHP was seeking  $3,000 plus
interest in damages.  The Company filed an answer and  counterclaim  on June 12,
2002. In the counterclaim, the Company claimed damages in excess of $2,800 based
on MHP's failure to pay under a contract.  In late June 2002, MHP agreed to make
two  payments  in the  amount  of $1,340  and  $1,360 to  partially  settle  the
Company's  claims  against  MHP. MHP added a fiduciary  duty claim.  The Company
continued to have counterclaims totaling over $200 against MHP for MHP's failure
to pay the  amounts  it agreed to pay NMHC for goods and  services.  In  August,
2005,  the Company  paid MHP $2,000 in complete  settlement  of all  outstanding
claims by both parties.  For the year ended June 30, 2005, Selling,  General and
Administrative expenses include $1.7 million related to this settlement.

     The Company has entered into  employment  agreements with its President and
Chief Executive  Officer,  Chief  Marketing  Officer,  Chief Financial  Officer,
President of PBM Services, Chief Information Officer, President of NMHCmail, and
President of NMHC Ascend. In addition, the Company has entered into a consulting
agreement with its current Chairman of the Board. The agreements provide for (i)
participation  in the bonus pool for senior  executives,  (ii)  eligibility  for
stock option  grants under the  Company's  then current  stock option plan,  and
(iii)  certain  termination  benefits  which,  depending  upon  the  reason  for
termination, can equal up to two years of salary for these senior executives.


     12.    STOCK OPTIONS AND WARRANTS:

     During the years ended June 30, 2005,  2004, and 2003, the Company  granted
stock  options  under the 1999 Stock Option Plan (the  "Plan").  During 2002 and
2004, the Company  amended the Plan and increased the number of shares  issuable
in connection with options granted under the Plan. The total number of shares of
common stock  reserved by the Company for  issuance  under the Plan is 4,850,000
plus an  indeterminable  number  of shares of  common  stock  issuable  upon the
exercise of "reload options." There are no options  outstanding that contain the
"reload"  provision.  Stock options outstanding have a life of 5 to 10 years, as
defined in Section 422 of the Internal Revenue Code.  Incentive  options may not
be  granted  for a price less than 100% of the fair  market  value of the common
stock as of the date of the grant or 110% in the case of an individual  who owns
more  than  10% of the  combined  voting  power of all  classes  of stock of the
Company.  All options to date have been issued with an option  exercise price at
or above the fair market value of those options on the date of grant.

     The following tables summarize  information about stock option activity for
the years ended June 30, 2003, 2004, and 2005:

                                                                Weighted-Average
                                            Number of             Exercise Price
                                             Options                   Per Share
--------------------------------------------------------------------------------
Outstanding options at June 30, 2002       1,861,026                 $    6.77
Cancelled                                    (73,634)                     6.99
Granted                                      402,498                      8.46
Exercised                                   (221,000)                     2.20
--------------------------------------------------------------------------------
Outstanding options at June 30, 2003       1,968,890                      7.61
Cancelled                                   (112,834)                     9.94
Granted                                      766,104                     18.53
Exercised                                 (1,092,693)                     6.43
--------------------------------------------------------------------------------
Outstanding options at June 30, 2004       1,529,467                     13.76
Cancelled                                   (156,305)                    26.00
Granted                                      486,649                     23.24
Exercised                                   (418,598)                     9.54
--------------------------------------------------------------------------------
Outstanding options at June 30, 2005       1,441,213                 $   16.52
================================================================================

     The following table summarizes  information about stock options outstanding
at June 30, 2005:
<TABLE>
      <S>                                                       <C>    <C>    <C>    <C>    <C>    <C>

                                                             Outstanding                            Exercisable
                                              --------------------------------------------    --------------------------
                                              -------------- --------------- -------------    ------------ -------------
                                                               Weighted-      Weighted-                     Weighted-
                                                                average        average                       average
                       Option                  Number of       Remaining      Exercise        Number of     Exercise
                    Price Range                  Shares          Life           Price           Shares        Price
                    ------------------------- -------------- --------------- -------------    ------------ -------------
                    ------------------------- -------------- --------------- -------------    ------------ -------------
                    $  1.67  to $  2.51             18,660   0.47 years            $1.77          18,660         $1.77
                    $  2.52  to $  3.78              8,020   1.03 years            $3.07           8,020         $3.07
                    $  3.79  to $  5.69              2,388   1.22 years            $4.27           2,388         $4.27
                    $  5.70  to $  8.55             90,601   2.07 years            $7.94          78,932         $7.88
                    $  8.56  to $ 12.84            565,903   2.81 years           $10.19         487,697        $10.03
                    $ 12.85  to $ 19.28            141,805   5.86 years           $13.87          42,561        $13.99
                    $ 19.29  to $ 28.94            495,565   8.51 years           $23.34          15,358        $25.56
                    $ 28.95  to $ 36.66            118,271   3.90 years           $31.45          72,325        $32.26

                    ------------------------- -------------- --------------- -------------    ------------ -------------
                    ------------------------- -------------- --------------- -------------    ------------ -------------
                    $ 1.67   to  $36.66          1,441,213   5.07 years           $16.52         725,941        $12.26
                    ========================= ============== =============== =============    ============ =============

</TABLE>

     In July 1999 the Company  granted the  underwriters  of the Public Offering
200,000  warrants for nominal  consideration.  The warrants  entitle the holders
thereof to purchase 200,000 shares of common stock from the Company at $9.00 per
share and are  exercisable  for four years  commencing on July 29, 2000. Of such
warrants,  80,000  were  subsequently  purchased  from the  underwriters  by the
Company's  former  Chairman  of the Board  and are  exercisable  for four  years
commencing  on July 29,  2000.  As of June 30,  2005,  all  warrants  have  been
exercised.


 13.  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 stockholders 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, 2005, no grants had been made under the Stock Grant
Plan.  There are  700,000  shares of  common  stock  reserved  for  issuance  in
connection with grants made under the Stock Grant Plan.


 14.    SUPPLEMENTAL CASH
        FLOW INFORMATION:


Supplemental cash flow information is as follows:


 Year ended June 30,                    2005            2004              2003
--------------------------------------------------------------------------------

Cash paid:
  Interest                      $      567         $     733          $   1,194
  Income taxes                       2,825             1,631              4,039

 Noncash investing and financing
 activities:
  Issuance of common stock
  in connection with the
  acquisition of PAI                     -                -                 250
--------------------------------------------------------------------------------
 Beneficial conversion feature           -           80,000                   -
 Compensation charge related
 to acceleration of stock options
 and stock options issued in lieu
 of a transaction bonus                  -              963                  -
--------------------------------------------------------------------------------


     15.    EMPLOYEE BENEFIT PLAN:

     The Company  maintains a 401-K plan that covers  substantially  all Company
employees.Participants  may elect to contribute to the plan a minimum of 1% to a
maximum of 18% of their annual compensation, not to exceed a dollar limit set by
law. Monthly, the Company will determine a discretionary  matching  contribution
equal to a percentage of each participant's contribution.  Contributions made by
the Company for the years ended June 30, 2005, 2004, and 2003 were approximately
$350, $283 and $228, respectively.


     16.    EARNINGS PER SHARE:

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

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

    Year ended June 30,                                   2005            2004          2003
-----------------------------------------------------------------------------------------------

     Basic                                            4,541,882       6,621,633     7,590,425
     Effect of assumed exercise
     of employee stock options                         484,846                -       445,973

     Effect of assumed exercise of warrants                  -                -             -

     Series A preferred stock "as if converted"      6,956,522                -             -

-----------------------------------------------------------------------------------------------
     Diluted                                        11,983,250        6,621,633     8,036,398
===============================================================================================

</TABLE>

     For the year ended June 30,  2004,  outstanding  options  and  warrants  to
purchase  1,610,595  shares of common  stock which were  anti-dilutive  were not
included in the computation of diluted earnings per share.


<PAGE>



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

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

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

  Allowance for doubtful accounts

  Year ended June 30, 2003                $2,248           $164          $(279)     $  (119)(b)       $2,014
  Year ended June 30, 2004                 2,014            692           (631)         237 (c)        2,312
  Year ended June 30, 2005                 2,312            651         (1,016)           6 (c)        1,953




</TABLE>

(a) Charged to bad debts
(b) Collection of acquisition opening balance applied against goodwill
(c) Opening reserve balance of acquisition




                                                                            S-1