# UNITED STATES

# SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 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, 2004

[ ] 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 incorporation or organization | (I.R.S. Employee Identification No.)
|------------------------------------------------------------- | ------------------------------------

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

11050   (Zip Code)

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

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

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

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

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 Act). Yes___ No X

The
aggregate market value of the registrants voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price as quoted on the NASDAQ
National Market on December 31, 2003 (the last business day of the registrants most
recently completed second fiscal quarter) was approximately $49,871,909.

Indicate
the number of shares outstanding of the registrants common stock, as of the latest
practicable date: 4,414,399 shares outstanding as of September 22, 2004.

Documents Incorporated by
Reference:

# INDEX

PAGE

|                           |  | 
|-------------------------- |  | 
|Forward Looking Statements |  | 

PART I

|        |  |                                                    
|------- |  | ---------------------------------------------------
|Item 1. |  | Description of Business                            
|Item 2. |  | Description of Property                            
|Item 3. |  | Legal Proceedings                                  
|Item 4. |  | Submission of Matters to a Vote of Security Holders

PART II

|         |  |                                                                      
|-------- |  | ---------------------------------------------------------------------
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters
|Item 6.  |  | Selected Financial Data                                              
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and      
|         |  | Results of Operations                                                
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk           
|Item 8.  |  | Financial Statements and Supplementary Data                          
|Item 9.  |  | Changes in and Disagreements on Accounting And Financial Disclosure  
|Item 9A. |  | Controls and Procedures                                              

PART III

|         |  |                                                               
|-------- |  | --------------------------------------------------------------
|Item 10. |  | Directors and Executive Officers of Registrant                
|         |  | Compliance with Section 16(a) of the Exchange Act             
|Item 11. |  | Executive Compensation                                        
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management
|Item 13. |  | Certain Relationships and Related Transactions                
|Item 14. |  | Principal Accountant Fees and Services                        

PART IV

|           |  |                                 
|---------- |  | --------------------------------
|Item 15.   |  | Exhibits and Financial Statement
|Signatures |  |                                 

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. (Health Card or the
Company) which attempt to advise interested parties of the factors which
affect Health Cards business, including, without limitation, the disclosures made
under the caption Description of Business in Item 1 hereof and
Managements Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 hereof.

PART I

Item 1.      DESCRIPTION OF BUSINESS

General

Health
Card is an independent company, incorporated in New York in 1981 and reincorporated in
Delaware in February of 2002, that provides comprehensive pharmacy benefit management
services under the name NMHCRX. In addition, the Company operates a health information
company through its wholly-owned subsidiary, Integrail, Inc. (Integrail), a
mail service pharmacy through its wholly-owned subsidiary, NMHCRX Mail Order, Inc.
(NMHCmail), effective July 1, 2003, and a specialty pharmacy through its
wholly-owned subsidiary, Ascend Specialty Pharmacy Services, Inc. (Ascend),
effective July 31, 2003. Health Cards executive offices are in Port Washington, New
York. The mission of Health Card is to improve its clients members health
through the timely delivery of effective pharmaceutical care and health information
management systems.

Recent Acquisitions and
Developments

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 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, the Company 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 cash 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 current director, 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 and did 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 were entitled to and did nominate and elect 60% of the
members of the Companys board of directors.

The Series A
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 Series A 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.

The
Company 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 described below.

As
part of the New Mountain Transaction, and upon Mr. Brodskys sale of stock in the
tender offer, Mr. Brodsky stepped down as Chairman of the Board of the Company, but
remains as a director. Mr. Steven B. Klinsky the managing member of the General Partner of New Mountain
Partners and the manager  member and Chief Executive Officer of New Mountain Capital, LLC the investment manager of New Mountain Partneres
assumed the Chairmanship from Mr. Brodsky. On
June 14, 2004, Mr. James Bigl, Chief Executive Officer and President, was appointed
Chairman of the Board with Mr. Klinsky assuming the newly created role of Lead
Non-executive Director. On August 30, 2004, Mr. Bigl resigned as Chief Executive Officer
and President of the Company. Mr. Bigl remains the Chairman of the Board of the Company
and shall serve as a consultant to the Company. Effective August 30, 2004, the Company
appointed Mr. James F. Smith, as Chief Executive Officer and President of the Company.

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 the pharmacy benefit management business (the Inteq
Acquisition). The aggregate purchase price of the Inteq Acquisition was $31.5
million in cash. In addition, the Company has agreed to pay The Inteq Group as additional
purchase price over a period of one year up to $4.2 million 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 and from the Companys credit facility (as described below). In connection with
the Inteq Acquisition, several members of Inteqs management will remain with the
Company as consultants during the transition period.

On
July 31, 2003, the Company entered into a Stock Purchase Agreement with Portland
Professional Pharmacy (PPRX), Portland Professional Pharmacy Associates
(PPRXA, and together with PPRX, PPP or Ascend) and the
individual shareholders (the PPP Shareholders) to purchase all of the shares
of PPP for $3,150,000 (the PPP Acquisition). In addition, the Company has
agreed to pay to the PPP Shareholders, as additional purchase price, up to $7 million over
a three-year period if the PPP business achieved certain financial targets. Funds for the
PPP Acquisition were supplied by the Company s credit facility (as described below).

In
connection with the PPP Acquisition, several members of PPPs management team have
joined the Company as employees, and were granted options to purchase an
aggregate of 150,000 shares of Common Stock, under the Companys 1999 Stock Option
Plan, as amended. As of May 1, 2004, the Company acquired all of the shares of PPP. Each of
PRXA and PPRX continues to operate under their respective names and also does business
under the name NMHC Ascend. Ascend provides specialty-pharmacy services in a broad range
of areas, including womens health, pediatric care, mens health and transplant.
The Company intends to position Ascend, as a preferred provider with PPPs target
markets while focusing on the extension of their specialty services to the Companys
PBM division.

On
July 1, 2003, the Company opened its mail service pharmacy division, NMHCmail, in Miramar,
Florida. Prior to opening its mail service facility, Health Card outsourced all of its
mail service pharmacy business. Health Cards mail service operations is automated
and allows the Company to provide plan participants with a cost effective means to save on
the total co-payments they have to pay while minimizing the inconvenience resulting from
repeated trips to retail pharmacies to fill prescriptions; particularly to plan
participants with chronic conditions involving long-term drug therapy. In addition, the
mail service facility provides the Company with the infrastructure to build-out its
specialty pharmacy business.

On
November 1, 2002, the Company and its wholly-owned subsidiary, Integrail Acquisition
Corp., entered into an Asset Purchase Agreement with Health Solutions, Ltd.
(HSL) (the Integrail Agreement), and certain of its security
holders (together with HSL, the Sellers). Pursuant to the Integrail Agreement,
Health Card acquired substantially all of the assets of Integrail, a division of
HSLs operations, for a purchase price of $1,400,000 (the Integrail
Acquisition). 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 $1,400,000 purchase price for the Integrail Acquisition was paid at the closing
directly to the Sellers, and half was deposited into escrow as security for the
performance of certain indemnification obligations of the Sellers. The Company agreed to
release certain amounts from the escrow to the Sellers if the Integrail business achieved
certain operational milestones during the 12 month period following the purchase. These
milestones were achieved and all escrowed funds were released in November 2003. Funds for
the Integrail Acquisition were supplied by the Companys credit facility.

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

The
purchase price for the Centrus Acquisition was $40 million in cash, of which $3 million
was held in escrow to secure certain indemnification obligations. All escrowed funds have
been released as of January 2003. In addition, the Company agreed to pay HSL as additional
purchase price up to $4 million over a period of three years if the Centrus business
achieved certain financial performance targets during the two-year period following the
consummation of the transaction. The financial performance targets were achieved during
the first two years; therefore, $4,000,000 has been earned. Of this amount, $1,000,000 was
paid in May 2003, $2,000,000 was paid in May 2004, and another $1,000,000 will be paid in
May 2005.

In
part to finance the Centrus Acquisition, on January 29, 2002, the Company and certain of
its subsidiaries entered into a $40 million secured revolving credit facility (the
Facility) with HFG Healthco-4 LLC, an affiliate of Healthcare Finance Group,
Inc. In connection with the Facility, the Company and certain of its subsidiaries have
agreed to sell, on an on-going basis, their accounts receivable to NMHC Funding, LLC
(Funding), a limited liability company of which the Company and such
subsidiaries are members. Funding utilizes these receivables as collateral to secure
borrowings under the Facility. The Facility has a three year term, provides for borrowing
up to $40 million at the London InterBank Offered Rate (LIBOR) plus 2.4% (3.76% at June
30, 2004), and is secured by receivables and other assets of the Company and certain of
its subsidiaries. Borrowings of $28.4 million under the Facility were used to finance part
of the purchase price of the Centrus Acquisition with an additional $300,000 borrowed to
pay for legal fees. The Facility has also been used by the Company for working capital
purposes and other acquisitions from time to time.

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 Health Card 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
Health Card to manage the prescription plans that they maintain for the benefit of their
plan participants. Health Card 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 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 Ascend.

THE COMPANY

Pharmacy Benefits
Management

Health
Card 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:

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

Health Card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 Health Cards national pharmacy network and the
sponsors plan. Health Card allows the plan participant to purchase approved
prescription drugs and the other physician-prescribed items, with the plan participant
paying a deductible and/or co-payment amount, if any, to the pharmacy.

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 Health Card for on-line real time processing. If the
prescription is for a drug listed on the sponsors approved drug list, Health
Cards 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 Health Card. In addition, Health Cards 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 Health Card. The prescription is then dispensed by the
pharmacist to the plan participant, who pays the appropriate co-payment and/or deductible
amount and signs a signature log maintained by the participating pharmacy. Plan
participants are provided with a list of pharmacies participating in Health Cards
pharmacy network. Plan participants may alternatively choose to fill prescriptions at a
non-participating pharmacy and would then have to submit a paper claim to Health Card 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 Health Cards 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 Health Card for such amounts and Health
Card pays an individually negotiated amount to its 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, and Note 1
to the Consolidated Financial Statements comprising Item 8 hereof.

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

Pursuant
to an agreement between Health Card and Specialty Pharmacy Care, Inc.
(Specialty), a wholly owned subsidiary of Health Card, Health Card submits
claims for rebates to Specialty for certain of Health Cards sponsors. Specialty
performs the services of a rebate administrator for which it is paid an administrative
fee. 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 Health Card must list the specified products of each of the drug manufacturers on
Health Cards approved formularies with the specified sponsors. Health Cards
Physicians & Therapeutics (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.
Health Card 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 Health Card 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 Health Cards
initial claims and would be obligated to pay incremental rebates based on increases beyond
the baseline. Similarly, Centrus has entered into separate agreements with drug
manufacturers which have been assumed by Health Card. To date, all of the rebate contracts
with Centrus have been consolidated with Health Card.

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

Pharmacy Network

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

Retail
Pharmacy Network Management. Health Card maintains a comprehensive multi-state network of
participating pharmacies. Both the retail and mail order components of the pharmacy
network, including Health Cards own facility, are managed by Health Cards
on-line claims management system. Certain of Health Cards sponsors require it to
maintain a pharmacy network with specified numbers of pharmacies in various locations to
serve plan participants. Health Cards retail pharmacy network consists of over
49,000 pharmacies, with the result that cards issued by the Company are recognized in over
91% of pharmacies in the U.S.

Benefit Design
Consultation

Health
Card assists sponsors in defining their financial and employee-benefit objectives for
their prescription drug benefit plans and in developing a program to meet such objectives.
Health Cards 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 strategie
- 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

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

- 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

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

Formulary Design and
Disease Information Services

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

- Chairman, Martin Edelstein, M.D.: Specialties / Areas of Expertise: Family Practice, Geriatrics, Academia
- Marlon Doucet, M.D.: Specialties / Areas of Expertise: Family Medicine
- Roberta Monson, MD: Specialties / Areas of Expertise: Infectious Disease, Academia
- Eric Schneider, Pharm.D., Specialties / Areas of Expertise: Ambulatory Care Practice, Academia
- Richard Handler M.D., Specialties / Areas of Expertise: Internal Medicine, Rheumatology
- David Grossman M.D., Specialties / Areas of Expertise: Cardiology
- James Tan M.D., Specialties / Areas of Expertise: Pediatrics
- Jennifer Cerulli, Pharm.D., Specialties / Areas of Expertise: Ambulatory Care Practice, Academia

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

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

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

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

Data Access, Reporting
and Information Analysis

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

- 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 Health Card 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 Health Cards proprietary decision support tool, known as INFO.

Physician Profiling

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

Health Information
Management

Health
Cards health information management services are delivered through its wholly-owned
subsidiary, Integrail, operating out of Latham, New York. Acquired by Health Card in
November 2002, Integrail provides comprehensive strategic services to analyze and predict
outcomes for both medical and pharmacy data. The focus of Integrails offerings is to
help improve quality of care while managing pharmacy and medical costs. 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.

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 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 for prescription ingredients compared
to those charged by a retail pharmacy.

Health
Card opened its 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.

Prior
to operating its own mail service pharmacy in Miramar, Florida, Health Card outsourced all
of its mail order business to third parties. Health Card continues to have a non-exclusive
relationship with Eckerd Health Services d/b/a Express Pharmacy Services (Express
Pharmacy) pursuant to which Express Pharmacy acts as a participating pharmacy and
dispenses drugs to plan participants by mail. The agreement between Health Card and
Express Pharmacy renews automatically for one year terms. Either party has the right to
terminate the agreement at the end of any renewal term, in each case on 90 days
prior written notice. The agreement provides that Express Pharmacy will (i) provide the
covered drugs by mail to participants; (ii) collect the appropriate co-payment; and (iii)
if required by the plan, collect any additional payment if a brand drug is dispensed when
a generic drug is available.

Sponsors
using the mail-order services of Express Pharmacy have nearly all been transitioned to the
mail pharmacy services of NMHCmail. Claims submitted by mail order pharmacies are managed
using Health Cards on-line claims management system and are subject to the same
review and verification as those claims submitted by retail pharmacies.

In
addition, Health Card dispenses specialty pharmaceuticals from its Portland, Maine
facility. For a discussion of Health Cards specialty pharmacy business, see -
Specialty Pharmacy.

Specialty Pharmacy

Health
Cards specialty pharmacy program is delivered through its wholly-owned subsidiaries,
PRXA and PPRX, both doing business as NMHC Ascend. Ascend manages high cost self-injected
medications, compounding prescriptions for mens and womens health and other
drugs 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 Health Cards sponsors pharmacy budget. This growth is a function of
increased utilization as well as an increase in the number of available treatment agents.
Diseases treated by specialty pharmacy medication include: HIV/AIDS, Hepatitis HCV,
Multiple Sclerosis, Hemophilia, Gauchers Disease, Chronic Renal Failure,
Infertility, Arthritis (OARA), Crohns Disease, Human Growth Hormone Deficiency,
Cystic Fibrosis, and Respiratory Syncytial Virus (RSV).

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
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, Ascend has relationships with biotech and drug
manufacturers to be a part of their dispensing network of pharmacies.

The
addition of NMHCmail will allow Health Card to dispense specialty pharmaceuticals from its
Miramar, Florida facility and the addition of Ascend will allow Health Card to expand its
range of specialty-pharmacy areas to include womens health, pediatric care,
mens health and transplant.

Sponsors

Agreement with Sponsors

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

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

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

Significant Sponsors

For
the fiscal year ended June 30, 2004, MVP Health Plan, Inc. (MVP) and Boston
Medical Center HealthNet (Boston Medical) were the only two sponsors that each
accounted for 10% or more of Health Cards total revenues.

For
the year ended June 30, 2004, revenues from MVP represented 30% of Health Cards
revenues. The contract between MVP and a subsidiary of Health Card remains in effect until
December 31, 2005.

Boston
Medical accounted for 10% of Health Cards revenues for the year ended June 30, 2004.
Boston Medical operates a Medicaid managed care program. Health Card entered into a
contract with Boston Medical effective April 1, 2003 that remains in effect for a three
year period and thereafter automatically renews for successive one year periods unless
otherwise terminated by either party.

Company Operations

Sales and Marketing

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

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

Furthermore,
Health Card continues to expand its web presence (www.nmhcrx.com) as both a functional
tool for clients to conduct the many value-added services provided by Health Card, and as
a portal for eligible plan members to make inquiries and place orders. The web site offers
a page dedicated to online services which allow plan participants to fill out customer
service surveys, to obtain direct payment claim forms, and to access the pharmacy network
listings. In addition, Health Card uses its web presence to make available specific
resources to clients who have unique reporting and data management requests, including
member access to claims history. All member 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 Health Cards business. Health Cards on-line
claims management system depends in large part on software licensed from an unaffiliated
party. By a license agreement dated February 18, 1998, Health Card was granted a
non-exclusive and nontransferable perpetual license to use this partys claims
adjudication software system. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources
in Item 7 hereof.

Health
Card maintains extensive preventative measures to protect against disaster, including
redundancy in processing, telecommunications and power sources.

Health
Card employees provide the required services to maintain and enhance the Companys
information systems infrastructure. Occasionally, outside, unaffiliated consultants are
retained for additional expertise. Historically, Health Card 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, Health Cards former Chairman of the Board and currently a director of the
Board, is also Chairman, CEO, Treasurer and principal stockholder. Health Card 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 the Companys 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 order
operations. Health Card is currently negotiating other supplier contracts as well. Health
Card believes that its supplier arrangements will be adequate to fulfill its needs. Ascend
also utilizes Amerisource Bergen for its purchases, as well as biotech firms for some of
the newer drugs it provides.

Competition

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

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

- a successful record of delivering lower annual costs for its 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 Health Card;
- a focus on customer service; and
- transparency to sponsors.

Employees

As
of September 10, 2004, Health Card and its subsidiaries had 394 employees. Of the 394
total employees, 363 are full-time and 31 are part-time. Health Card is not a party to any
collective bargaining agreement, and Health Card considers its relations with its
employees to be satisfactory.

Government Regulation

The
activities of PBMs such as Health Card are subject to regulation at the federal and state
levels. Health Card believes that its operations, as currently conducted, substantially
comply with the laws and regulations material to the operation of its business. However,
the application of complex standards to the detailed operations of Health Cards
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 Health Card has interpreted the applicable laws and
regulations in the same way as regulatory or judicial authorities, or that the laws and
regulations and/or the interpretation thereof will not change. To date, Health Cards
business activities and relationships with sponsors, pharmacies, rebate administrators,
plan participants, and brokers have not been the subject of regulatory investigation or
review on either the state or the federal level.

Moreover,
the states and federal government continue to propose new legislation that may, if
enacted, have a material adverse effect on Health Cards business, profitability or
growth prospects. A more detailed analysis of certain laws and regulations and proposed
legislation affecting the business, operations and relationships of Health Card 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 federal health care program, including Medicare or Medicaid.
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 Health Card 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. Health Card is not aware of any instance in which the Anti-Kickback Statute has
been applied (i) to prohibit independent PBMs, such as Health Card, from receiving rebates
from drug manufacturers based on drug sales by pharmacies to plan participants, or (ii) to
the 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.

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

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 Health Card
believes that its business practices and direct arrangements with pharmaceutical
manufacturers are in compliance with the OIG Guidance, it can not 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 Health Cards 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 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 and Medicare and Medicaid program exclusion. Health Cards specialty and
mail order pharmacy dispenses certain outpatient prescription drugs that may be directly
or indirectly reimbursed by the Medicare or Medicaid programs, potentially making it
subject to the Stark Laws requirements. However, Health Card does not believe that
it receives any physician referrals that would violate the Stark Law.

State Self-Referral Laws

Our
mail order and specialty pharmacy operations may also be subject to 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, Health Card
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. 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 Health Card 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. Nonetheless, Health Card
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 Health Cards activities
involve the receipt, use and disclosure by it of protected health information
(PHI), including disclosure of PHI to a patients health benefit plan. In
addition, Health Card may use de-identified data for research and analytical purposes.

In
December 2000, HHS issued final regulations under the Health Insurance and Portability Act
of 1996 (HIPAA) regarding the privacy of individually identifiable health
information (the Privacy Rule). The Privacy Rules, which became effective
April 14, 2003, imposes extensive requirements on the way in which covered entities and
their business associates use and disclose PHI. The Privacy Rules give patients
significant rights to understand and control how their PHI is used and disclosed. Direct
providers, such as pharmacies, may use patient information without specific patient
authorization for treatment, payment and health care operations. For most other uses or
disclosures of PHI, the Privacy Rules require covered entities to obtain written patient
authorization. In most cases, use or disclosure of PHI must be limited to the minimum
amount necessary to achieve the purpose of the use or disclosure.

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. Health Cards covered electronic transactions are in
compliance with these regulations.

In
April 2003, HHS also issued final regulations under HIPAA governing the security of PHI,
with an initial compliance date of April 20, 2005 (the Security Rules). The
Security Rules impose detailed requirements on health care providers, health plans,
healthcare clearinghouses, and their business associates relating to the storage,
utilization, and transmission of PHI.

Health
Card has a HIPAA Compliance Committee comprised of representatives from each of Health
Cards departments including legal counsel and chief financial officer who oversee and assess Health Cards compliance with HIPAA.
Health Card believes that it is in substantial compliance with the Privacy Rules and
Transaction Standards and Code Sets requirements promulgated under HIPAA. To date, Health
Card has, among other tasks, implemented a training program for its employees on the HIPAA
regulations and its application to Health Cards business, implemented practices for
the standardization of electronic communication, and installed a security system to
protect the integrity of electronic transmissions. Specifically, as a business
associate with respect to PBM services to sponsors, Health Card has entered into
business associate agreements with sponsors and vendors. As a covered entity
with respect to providing service through Health Cards mail service and specialty
pharmacies, Health Card has entered into business associate agreements with vendors or
other parties with which it shares PHI and provides Notice of Privacy Practices to
individuals describing how the relevant pharmacy uses and discloses PHI for treatment,
payment and healthcare operations.

Health
Card is continually assessing the steps it must take to be in full compliance with the
Security Standards and the related costs of compliance, but does not believe at this time that the Security
Standards will require changes to its information systems and business practices. However,
there can be no assurance that these changes and their associated costs will not have a
material adverse effect on Health Card. Sanctions for failing to comply with standards
issued pursuant to HIPAA include criminal penalties and civil sanctions.

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

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

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

ERISA

Health
Card 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. Health Card
administers pharmacy benefit plans according to the plan design choices made by the health
plan sponsor. Health Card believes that its activities are sufficiently limited that it
does not assume any of the fiduciary responsibilities of the sponsor and thus would not be
regulated as a fiduciary under ERISA. In addition, Health Cards current form
agreement with sponsors specifically provides that Health Card is not a fiduciary of the
plan. Although courts have declined to extend ERISA fiduciary obligations to managed care
companies, there can be no assurance that the U.S. Department of Labor (which enforces
ERISA) or a court will not assert that Health Card (or some other PBM) has a fiduciary
obligation in connection with its activities on behalf of its self-funded sponsors. If
Health Card is deemed to be a fiduciary, it could potentially be subject to claims
regarding benefit denials and breach of fiduciary duties in connection with its provision
of services. 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.
Decisions on these lawsuits are still pending.

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. Health Card has implemented and will continue to
implement in the future, changes to its operational processes, as necessary to accommodate
its sponsors compliance needs.

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. Health Card 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 Health Cards
operations.

Medicare Prescription
Drug Benefits Reforms

The
Medicare Prescription Drug, Improvement, and Modernization Act (the Medicare Drug
Act), which was enacted in 2003, creates a new voluntary prescription drug benefit
under the Social Security Act (Medicare Drug Benefit). Beginning in 2006,
Medicare beneficiaries entitled to Part A or enrolled in Part B, as well as certain other
Medicare enrollees, will be eligible for the Medicare Drug Benefit. Regulations
implementing the Medicare Drug Benefit have not yet been published, and the Medicare Drug
Act requires that the Federal Trade Commission conduct a study regarding certain
competitive aspects of PBM services and make recommendations regarding additional
legislation that may be needed concerning the Medicare Drug Benefit. The FTC has contacted
many PBMs, including Health Card, to provide them with detailed business documents and
data concerning business practices relating to their businesses. At this stage, Health
Card has not been able to fully assess the extent to which Health Card may participate in
the administration of the Medicare Drug Benefit, the costs involved or the impact on its
business and profitability.

The
Medicare Drug Act also 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. Health Card has entered into a contract with
MemberHealth, Inc., an endorsed sponsor, for the provision of rebate administration
services to enrollees in the sponsors card program. Specifically, Health Card
negotiates and enters into rebate agreements with pharmaceutical manufacturers and
collects rebates on behalf of the enrollees. In return, Health Card receives an
administrative fee for its 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 Health Card believes it is compliant with
consumer protection laws, there can be no assurance that Health Cards 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 Health Cards 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. Health Card 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. Health Card has registered or is applying to become registered in those
states in which it has 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, Health Card
conducted its activities without obtaining any TPA, utilization review or PPO licenses.
Health Card 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 Health Card was non-compliant prior to the time it was
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 Health Cards business,
results of operations or financial condition.

Mail Service Pharmacy
Regulation

Health
Cards mail order and specialty pharmacies, NMHCmail and Ascend, respectively,
distribute drugs throughout the United States. Health Cards mail order fulfillment
center is located in Florida and its specialty pharmacy is located in Maine. NMHCmail and
Ascend are each licensed to do business and to deliver controlled substances in its
respective state. Some of the states into which NMHCmail and 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 Ascend have each registered or is 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 employ a
pharmacist licensed in the state to which the drugs are shipped. Health Card believes that
NMHCmail and Ascend are currently in substantial compliance with state laws and
regulations that apply to their mail service pharmacy operations. In addition, Health Card
believes that all of NMHCmails and 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 it will obtain all of the required state licenses prior
to such date.

NMHCmail
plans to dispense prescription drugs for refills pursuant to orders received through the
internet. 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 mail service pharmacy operations could be
materially adversely affected if such legislation is enacted and restricts its ability to
offer its 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
Health Card.

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. Health
Card believes that it is in substantial compliance with all such rules and regulations
affecting its mail service 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 Health Cards
drug purchases. The loss of such discounts could have a material adverse impact on Health
Cards 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. In 2003, Maine passed legislation that directly
regulates the activities of PBMs. In part, the Maine 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 U.S.
District court in Maine has preliminarily enjoined enforcement of the Maine statute. To
the extent states in which Health Card does business enact bills that regulate the
activities of PBMs in a comprehensive manner, such bills could materially adversely affect
Health Cards 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 in their statutes. If laws
directly regulating PBMs are passed in states in which Health Card does business, such
laws could materially affect Health Cards operations.

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 Health Cards
ability to negotiate discounts in the future from network pharmacies and on the
reimbursement Health Card receives 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 Health Cards ability to negotiate discounts on the purchase of
prescription drugs from its network pharmacies or manufacturers or otherwise discourage
the use of the full range of Health Cards 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 Health Cards customers, which could
adversely affect Health Cards 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 the reimbursement rate of Health Cards
mail service pharmacy. 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 similar pending 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 Health Cards 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 Health Cards
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.

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 Health Card
represents.

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. A House Government Reform Subcommittee held hearings
on this issue during 2003 and the Department of Health and Human Services has undertaken
to study how the safety of imported drugs could be ensured with the results to be reported
by December 1, 2004. Whether and how such a policy will be implemented is unclear. The
ultimate impact of such legislation on the business of Health Card is not known.

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 Health Card, it may apply to certain of Health
Cards 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
Health Cards customers through pharmacy benefit management.

Network Access Limitations

Many
states have adopted legislation restricting the ability of a PBM to limit participation in
its pharmacy provider network or to remove a provider from the network. These laws may
require Health Card or its sponsors to accept for participation in the network any retail
pharmacy willing to meet the applicable plans price and other terms, and may
restrict the ability of Health Card and its sponsors to remove a pharmacy from the network
without certain due process protections. To date, these statutes have not had
a significant impact on Health Cards business because for most of its customers,
Health Card administers 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. Increasing regulation of formularies by states could
significantly affect Health Cards ability to develop and administer formularies on
behalf of Health Cards sponsors.

Future Legislation

Health
Card can not accurately predict what additional federal or state legislation or regulatory
initiatives may be enacted in the future relating to its 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 Health Cards business operations or profitability.

Company Information

Address and Availability
of Information.

Health Cards principal
executive offices are located at 26 Harbor Park Drive, Port Washington, NY 11050. Its
telephone number is (516) 626-0007 and web site is www.nmhcrx.com. Health Card files its
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). 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 Health Card. You may also
read and copy any materials Health Card files with the SEC at the SECs Public
Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, DC 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

Code     of
Ethics. As of September 19, 2003, Health Card has adopted a code of ethics for all of its
senior officers. In addition, the Company has adopted a code of business conduct
applicable to all employees. Upon request by contacting Health Card at the address or number above, a
copy of the code of ethics will be mailed to such person free of charge.

The
Company 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). The Company subleases the Leased Premises from BFS Realty, LLC, an
affiliate of the Companys former Chairman and current director (the
Affiliate). The Affiliate leases the Leased Premises from the Nassau County
Industrial Development Agency (NCIDA) pursuant to a lease that was entered
into by NCIDA and the Affiliate in July 1994, which expires in March 2005. The Affiliate
has the right to purchase the Leased Premises upon expiration 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 $308,305. While formerly the Company made
estimated monthly real estate tax, utilities and maintenance-expense payments to the
Affiliate, the Lease provided that the Company would pay its pro-rata share of such
expenses directly, to the entities to whom payment must be made. 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 $580,174 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, 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 by 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.

Pursuant
to a lease dated August 10, 1998 and expiring on August 31, 2005, Health Card occupies
approximately 1,500 square feet at 63 Manorhaven Boulevard, Port Washington, New York,
which is used currently for office storage space. The landlord for these premises is 61
Manorhaven Boulevard, LLC, of which the Companys former Chairman and current
director is the sole member. The current rent is $2,000 per month. The annual rent
increases by 5% per year. Additional rent, in the form of certain expenses, is also
payable.

Additionally,
the Company leases office and/or warehouse space through its subsidiaries in Little Rock,
Arkansas; 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 $194,000; for leased space in Tulsa approximately $24,000; for Miramar
approximately $142,000; for Portland approximately $120,000; for Latham
approximately $383,000; and for Dallas approximately $168,000. The Company intends
to move its current office space in Dallas to a less costly space in Dallas and has
delivered a notice of termination to the landlord of the Dallas space, effective January
31, 2005.

In
addition, Health Card rents a two family house in Port Washington, New York (near the
Companys offices) from P.W. Capital, LLC, (a company affiliated with Health
Cards former Chairman and current director of the Board) which is used for
out-of-town employees. Health Card evaluated the cost of hotels for these individuals and
determined it was more cost efficient to rent the house at an annual rate of $66,000. For
the same reasons, Health Card rents two houses from Living In Style, LLC, an entity owned
by three of Health Cards executive officers. Pursuant to leases dated May 1, 2002
and expiring April 30, 2007, Health Card paid an aggregate of $133,000 in rent for these
two facilities during the fiscal year ended June 30, 2004. The annual rent for each of the
facilities increases by 5% per year.

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

An
action was commenced against the Company on April 30, 2002 by Midwest Health Plan Inc.
(MHP) in the United States District Court for the Eastern District of
Michigan. The amended complaint alleges, among other things, that the parties entered into
a contract dated July 1999 (the Agreement), and further alleges that the
Company has overcharged MHP for the administration of prescription benefit services in
contravention to the terms of the Agreement and breached its fiduciary duties by making a
profit. MHP is seeking $3 million dollars in damages. The Company filed an answer and
counterclaim on June 12, 2002. In the counterclaim, the Company claimed damages in excess
of $2.8 million based on Midwests failure to pay under a contract. In late June
2002, Midwest agreed to make two payments in the amount of $1.34 million and $1.36 million
to partially settle the Companys claims against Midwest. Midwest has now added a
fiduciary duty claim. The Company continues to have counterclaims totaling over $200,000
against Midwest for Midwests failure to pay the amounts it had agreed to pay Health
Card for goods and services. The Company argued its motion for partial summary judgment
and motion to dismiss the fiduciary duty claim in February 2004 and is currently awaiting
the courts decision on such motions. The Company intends to vigorously defend the
action. The Company is unable to provide an estimate of any particular loss, if any, which
may be associated with the MHP claims.

PART II

Market Information

Health
Card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.

|                     | Fiscal
        Years ended June 30,
|-------------------- | -----------------------------------
|                     | 2004                               
|                     |                                    
|                     | High                               
|                    
|First
      Quarter  | $                                  
|Second
      Quarter | $                                  
|Third
      Quarter  | $                                  
|Fourth
      Quarter | $                                  

Holders

Health
Card has been advised by its transfer agent (Continental Stock Transfer & Trust
Company) that the approximate number of record holders of its common stock as of September
22, 2004 was 43.

Dividend Policy

Health
Card has not declared or paid any cash dividends in the past on its common stock. Health
Cards 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 $1,596,000 was paid out on the preferred stock for the
year ended June 30, 2004. Health Card is otherwise prohibited, under the terms of the
Facility, from making any distributions to shareholders or declaring or paying any
dividend. Even if such prohibition were not in effect, Health Card currently intends 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 the Company are authorized
for issuance is set forth under Part III, Item 12 of this From 10-K and such information
is incorporated herein by reference.

Recent Sales of
Unregistered Securities

No
unregistered shares of the Companys securities were issued during the fourth fiscal
quarter of 2004.

The
following tables summarize certain selected financial information for each of the years in
the five year period ended June 30, 2004 and provide certain supplemental data. The
selected consolidated income statement data for the years ended June 30, 2004, 2003, and
2002 and the selected consolidated balance sheet data as of June 30, 2004 and 2003 have
been derived from the audited consolidated financial statements of Health Card included in
Item 8 hereof. The selected consolidated income statement data for the years ended June
30, 2001 and 2000 and the selected consolidated balance sheet data as of June 30, 2002,
2001 and 2000 have been derived from audited consolidated financial statements of Health
Card that are not included in this Form 10-K. The information contained in this table
should be read in conjunction with Health Cards consolidated financial statements
and notes thereto, and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7 hereof. All amounts are in
thousands, except per share amounts.

|Year Ended June 30,                 
|------------------------------------
|
|Income Statement Data:1             
|Revenues                            
|Cost of claims                      
|                                    
|                                    
|Gross profit                        
|Selling, general and                
|administrative expenses             
|                                    
|                                    
|Operating income                    
|Other income (expense)              
|                                    
|                                    
|Income before provision for         
|income taxes                        
|Provision for income taxes          
|                                    
|                                    
|Net income                          
|Beneficial conversion feature       
|Preferred stock cash dividend       
|Accretion of transaction expenses   
|                                    
|                                    
|Net (loss) income available to      
|common stockholders                 
|                                    
|                                    
|(Loss) earnings per common share:   
|Basic                               
|Diluted                             
|Weighted average number of          
|shares outstanding:                 
|Basic                               
|Diluted                             
|Balance Sheet Data:                 
|Cash and cash equivalents           
|Working capital (deficit)           
|Total assets                        
|Long term debt including            
|current portion                     
|Redeemable convertible preferred    
|stock                               
|Total common stockholders' (deficit)
|equity                              
|Supplemental Data2                  
|Retail pharmacy claims              
|processed                           
|Mail pharmacy claims processed      
|Estimated plan participants         
|(at year end)3                      

---

(1)   Reference is made to Item 1 hereof, (Description of Business) and 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 2004.

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

(3)   Generally, the PBM industry presents estimated plan participants based
      upon the number of participants to whom they provide some level of services.
      Historically, the Company only reported fully managed group health lives.
      the Company has now adopted the generally accepted industry practice and
      has restated its plan participant count for fiscal 2002-2003.

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

Overview

The
audited Consolidated Financial Statements include the accounts of Health Card and its
wholly owned subsidiaries, PAI, PMP, Centrus, IPA, Specialty, Contracts, PBM Tech,
NMHCmail, Integrail, Portland Professional Pharmacy and Portland Professional Pharmacy
Associates (collectively Ascend), and Inteq Corp. and Inteq TX Corp.
(collectively Inteq). Also included are the accounts of Funding. Unless the
context otherwise requires, references herein to the Company or Health
Card refer to the Company and its subsidiaries on a consolidated basis. The results
of operations and balance sheet of the Companys acquisitions and subsidiaries have
been included in the consolidation as of the effective date that the Company 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, Integrail
 November 1, 2002, Ascend  July 31, 2003, and Inteq  April 1, 2004. All
material intercompany balances and transactions have been eliminated in the consolidation.

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

Revenue
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
beginning of the month. The amount of revenue related to the drugs dispensed by pharmacies
participating in Health Cards pharmacy network is recognized at the time of
dispensing the drug as the cost is incurred. The amount of revenue recognized is reduced
by the amount of rebates that Health Card shares with its sponsors. The specific terms of
the contracts that Health Card enters into with its sponsors will determine whether Health
Card recognizes the gross revenue related to the cost of the prescriptions filled. In
certain cases, the Company has not recognized the gross revenue or cost related to
prescriptions filled for a specific sponsor. This has no impact on the Companys
gross profit since neither the prescription revenue nor the related cost of the
prescriptions is recorded.

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

|                              | Years Ended June 30,
|----------------------------- | --------------------
|
|Revenues relating to:         |                     
|Pharmaceuticals               |                     
|Administrative fees and other |                     
|Total Revenues                |                     

Health
Card does not take possession or legal ownership of the pharmaceuticals dispensed by the
retail pharmacy network or its out-sourced mail order facilities, although Health Card
assumes the legal responsibility and financial risk of paying for dispensed
pharmaceuticals whether or not Health Card is paid by its sponsors. Health Card does take
possession and dispenses pharmaceuticals from its mail order facility and its specialty
pharmacy as of August 1, 2003.

Health
Card utilizes its comprehensive pharmacy benefit database to perform outcome studies and
to develop disease information programs which are used to reduce overall healthcare costs.
The Companys 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. Health Card
believes 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 Health Card in
the future.

Mail Order 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 elimiated in consolidation.  To date, Mail Order only fills prescriptions for
NMHC plan sponsors.  Revenue is recognized by Ascend at the point of shipment to the member.
Ascend invoices individual members, sponsors, and insurance companies as well as Medicare and Medicaid.

Cost
of claims includes the amounts paid to network pharmacies, including mail service
pharmacies, for pharmaceutical claims, and reductions resulting from the gross rebates
received from drug manufacturers. Cost of claims are recognized as follows: the
contractual obligation of Health Card to pay for these drugs is recorded as cost of claims
at the time of dispensing of the drug by the pharmacy network. Cost of claims is reduced
by the rebates that Health Card receives. Rebates are earned from drug manufacturers based
on drugs utilized by plan participants at the time of dispensing. These rebates, which varies by sponsor, is 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. Health
Card processes its rebate claims either direct with the drug manufacturers, through its
wholly-owned subsidiary, Specialty, for which it receives administrative fees, or through
a third party rebate administrator. Effective July 1, 2001, Health Card has entered into
an agreement with a third party administrator to handle all of its consolidated rebate
claims which it does not otherwise submit direct to the drug manufacturers.

The third party administrator provides estimates to
Health Card based on its analysis of the amount of rebates that Health Cards claims
should generate. These estimates are prepared based on estimates of how Health Cards
claims might influence the market share of a particular drug covered under an agreement
with a drug manufacturer. Market share is generally defined as the percentage of
utilization of a certain drug or drugs within its therapeutic class. Under Health
Cards contract with the Administrator, Health Card receives a specified minimum
amount per claim 150 days after the end of a quarter. Amounts above the minimum are shared
between the Administrator and Health Card with final settlement twelve months after a
quarter end. Health Card accrues rebates based upon an estimate provided by the
Administrator.

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

Certain
of Health Cards sponsors are entitled to all or a portion of rebates received by
Health Card, which portion varies contractually by sponsor. The manufacturer rebates
retained by Health Card, after the sponsors receive their contractual amounts, have
historically had a significant impact on Health Cards financial performance. For the
fiscal years ended June 30, 2004, 2003 and 2002 the rebates retained by Health Card has
equaled 16%, 11% and 19%, respectively, of the Companys total gross profit. Due to
the expected continued growth and diversification of Health Cards business, Health
Card expects rebates to continue to account for a significant, but declining, percentage
of its total gross profit.

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

Credit
risk relating to the rebates receivable is evaluated based on the financial strength of
the rebate administrator and the drug manufacturers plus Health Cards collection
history. The drug manufacturers contracted with are primarily Fortune 500 companies and
Health Card has not had a history of write-offs related to rebate receivables. Health Card
does not believe a credit risk reserve is necessary.

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

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

# OPERATING INCOME($ in thousands)Year ended June 30,

|                       | 2004 | Increase/
(Decrease) | 2003 | Increase/
(Decrease) | 2002
|---------------------- | ---- | -------------------- | ---- | -------------------- | ----
|Revenue                |      | $651,098             |      | 13                   | .6% 
|Cost of Claims         |      | 587,055              |      | 11                   | .7% 
|                      
|Gross Profit           |      | 64,043               |      | 34                   | .0% 
|Selling, general and   |     
|administrative expense |      | 50,606               |      | 40                   | .7% 
|                      
|Operating Income       |      | $  13,437            |      | 13                   | .7% 

Results of Operations

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 Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related to the
cost of the prescriptions filled. For those contracts that Health Card recognizes net
revenue, there is no impact on gross profit since neither the prescription revenue nor the
related costs of the prescriptions is recorded. Health Card includes in revenue only those
co-payments collected in its mail order facility in Miramar, Florida. 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 Health Cards members and not included in
Health Card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 the Company 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 when rebates payable to the Companys sponsors increased 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 the
Company 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 the Company 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 NMHCmail 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, the Company 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 the Company in the
twelve months ended June 30, 2004 which were not part of the Company during all of the
twelve months ended June 30, 2003. The services provided by these entities include
specialty pharmacy distribution through the Companys acquisition of PPP, predictive
modeling and consulting services through the Companys acquisition of Integrail, and
mail order distribution through the Company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, the Company earned other income, net, of
approximately $40,000. For the fiscal year ended June 30, 2003, the Company 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 the Company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 the Company, and excess cash balances related to some of the Companys
acquisitions. The Company 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 the Company 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 the
Company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.

There
were three other charges recorded to determine income (loss) available to common stockholders related to
the New Mountain Transaction. These include: (i) series A preferred stock cash dividends 
approximately $1,596,000. 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 (See Note 2 to the Consolidated Financial Statements
comprising Item 8 hereof.). The dividend of approximately $1,596,000 represents the amount
accrued and paid for the days from the closing of the New Mountain Transaction on March
19, 2004 to June 30, 2004; (ii) beneficial conversion feature  $80 million. This
non-recurring, non-cash charge represents 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, and which is limited to the $80 million
purchase price for the series A preferred stock; and (iii) accretion of transaction expenses 
approximately $135,000. Certain transaction costs related to the New Mountain transaction of approximately
$4.7 million 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 series A preferred stock investment.
The approximate $135,000 charge represents the accretion from March 19, 2004 to June 30,
2004.

After
deducting these three charges from net income there was a net loss available to common
stockholders of approximately $73.8 million for the twelve months ended June 30, 2004.
Since there was a loss, diluted EPS for the twelve months ended June 30, 2004 equals basic
EPS of ($11.14).

While
net income and net income available to common stockholders excluding non-recurring 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 New Mountain Transaction on net income
and net income available to common stockholders. Net income and net income available to
common stockholders excluding non-recurring 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 non-recurring New Mountain transaction items, is as follows (all
amounts are in thousands, except per share amounts):

|Twelve Months
      Ended                        
|-------------------------------------------------
|
|Net
      income, as reported                    
|Add back:                                        
|Transaction
      bonuses and severance payment, 
|net
      of income tax benefit                  
|Compensation
      charge related to stock option
|issued
      in lieu of transaction bonus, net of
|income
      tax benefit                         
|Compensation
      charge related to the         
|acceleration
      of directors options, net of  
|income
      tax benefit                         
|                                                 
|Net income
      excluding non-recurring         
|New
      Mountain Transaction items ( C )       
|Less:                                            
|Preferred
      dividends                        
|Accretion
      of transaction expenses          
|                                                 
|Net income
      available to common             
|shareholders
      excluding non-recurring New   
|Mountain
      Transaction items ( A )           
|Earnings
      per share excluding non-recurring 
|New
      Mountain Transaction items:            
|Basic
      ( ( A ) / ( B ) )                    
|Diluted
      ( ( C ) / ( D ) )                  
|Weighted
      average number of                 
|shares
      outstanding:                        
|Basic
      ( B )                                
|Diluted
      ( D )                              

---

The
Company has no off balance sheet transactions.

Fiscal Year Ended June
30, 2003 Compared to Fiscal Year Ended June 30, 2002

Revenue
increased $113.4 million, or approximately 25%, from $459.83 million for the fiscal year
ended June 30, 2002, to $573.27 million for the fiscal year ended June 30, 2003. Revenue
recognized for contracts recorded on a gross revenue basis was $459.4 million for the
fiscal year ended June 30, 2002 and $572.0 million for the fiscal year ended June 30,
2003. Revenue recognized for contracts recorded on a net revenue basis was $0.5 million
for the fiscal year ended June 30, 2002 and $1.3 million for the fiscal year ended June
30, 2003. The specific terms of the contracts that Health Card enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related to the
cost of the prescriptions filled. For those contracts that Health Card recognizes net
revenue, there is no impact on gross profit since neither the prescription revenue nor the
related costs of the prescriptions is recorded. Of the $113.4 million increase in revenue
in fiscal 2003, $156.0 million was due to the inclusion of revenues from Centrus, since it
was acquired on January 29, 2002 and included a full fiscal year in 2003 compared to a
little over five months in the fiscal year ended June 30, 2002. This increase due to
Centrus is a net amount and reflects the fact that one major sponsor terminated their
contract effective December 31, 2002 and a new major sponsor was added in April 2003.
Another $38.5 million of the overall gross revenue increase was due to revenue related to
new sponsors or new services offered during fiscal 2003 unrelated to Centrus
customers and excluding contracts recorded on a net revenue basis. Also, $19.6 million of
the increase was from other existing sponsors as a result of several factors including
higher charges relating to increased cost of pharmaceuticals, new drugs, plan participant
growth and an increase in the average number of claims per plan participant. These
increases were partially offset by non-Centrus 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 June 30, 2002, leading to a
reduction in revenue of approximately $82.9 million, 2) there was one contract during the
twelve months ended June 30, 2003 that the Company recognized on a net revenue basis that
was recognized on a gross revenue basis during the twelve months ended June 30, 2002. 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 $15.6 million, and 3) rebates
payable to the Companys non-Centrus sponsors increased by $2.2 million for the
twelve months ended June 30, 2003 as compared to the twelve months ended June 30, 2002.
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 $100.7 million, or approximately 24%, from $424.8 million for the
fiscal year ended June 30, 2002, to $525.5 million for the fiscal year ended June 30,
2003. Centrus accounted for $151.6 million, of the net 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 $77.7 million, the recognizing of a
certain contract on a net revenue basis which reduced cost of claims by $15.6 million,
and. an increase of $1.7 million in gross rebates received, which is treated as a
reduction in cost of claims. The balance of the increase in cost of claims is related to
the increased revenue as described above related to both new and existing sponsors. As a
percentage of revenue, cost of claims decreased from 92.4% to 91.7% for the fiscal years
ended June 30, 2002 and June 30, 2003, respectively. The same factors contributed to the
declining costs as a percentage of revenue. The two major sponsors, which terminated their
contracts, are managed care organizations. 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. While not all of the revenue associated with these two
sponsors was replaced by new business, the new business, 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. The decline in cost of
claims as a percentage of revenue was moderated by the higher cost of claims on the
Centrus book of business, which serves managed care clients primarily. Centrus cost
of claims for the fiscal year ended June 30, 2003 ran about 6  9 percentage points
greater than the rest of the Companys business, and since Centrus accounted for 49%
of the Companys revenue in the fiscal year, this impacted the overall cost of claims
percentage.

Gross
profit increased from $35.1 million for the fiscal year ended June 30, 2002 to $47.8
million for the fiscal year ended June 30, 2003; a $12.7 million, or 36%, increase. In
addition, to the revenue volume increase, Centrus accounted for $4.3 million, or 33%, 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 $1.6 million, or 13%. Gross profit, as a percentage of revenue,
increased from 7.6% to 8.3% for the twelve months ended June 30, 2002 and June 30, 2003,
respectively. The contracts the Company 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.
Partially offsetting this impact, the Company has seen some decline in profit margins due
to competitive pressures.

Selling,
general, and administrative expenses, which include amounts charged by affiliates,
increased $8.7 million, or approximately 32%, from $27.3 million for the fiscal year ended
June 30, 2002 to $36.0 million for the fiscal year ended June 30, 2003. This increase is
primarily related to the acquisition of Centrus. While the expenses specifically related
to Centrus were $7.3 million greater in the twelve months ended June 30, 2003 as compared
to the five months since the acquisition in the twelve months ended June 30, 2002, this
was partially offset by reductions in other areas of the Company related to the full
integration of Centrus. The Company analyzed every department in the Company and made
decisions concerning the most efficient way to operate regardless of location. This
evaluation has led to synergies across the Company and has allowed the Company to maximize
the utilization of its resources. It is anticipated that this kind of analysis and
deployment of resources will continue as the Company grows.

Selling,
general, and administrative expenses also increased in the twelve months ended June 30,
2003 due to the start-up of two new activities in the quarter ended December 31, 2002. The
Company acquired Integrail as of November 1, 2002 (See Note 3 to the Consolidated
Financial Statements comprising Item 8 hereof). In the months since the Company acquired
Integrail, approximately $1.3 million of expenses were incurred primarily related to
salary and benefits and depreciation and amortization. The other activity was the start-up
of the build out of a mail order facility in Miramar, Florida. Prior to July 1, 2003, the
Company out-sourced the total actual fulfillment of prescriptions that are ordered by
mail. By bringing these services in-house the Company will be better able to control
service and cost for its customers. For the twelve months ended June 30, 2003,
approximately $450,000 of expenses were incurred on this endeavor. The division started
dispensing pharmaceuticals as of July 1, 2003.

Due
to the additions of Integrail and the mail order facility along with Centrus for the full
twelve months in the fiscal year ended June 30, 2003, the Companys expenses
increased $4.4 million for expenditures related to increases in compensation and benefits,
primarily associated with new employees including senior management. Some of this increase
was also related to the replacement of resources from related parties with full time
employees (see below). In addition, the Company incurred the following additional expenses
in the twelve months ended June 30, 2003: 1) approximately $400,000 of expenses incurred
related to two acquisitions which the Company did not complete, 2) approximately $127,000
related to a settlement of a New York State sales tax audit, and 3) the payment of
$100,000 related to a terminated consulting agreement.

General
and administrative expenses charged by affiliates decreased approximately $1.0 million, or
54%, year-over-year from $1.9 million to $0.9 million for the fiscal years ended June 30,
2002 and June 30, 2003, respectively. The Company has eliminated many of the related party
transactions effective January 1, 2002. The majority of the decrease related to reduced
information technology services and management and consulting services procured from
affiliated companies. The hiring of full time employees and the use of outside consultants
replaced the use of affiliated companies to update the information technology
infrastructure.

Selling,
general, and administrative expenses as a percent of revenue increased from 5.9% for the
fiscal year ended June 30, 2002 to 6.3% for the fiscal year ended June 30, 2003. The main
reason for the increase is 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. In addition, the acquisition of Integrail and the start-up of NMHCmail led to an
increase in this percentage.

For
the fiscal year ended June 30, 2002, the Company incurred other expense, net, of
approximately $502,000. For the fiscal year ended June 30, 2003, the Company incurred
other expense, net, of approximately $804,000. The components of the approximate $302,000
increase in net expense were an approximate $84,000 increase in interest expense, an
approximate $270,000 decrease in interest income, offset by an approximate $52,000
additional gain on assets sold during the fiscal year ended June 30, 2002. The primary
reasons for the net increase in expense were 1) the interest expense incurred on the
Companys revolving credit facility and on the Note Offering to finance the
acquisition of Centrus and Integrail (see Item 1, Description of Business-Recent
Acquisitions, and Notes 3 and 7 to the Consolidated Financial Statements comprising Item 8
hereof), and 2) the reduction in interest income since all cash balances go towards paying
off the revolving credit facility. Partially offsetting the increase in other expense was
an approximate $52,000 increase in deferred gain on the sale of assets related to a
sale/leaseback transaction, which gain of approximately $459,000 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.)

Income
before the provision for income taxes increased approximately $3.6 million, or 50%, from
approximately $7.4 million, for the fiscal year ended June 30, 2002, to approximately
$11.0 million for the fiscal year ended June 30, 2003. The primary reason for the increase
was the improving efficiencies that come with scale arising from the integration of the
acquisitions the Company has completed. As mentioned previously, the acquisition of
Integrail and the start-up of the mail order facility had the impact of reducing
profitability in the year ended June 30, 2003.

The
effective tax rate increased from 39.4% for the fiscal year ended June 30, 2002 to 41.8%
for the fiscal year ended June 30, 2003. The increase stemmed primarily from an increase
in the state tax rate as more of the Companys income has been allocated to higher
taxed states.

Net
income for the fiscal year ended June 30, 2003 was approximately $6.4 million as compared
to approximately $4.5 million for the fiscal year ended June 30, 2002; a 44% increase.
Earnings per diluted share increased by $0.24, to $0.80 for the fiscal year ended June 30,
2003.

The
Company has no off balance sheet transactions.

Liquidity and Capital
Resources

The
Companys primary cash requirements are for capital expenditures and operating
expenses, including cost of pharmaceuticals, software and hardware upgrades and the
funding of accounts receivable. Effective July 2003, the Company requires cash to carry
inventory in its mail order facility and specialty pharmacy. The Company also requires
cash for potential acquisitions of other pharmacy benefit management companies or of
companies providing related services. As of June 30, 2004, the Company had a working
capital deficit of $27.7 million as compared to a working capital deficit of $32.6 million
as of June 30, 2003. The primary reason for the improvement in working capital was the
profitability generated by the Company during the fiscal year ended June 30, 2004. The cash
flow generated from operations - $23.9 million, plus the net proceeds of the New Mountain
transaction - $24.0 million, plus the proceeds the Company received upon the exercise of stock
options - $7.0 million, plus the repayment of affiliate loans - $2.8 million, were used
 to fund the acquisitions of Inteq - $29.1 million and PPP -
$3.7 million (see Item 1, "Description of Business - Recent Acquisitions and Developments"
and Note 3 to Consolidated Financial Statements comprising Item 8 hereof), repay the Companys credit facility - $15.6 million, purchase capital
assets - $7.4 million, pay preferred dividends - $1.6 million and pay additional consideration related to the Centrus acquisition -
$2.0 million.  The Companys acquisitions have increased goodwill and other intangible assets which are
long term assets, while decreasing working capital. The Company has now acquired six
companies since July 2000 utilizing primarily cash. This has had the effect of increasing
the Companys working capital deficits until sufficient profitability is generated to
pay back the cost of the acquisitions.

Net
cash provided by operating activities was $23.9 million and $15.7 million for the fiscal
years ended June 30, 2004 and 2003, respectively. One factor leading to the $8.2 million
increase in cash provided by operations was the $1.5 million of incremental net income
generated during the fiscal year ended June 30, 2004 as compared to the fiscal year ended
June 30, 2003. Another factor in the increase in cash was the growth in income tax
payables and other current and long-term liabilities which increased approximately $3.2
million.

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

Net
cash used in investing activities was $39.4 million for the twelve months ended June 30,
2004, as compared to $6.0 million for the twelve months ended June 30, 2003. The primary
differences in the two periods were the acquisition of Inteq and PPP and the repayment of
affiliate loans in the twelve months ended June 30, 2004, as compared to the acquisition
of Integrail in the twelve months ended June 30, 2003.  In addition, there was a $4.9 million increase in
capital expenditures for the twelve months ended June 30, 2004 as compared to the twelve
months ended June 30, 2003. The net cash outlay for Inteq was $29.1 million, representing
the initial payment of $29.6 million to the Sellers and $3.0 million to escrow plus
approximately $572,000 of related expenses. Cash in the amount of approximately $4.1
million was assumed in the acquisition. The net cash outlay for PPP was $3.7 million,
representing the initial payment of $3.2 million to the Sellers, $609,000 to pay off
PPPs bank debt plus $77,000 of related expenses. Cash in the amount of approximately
$177,000 was assumed in the acquisition. In addition, approximately $666,000 has been
accrued through June 30, 2004 as additional purchase price related to an earn-out
provision, which was paid in September 2004 (See Note 3 to Consolidated Financial Statements comprising
Item 8 hereof. The net cash outlay for Integrail was $1.5 million, representing the initial
payment of $1.4 million plus $72,425 of related expenses. No cash was assumed in this
acquisition.

During
the year ended June 30, 2004 the Company repaid a net of approximately $15.6 million under
its revolving credit facility. The Company also paid $0.5 million towards its outstanding
capital lease and other debt obligations during the fiscal year ended June 30, 2004. As
stated previously, the Company received a net of $24 million from the New Mountain
transaction (See Item 1, Description of Business-Recent Acquisitions, and Note
3 to the Consolidated Financial Statements comprising Item 8 hereof), plus $7.0 million
from the exercise of stock options. The Company used some of these funds to pay $1.6
million of preferred dividends for the twelve months ended June 30, 2004.

On
January 29, 2002, the Company entered into a $40 million revolving credit facility,
details of which are set forth in Item 1 above and in Note 7 to the Consolidated
Financial Statements comprising Item 8 hereof. Borrowings of $28.7 million under the
Facility were used to finance part of the purchase price of the Companys acquisition
of Centrus. The Facility contains various covenants that, among other things, require the
Company to maintain certain financial ratios, as defined in the agreements governing the
Facility. As of September 17, 2004, approximately $5.1 million was outstanding under the
Facility, and the Company was in compliance with its financial-ratios covenants.

Three
of these financial covenants are based upon the EBITDA (earnings before interest, taxes,
depreciation and amortization) generated by the Company over specified periods of time.
These covenants, EBITDA for the current fiscal quarter, interest coverage ratio, and debt
service coverage for the previous twelve months, are evaluated by the Lender as a measure
of the Companys liquidity and its ability to meet all of its obligations under the
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 nor liquidity under U.S. generally accepted accounting
principles, it is provided as information for investors for analysis purposes in light of
the financial covenants referred to above. EBITDA is not meant to be considered a
substitute or replacement for net income as prepared in accordance with U.S. generally
accepted accounting principles. The reconciliation from net cash from operations to EBITDA
is as follows (see Consolidated Statement of Cash Flows comprising Item 8 hereof for more
details):

|                            | Year Ended June 30,
|--------------------------- | -------------------
|
|Cash flow from operations   |                    
|Provision for income taxes  |                    
|Interest (income) expense,  |                    
|net                         |                    
|Net change in assets and    |                    
|liabilities                 |                    
|Non-cash items to reconcile |                    
|net cash from operations to |                    
|net income                  |                    
|                           
|                           
|EBITDA                      |                    
|                           

The
Company has entered into various capital lease transactions for hardware and software. The
Company has also assumed various capital leases through its acquisitions. The principal
balance of all capital leases as of June 30, 2004 was approximately $340,000.

The
Company has entered into various real estate operating leases with both related and
unrelated parties. The Company has entered into various operating leases with unrelated
third parties for office equipment. These leases have different payment terms and
expirations dates. The Company also entered into two sale-leaseback operating leases of
certain fixed assets (principally computer hardware and externally developed software) one
with an affiliate of the Companys former Vice Chairman. 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, 2004 is as
follows:

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|
|
|
|Long Term Debt                     |  | $       53            
|Capital Lease Obligations          |  | 340                   
|Operating Leases                   |  | 23,176                
|Sale-leaseback                     |  | 498                   
|                                  
|                                  
|Total Contractual Cash Obligations |  | $24,067               
|                                   |  |                       

The
shareholders of the Inteq Group are eligible to receive additional consideration of up to
$4,200,000, if certain financial targets are met over the first year. Of this potential
amount, $3,000,000 was deposited into escrow at the time of closing. As of June 30, 2004,
$955,000 has been earned and will be released from escrow on September 30, 2004.

The
shareholders of PPP are eligible to receive additional consideration of up to $7,000,000,
if certain financial targets are met over the first three years. 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 the Company, up to 50% of any amounts earned can be
paid in the form of the Companys stock in lieu of cash. For the first year ended July 31, 2004,
$716,010 has been earned and was paid on September 15, 2004. Of this amount, $358,005 was
paid in cash and $358,005 was paid in the form of the Companys common stock.

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 will be paid in May 2005.

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 million. On March 19, 2004, the Company 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 the Companys outstanding
common stock at $11.00 per share. Prior to the closing of the New Mountain Transaction,
Bert E. Brodsky, the former chairman of the board of directors and a current director, 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 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 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 were 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 million, excluding expenses related to the
closing of the New Mountain Transaction, for the Inteq Acquisition (See Item 1,
Description of Business-Recent Acquisitions, and Note 3 to the Consolidated
Financial Statements comprising Item 8 hereof) and working capital purposes.

The series A
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 series A 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.

The
Company anticipates that current cash positions, after its six acquisitions together with
anticipated cash flow from operations, will be sufficient to satisfy the Companys
contemplated cash requirements for at least 24 months. This is based upon current levels
of capital expenditures and anticipated operating results for the next 24 months. However,
it is one of the Companys stated goals to acquire other pharmacy benefit management
companies and companies providing related services. Depending on the Companys
evaluation of future acquisitions, additional cash may be required to complete these
acquisitions. In addition, the Company will require cash to acquire inventory for its mail
order and specialty distribution operations. In the event that the Companys plans
change or its assumptions prove to be inaccurate, or the proceeds from the Facility and
the New Mountain Transaction prove to be insufficient to fund operations and acquisitions,
the Company could be required to seek additional financing sooner than anticipated. There
can be no assurance that such financing could be obtained at rates or on terms acceptable
to the Company, if at all.

Supplemental Quarterly
Financial Data

Unaudited quarterly
financial data ($ in thousands, except per share amounts) for the fiscal years 2004 and
2003 are summarized as follows:

|                                                         |  | Fiscal Year
      2004
|-------------------------------------------------------- |  | ----------------------
|
|Revenue                                                  |  | $      176,647        
|Income before
      provisions for income tax            |  | 4,277                 
|Net Income                                               |  | 2,525                 
|Net income
      (loss) available to common stockholders |  | 1,010                 
|Earnings
      (loss per common share):                  | 
|Basic                                                    |  | 0.25                  
|Diluted                                                  |  | 0.21                  
|Common share
      prices:                               | 
|Basic                                                    |  | 41.72                 
|Diluted                                                  |  | 23.64                 

|                                                         |  | Fiscal Year
      2003
|-------------------------------------------------------- |  | ----------------------
|
|Revenue                                                  |  | $      148,397        
|Income before
      provisions for income tax            |  | 2,985                 
|Net Income                                               |  | 1,676                 
|Net income
      (loss) available to common stockholders |  | 1,676                 
|Earnings
      (loss per common share):                  | 
|Basic                                                    |  | 0.22                  
|Diluted                                                  |  | 0.21                  
|Common share
      prices:                               | 
|Basic                                                    |  | 11.84                 
|Diluted                                                  |  | 8.00                  

---

Other Matters

Inflation

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

Critical Accounting
Policies and Estimates

General

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

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

Revenue Recognition

| | (a) | Since January 1, 2000, all services provided by the Company have been on a fee
               for services basis. 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 is recognized when the claims are adjudicated.
Included as revenue are the Companys administrative fees and charges relating to
pharmaceuticals dispensed by the Companys network of pharmacies. Revenue is reduced
by the amount of rebates paid to the Companys sponsors.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The specific terms of the contracts that Health Card enters into with its
               sponsors will determine whether Health Card recognizes the gross revenue related
               to the cost of the prescriptions filled. 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. In
               certain cases, primarily because the amount the Company earns is fixed, the
               Company has not recognized the gross revenue or cost related to prescriptions
               filled for a specific sponsor. This has no impact on the Companys gross
               profit since neither the prescription revenue nor the related cost of the
               prescriptions is recorded.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Health Card includes in revenue only those co-payments collected from individual
               members by its mail order facility in Miramar, Florida. Co-payments retained by
               pharmacies on the remainder of the prescriptions filled for Health Cards
               members are not included in Health Cards reported revenue. Health Card
               discloses these amounts parenthetically on the face of its Consolidated
               Statement of Income.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Bad Debt

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

Goodwill and Intangible
Asset Impairment

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

Deferred Taxes

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

Capitalized Software

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

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

|Item 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- |  | --------------------------------------------

The
audited financial statements of Health Card as of June 30, 2004, 2003 and 2002, 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 are the controls and procedures designed to ensure that
information that the Company 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 management in order to allow timely decisions regarding
required disclosure.

Under
the supervision and with the participation of management, chiefly the Companys
principal executive officer and the Companys principal financial officer, Health
Card evaluated the effectiveness of the design and operation of its disclosure controls
and procedures within 90 days of the filing date of this Annual Report on Form 10-K. Based
on that evaluation, the Companys principal executive officer and the Companys
principal financial officer have concluded that these controls and procedures are
effective in alerting them to material information, on a timely basis, required to be
included in the Companys periodic SEC filings. There have been no significant
changes in the Companys internal controls including those controls over financial
reporting in this period, or in other factors that could significantly affect these
controls, subsequent to the date of the evaluation.

PART III

|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|-------- |  | ---------------------------------------------------

The
information required is incorporated herein by reference to the fiscal year 2004
definitive Proxy Statement under the caption Election of Directors, which the
Company anticipates will be filed by October 28, 2004.

|Item 11. |  | EXECUTIVE COMPENSATION.
|-------- |  | -----------------------

The
information required by this item is incorporated herein by reference to the fiscal 2004
Definitive Proxy Statement under the caption Executive Compensation, which the
Company anticipates will be filed by October 28, 2004.

|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- |  | ----------------------------------------------------------------------------------------------

The
information required by this item is incorporated herein by reference to the fiscal 2004
Definitive Proxy Statement under the captions Security Ownership of Certain
Beneficial Owners and Security Ownership of Management, which the Company
anticipates will be filed by October 28, 2004.

|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- |  | -----------------------------------------------

The
information required by this item is incorporated herein by reference to the fiscal 2004
Definitive Proxy Statement under the caption Certain Relationships and Related
Transactions, which the Company anticipates will by filed by October 28, 2004.

|Item 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- |  | ---------------------------------------

The
information required by this item is incorporated herein by reference to the fiscal 2004
Definitive Proxy Statement under the caption Principal Accountant Fees and Services, which
the Company anticipates will by filed by October 28, 2004.

PART IV

|Item 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|-------- |  | -------------------------------------------

|(a) | 1. | Financial Statements
|--- | -- | --------------------

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

|                                                                  | PAGE
|----------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm           |     
|Consolidated Balance Sheet as of June 30, 2004 and 2003           |     
|Consolidated Statement of Income for each of the years ended      |     
|June 30, 2004, 2003 and 2002                                      |     
|Consolidated Statement of Stockholders' (Deficit) Equity for each |     
|of the years ended June 30, 2004, 2003 and 2002                   |     
|Consolidated Statement of Cash Flows for each of the years ended  |     
|June 30, 2004, 2003 and 2002                                      |     
|Notes to Consolidated Financial Statements                        |     

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

|ExhibitNumber |  | Description of Exhibit
|------------- |  | ----------------------

|2.1 |  | Stock Purchase Agreement dated July 31, 2003, among Health Card 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 Health Card and New Mountain Partners, L.P. (8)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|2.3   |  | Asset Purchase Agreement among Health Card, Inteq PBM, LP, Inteq-RX Group, LLP,             and  the  individuals  named  therein
        dated April 1, 2004 (6)       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Certificate of Incorporation of Health Card (2)                                                                                                                         
|3.2   |  | Certificate of Amendment to the Certificate of Incorporporation of Health Card (7)                                                                                      
|3.3   |  | Amended and Restated By Laws of Health Card                                                                                                                             
|3.4   |  | Amended and Restated Audit Committee Charter (7)                                                                                                                        
|4.1   |  | Form of Warrant Agreement, including for of Representatives' Warrants (1)                                                                                               
|4.2   |  | Certificate of Designation, Preferences and Rights of Series A 7% Convertible Preferred Stock of Health Card (7)                                                        
|10.1  |  | Amendment No. 3 dated October 30, 2003 to Receivables Purchase and Transfer
Agreement by and among the Company and certain of its subsidiaries
and NMHC Funding, LLC (5)
|10.2  |  | Stock Option Agreement between Health Card and James Bigl dated July 22, 2003 (3)                                                                                       
|10.3  |  | Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003 (3)                                                                                      
|10.4  |  | Stock Option Agreement between Health Card and David Gershen dated August 1, 2003 (3)                                                                                   
|10.5  |  | Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003 (3)                                                                                     
|10.6  |  | Stock Option Agreement between Health Card and Patric McLaughlin dated August 1,  2003 (3)                                                                              
|10.7  |  | Sixth Amendment to Employment Agreement, dated October 30, 2003, by and between Health Card 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  |  | AmerisouseBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc. and AmerisourseBergen 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 Health Card (5)                                                             
|10.12 |  | Amendment to Lease Agreement (30 Sea Cliff), dated as of October 30, 2003, between Living in Style LLC and Health Card (5)                                              
|10.13 |  | Amendment to Lease Agreement (32 Sea Cliff), dated as of October 30, 2003, between Living in Style LLC and Health Card (5)                                              
|10.14 |  | Second Amendment to Employment Agreement, dated October 30, 2003, by and between Health Card and Bert E. Brodsky (5)                                                    
|10.15 |  | Amended and Restated Employment Agreement dated June 14, 2004 between Health Card and James J. Bigl                                                                     
|10.16 |  | Form of Stock Agreement between Health Card and Non-Employee Directors dated May 4, 2004 for a grant of 15,000 shares of common stock                                   
|10.17 |  | Form of Stock Agreement between Health Card and Non-Employee Directors dated May 4, 2004 for a grant of 20,000 shares of common stock                                   
|10.18 |  | Employment Agreement between Health Card and James Smith dated August 31, 2004                                                                                          
|14    |  | Code of Ethics (3)                                                                                                                                                      
|21    |  | List of Subsidiaries                                                                                                                                                    
|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                                                                                   

---

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

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

|(3) |  | Denotes
 document  filed as an Exhibit to Health Card'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 Health  Card's  Form 8-K filed on  November  13,  2003
and  incorporated  herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Denotes
 document  filed as an Exhibit to Health Card'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 Health Card's Form 8-K filed on April 14, 2004 and
incorporated herein by reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

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

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

|(b)              Reports on Form 8-K
|------------------------------------

The
following Current Reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 2004:

| | (i) | A Form 8-K was filed on April 14, 2004 in connection with the acquisition of
               Inteq.
| | --- | --------------------------------------------------------------------------------------------------

| | (ii) | A Form 8-K was filed on May 10, 2004 in connection with the issuance of a press
               release announcing the Companys results for the quarter ended March 31,
               2004.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | A Form 8-K was filed on June 15, 2004 in connection with a press release
               announcing the appointment of James J. Bigl, as chairman of the board and
               planned expansion of the management team.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | A Form 8-K was filed on June 15, 2004 in connection with the financial
               statements relating to the acquisition of Inteq.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------

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. BiglChairman of the BoardDate: September 28, 2004
|--------------------------------------------------------------------------------------------------------------------------------------------------------------



|By: /s/ James J. Bigl
James J. BiglChairman of the BoardDate: September 28, 2004
|----------------------------------------------------------------------------------------------

|By: /s/ Bert E. Brodsky
Bert E. Brodsky, DirectorDate: September 28, 2004
|---------------------------------------------------------------------------------------

|By: /s/James Smith
James SmithCEO and Principal Executive OfficerDate: September 28, 2004
|-------------------------------------------------------------------------------------------------------

|By: /s/ Gerald Angowitz
;Gerald Angowitz, DirectorDate: September 28, 2004
|----------------------------------------------------------------------------------------

|By: /s/Paul J. Konigsberg
Paul J. Konigsberg, DirectorDate: September 28, 2004
|--------------------------------------------------------------------------------------------

|By: /s/Steven B. Klinsky
Steven B. Klinsky, DirectorDate: September 28, 2004
|------------------------------------------------------------------------------------------

|By: /s/ Michael Ajouz
Michael Ajouz, DirectorDate: September 28, 2004
|-----------------------------------------------------------------------------------

|By: 
Robert R. Grusky, DirectorDate: September 28, 2004
|---------------------------------------------------------------------

|By: 
G. Harry Durity, DirectorDate: September 28, 2004
|--------------------------------------------------------------------

|By: 
Michael T. Flaherman, DirectorDate: September 28, 2004
|-------------------------------------------------------------------------

|By:  
Robert Silberman, DirectorDate: September 28, 2004
|----------------------------------------------------------------------

|By: /s/ Stuart Fleischer
Stuart FleischerPrincipal Financial and Accounting OfficerDate: September 28, 2004
|-------------------------------------------------------------------------------------------------------------------------

---



INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                        | PAGE
|------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm |     
|Consolidated Financial Statements:                      |     
|Balance Sheet                                           |     
|Statement of Income                                     |     
|Statement of Stockholders' (Deficit) Equity             |     
|Statement of Cash Flows                                 |     
|Notes to Consolidated Financial Statements              |     

---

Report of Registered Public Accounting Firm

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

We
have audited the accompanying consolidated balance sheets of National Medical Health Card
Systems, Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated
statements of income, stockholders (deficit) equity, and cash flows for each of the
three years in the period ended June 30, 2004. 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 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, 2004 and 2003, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended June 30,
2004 in conformity with United States 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.

| |  | By: /s/ Ernst & Young
Melville, New YorkSeptember 10, 2004
| |  | ----------------------------------------------------------



|CONSOLIDATED BALANCE SHEET                                                 
|---------------------------------------------------------------------------
|
|
|
|Assets                                                                     
|Current:                                                                   
|Cash and cash equivalents (including cash equivalent investments           
|of $1,191 and $1,189, respectively)                                        
|Restricted cash                                                            
|Accounts receivable, less allowance for doubtful accounts                  
|of $2,312 and $2,014, respectively                                         
|Rebates receivable                                                         
|Inventory                                                                  
|Due from affiliates                                                        
|Deferred tax assets                                                        
|Other current assets                                                       
|                                                                           
|                                                                           
|Total current assets                                                       
|Property, equipment and software development costs, net                    
|Intangible assets, net of accumulated amortization of $2,106 and $1,210,   
|respectively                                                               
|Goodwill                                                                   
|Other assets                                                               
|                                                                           
|                                                                           
|Total Assets                                                               
|                                                                           
|                                                                           
|Liabilities, Redeemable Preferred Equity, and Common Stockholders'         
|(Deficit) Equity                                                           
|Current Liabilities:                                                       
|Accounts payable and accrued expenses                                      
|Revolving credit facility and loans payable-current                        
|Current portion of capital lease obligations                               
|Due to officer/stockholder                                                 
|Income taxes payable                                                       
|Other current liabilities                                                  
|                                                                           
|                                                                           
|Total current liabilities                                                  
|Capital lease obligations, less current portion                            
|Long term loans payable and other liabilities                              
|Deferred tax liability                                                     
|                                                                           
|                                                                           
|Total liabilities                                                          
|                                                                           
|                                                                           
|Commitments and Contingencies                                              
|Redeemable Preferred Equity:                                               
|Redeemable convertible preferred stock $.10 par value; 15,000,000 and      
|10,000,000 shares authorized, 6,956,522 and none issued and                
|outstanding, respectively                                                  
|Common Stockholders' (Deficit) Equity:                                     
|Common Stock, $.001 par value, 35,000,000 and 25,000,000 shares authorized,
|8,969,694 and 7,812,907 shares issued, 4,329,794 and 7,621,907             
|outstanding, respectively                                                  
|                                                                           
|Additional paid-in-capital                                                 
|Retained(deficit) earnings                                                 
|Treasury stock at cost, 4,639,900 and 191,000 shares, respectively         
|                                                                           
|Total common stockholders' (deficit) equity                                
|                                                                           
|                                                                           
|Total Liabilities, Redeemable Preferred Equity, and Common Stockholders'   
|(Deficit) Equity                                                           
|                                                                           
|                                                                           

See accompanying notes
to consolidated financial statements

F-4

# CONSOLIDATED STATEMENT
OF INCOME

(All amounts in
thousands, except per share amount)

---

---

|                                                            | Years ended June 30,
|----------------------------------------------------------- | --------------------
|
|Revenue (includes co-payments collected of $2,274,          |                     
|$0, and $0, respectively, and excludes                      |                     
|co-payments retained by the pharmacies of                   |                     
|$203,420, $168,475, and $102,338, respectively)             |                     
|                                                           
|Cost of claims (excludes co-payments retained by the        |                     
|pharmacies of $203,420, $168,475, and $102,338,             |                     
|respectively)                                               |                     
|Gross profit                                                |                     
|Selling, general and administrative expenses                |                     
|                                                           
|Operating income                                            |                     
|                                                           
|Other income (expense):                                     |                     
|Interest expense                                            |                     
|Interest income                                             |                     
|Other income, net                                           |                     
|                                                           
|                                                            |                     
|                                                           
|Income before provision for income taxes                    |                     
|Provision for income taxes                                  |                     
|                                                           
|Net income                                                  |                     
|                                                           
|Beneficial conversion feature                               |                     
|Preferred stock cash dividend                               |                     
|Accretion of transaction expenses                           |                     
|                                                           
|Net (loss) income available to common stockholders          |                     
|                                                           
|(Loss) earnings per common share:                           |                     
|Basic                                                       |                     
|                                                           
|Diluted                                                     |                     
|                                                           
|Weighted-average number of common shares outstanding:       |                     
|Basic                                                       |                     
|                                                           
|Diluted                                                     |                     
|                                                           
|                                                           
|See accompanying notes to consolidated financial statements |                     

F-5

# CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY

(All amounts in thousands)

|                                              |  |  |   |      |   | 
|--------------------------------------------- |  |  | - | ---- | - | 
|
|Balance at June 30, 2001                      |  |  | $ | (300 | ) | 
|Principal paid on notes receivable            |  |  |   | 300  |   | 
|Exercise of stock options                     |  |  |   | --   |   | 
|Stock issued - PAI acquisition - additional   |  |  |   | --   |   | 
|Net income                                    |  |  |   | --   |   | 
|                                             
|                                             
|Balance at June 30, 2002                      |  |  |   | --   |   | 
|Exercise of stock options                     |  |  |   | --   |   | 
|Stock issued - PAI acquisition - additional   |  |  |   | --   |   | 
|Net income                                    |  |  |   | --   |   | 
|                                             
|                                             
|Balance at June 30, 2003                      |  |  |   | --   |   | 
|Accretion of transaction expenses related to  |  | 
|preferred stock offering                      |  |  |   | --   |   | 
|Purchase of treasury stock in tender offer    |  | 
|including related expenses                    |  |  |   | --   |   | 
|Exercise of stock options                     |  |  |   | --   |   | 
|Shares issued related to outstanding warrants |  |  |   | --   |   | 
|Payment of preferred dividends                |  |  |   | --   |   | 
|Beneficial conversion feature                 |  |  |   | --   |   | 
|Stock option income tax benefit               |  |  |   | --   |   | 
|Compensation component of employee stock      |  | 
|options                                       |  |  |   | --   |   | 
|Net income                                    |  |  |   | --   |   | 
|                                             
|                                             
|Balance at June 30, 2004                      |  |  | $ | --   |   | 
|                                             

See accompanying notes to consolidated financial statements

F-6

---

|CONSOLIDATED
      STATEMENT OF CASH FLOWS                               
|-------------------------------------------------------------------------
|
|
|
|Cash flows from operating activities:                                    
|Net
      income                                                         
|Adjustments
      to reconcile net income to net cash                    
|provided
      by operating activities:                                  
|Depreciation
      and amortization                                      
|Amortization
      of deferred gain                                      
|Net
      gain on disposal of capital assets                             
|Provision
      for doubtful accounts                                    
|Compensation
      expense accrued to officer/stockholder                
|Deferred
      income taxes                                              
|Interest
      accrued on stockholders'/affiliate's loans                
|Changes
      in assets and liabilities, net of effect from acquisitions:
|Restricted
      cash                                                    
|Accounts
      receivable                                                
|Rebates
      receivable                                                 
|Inventory                                                                
|Other
      current assets                                               
|Due
      to/from affiliates                                             
|Other
      assets                                                       
|Accounts
      payable and accrued expenses                              
|Income
      taxes payable and other current liabilities                 
|Other
      long term liabilities                                        
|                                                                         
|                                                                         
|Net cash provided by operating activities                                
|                                                                         
|                                                                         
|Cash flows from investing activities:                                    
|Capital
      expenditures                                               
|Repayment
      of loan from affiliate                                   
|Repayment
      of loan from officer                                     
|Acquisition
      of Integrail, net of cash acquired                     
|Acquisition
      of Centrus, net of cash acquired                       
|Acquisition
      of PAI                                                 
|Acquisition
      of Inteq, net of cash acquired                         
|Acquisition
      of PPP, net of cash acquired                           
|Proceeds
      from disposal of capital assets                           
|Repayment
      of note by stockholder                                   
|                                                                         
|                                                                         
|Net cash used in investing activities                                    
|                                                                         
|                                                                         
|Cash flows from financing activities:                                    
|Proceeds
      from exercise of stock options                            
|Proceeds
      from issuance of preferred stock, net of offering costs   
|Purchase
      of treasury stock in tender offer including related       
|expenses                                                                 
|Proceeds
      from convertible note offering                            
|Repayment
      of convertible note offering                             
|Proceeds
      from revolving credit facility                            
|Repayment
      of revolving credit facility                             
|Payment
      of preferred dividends                                     
|Deferred
      financing costs                                           
|Repayment
      of debt and capital lease obligations                    
|                                                                         
|                                                                         
|Net cash provided by (used in) financing activities                      
|                                                                         
|                                                                         
|Net (decrease) increase in cash and cash equivalents                     
|Cash and cash equivalents at beginning of period                         
|                                                                         
|                                                                         
|Cash and cash equivalents at end of period                               
|                                                                         
|See accompanying notes to consolidated financial statements              

F-7

---

# 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, Health Card)
provides comprehensive pharmacy benefit management (PBM) services to plan
sponsors, which include managed care organizations, local governments, unions,
corporations and third party health care plan administrators through its network of
licensed pharmacies throughout the United States. The Companys pharmacy benefit
management services include electronic point-of-sale pharmacy claims management, retail
pharmacy network management, mail order pharmacy claims management, specialty pharmacy
claims management, benefit design consultation, preferred drug management programs, drug
review and analysis, consulting services, disease information services, data access,
reporting and information analysis, and physician profiling. In addition, the Company
operates a mail order 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. (Mail Order), Portland Professional Pharmacy and Portland Professional
Pharmacy Associates (collectively Ascend), Inteq Corp. and Inteq TX Corp.
(collectively Inteq), and Integrail, Inc. (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 Health
Card refer to the Company and its subsidiaries, on a consolidated basis. All
material intercompany balances and transactions have been eliminated in the consolidation.

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

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

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

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

NMHCRX
Mail Order, Inc. was incorporated in August 2002 to provide mail order pharmacy services
to the Companys existing sponsors as well as other small regional PBMs. Prior to
opening its own facility in Miramar, Florida, the Company 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
Mail Order 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 municipal bonds with interest
rates that are reset monthly which are readily convertible into cash at par value (cost).
Restricted cash balances at June 30, 2004 and 2003 includes approximately $1,695 and
$2,383, respectively, which are restricted as to their use as related to the maintenance
of minimum cash balances in accordance with Ohio statute.

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 order 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 Health Card 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, 2004,
2003 and 2002, the rebates retained by the Company were approximately $10,314, $5,398 and
$6,513, respectively.

Mail
Order began filling prescriptions out of the Miramar facility on July 1, 2003. Mail
Order maintains an inventory of pharmaceuticals, which it purchases from a drug wholesaler
or direct from the manufacturer. Mail Order 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, Mail Order only fills
prescriptions for NMHC plan sponsors.

Ascend
also maintains an inventory of pharmaceuticals, which it purchases from drug wholesalers
or direct from manufacturers. Revenue is recognized by Ascend at the point of shipment to
the member. Ascend invoices individual members, sponsors, and insurance companies as well
as Medicare and Medicaid.

The
inventory balance for Mail Order and Ascend at June 30, 2004 was $3,252. Inventory which
consists entirely of finished goods is stated at the lower of cost (first in, first out
method) or market.

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.

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.

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,
2004 and 2003, approximately $2,744 and $1,012, 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 $2,971, $2,245, and $1,834 for the years ended June
30, 2004, 2003 and 2002, respectively.

A
significant portion of the Companys computer software for its reporting system was
previously developed by a company affiliated by common ownership (see Note 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.

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

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

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 loss 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, 2004, 2003, and 2002: no dividend yield, weighted-average expected life of
the option of 6.7 years, risk-free interest rate ranges of 3.6% to 3.83% and a volatility
of 76.6%, 83.2%, and 86.2%, respectively, for all grants. The weighted-average value of
options granted is $19.58, $4.99, and $6.77 for the  years ended June 30, 2004, 2003,
and 2002, 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. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using the fair
value method of SFAS No. 123 or the intrinsic value method of APB No. 25. The Company
adopted SFAS No. 148 effective December 31, 2002.

The
following table illustrates the effect on net (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,
|------------------------------ |  | -------------------
|
|Reported net (loss) income     |  |                    
|available to common            |  |                    
|stockholders                   |  |                    
|Stock compensation expense     |  |                    
|included in net (loss)         |  |                    
|income available to            |  |                    
|common stockholders            |  |                    
|Pro forma compensation expense |  |                    
|                              
|Pro forma net (loss) income    |  |                    
|available to common            |  |                    
|stockholders                   |  |                    
|Pro forma (loss) earnings      |  |                    
|per share:                     |  |                    
|Basic                          |  |                    
|Diluted                        |  |                    
|                              
|                               |  |                    

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, 2004 and 2003, were approximately $10,810 and $5,694,
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.

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.

For
comparability, certain 2003 and 2002 amounts have been reclassified, where appropriate, to
conform to the financial statement presentation used in 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 a $80,000, which is the purchase
price of the series A preferred stock.

3.  BUSINESS
ACQUISITIONS

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 will remain 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 were $572 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 are 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 $29,023, which consists of the following components: customer
relationships valued at $1,800, which will be amortized over ten (10) years and goodwill
of $27,223, 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, $955 out of a total potential of $4,200, of
additional consideration has been earned and will be released from escrow on September 30,
2004. 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) 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 that was put in place in January 2002 (see Note 7 - Debt). The Company intends to
position 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 were $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, up the 50% of the $7,000
can be paid in the form of company stock. For the first year ended July 31, 2004, $716 has
been 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).

In
connection with the PPP Acquisition, several members of PPPs management team have
joined the Company as employees, and have been granted stock options to purchase an
aggregate of 150,000 shares of Common Stock, under the Companys 1999 Stock Option
Plan, as amended. As of May 1, 2004, the Company assumed all of the shares of PPP. 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 will be amortized over two (2) years:
(iii) non-compete contracts valued at $76, which will be amortized over four (4) years;
and (iv) goodwill of $38,098 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 will be paid in May 2005.

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

The
purchase price for the assets consisted of (i) $4,000 in cash, (ii) the satisfaction by
the Company of PMPs bank indebtedness of $1,255, and (iii) cancellation of the
$1,500 promissory note from PMP to the Company, dated January 16, 2001. Part of the cash
portion of the purchase price ($722) was paid into an escrow account to provide security
for the indemnification obligations of PMP and its members to the Purchaser. The
acquisition was accounted for under the purchase method of accounting and the results of
PMPs operations were included in the consolidated financial statements commencing
with the acquisition date. The excess of the acquisition costs over the fair value of
identifiable net assets acquired was $6,475 which consisted of the following components:
(i) customer relationships valued at $305, which was amortized over 2.5 years using
the straight-line method of amortization, and (ii) goodwill of $6,170, which has not been
amortized for book purposes since July 1, 2001 in accordance with SFAS 142. For tax
purposes, the goodwill and customer relationships will be amortized over fifteen years.
The Company was required to pay up to $1,000 of additional cash consideration if certain
financial targets relating to PMPs business were met over the first three years
after closing, which would be accounted for as an addition to goodwill. The targets which
were related to retaining specific contracts were not achieved and consequently no
additional consideration was paid.

Two
claims were filed against the sellers of PMP by the Company for non collection of certain
accounts receivable and for certain other misrepresentations. A settlement was reached
whereby the Company received in July 2003, $540 out of escrowed funds to cover both claims
of which $346 was applied towards reducing goodwill.

Pursuant
to the terms of the Agreement and Plan of Merger between the Company and Pharmacy
Associates, Inc. (PAI), dated July 20, 2000 (the PAI Agreement),
the Company acquired PAI, a regional pharmacy benefit management company operating in
Arkansas, Louisiana and Mississippi. Under the terms of the merger agreement, stockholders
of PAI received an aggregate of $6,000 in cash and 400,000 shares of the Companys
common stock, which was valued at $850, on the acquisition date. The excess of the acquisition costs over the fair value of identifiable
net assets acquired was $6,345, which consisted of the following components: (i) customer
relationships valued at $131, which was amortized entirely over the first year, (ii)
noncompete contracts valued at $44, which will be amortized over five years using the
straight-line method of amortization, and (iii) goodwill of $6,170, which has not been
amortized for book purposes, since July 1, 2001 in accordance with SFAS 142. The goodwill
associated with this acquisition is not deductible for tax purposes. PAI stockholders were
entitled to receive additional consideration of up to $2,000 payable in a combination of
cash and unregistered common stock over a two-year period if certain financial targets of
PAI were met, which was accounted for as an addition to goodwill. The financial targets
were achieved for both years; therefore, $750 in cash and $250 in Common Stock (62,500
shares valued at $4.00 per share) was paid and issued in August, 2001, and $750 in cash
and $250 in Common Stock (41,668 shares valued at $6.00 per share) were paid and issued in
August, 2002.

The
following summarized unaudited pro forma results of operations set forth below for the
years ended June 30, 2004 and 2003 assume the Integrail, PPP, and Inteq acquisitions had
occurred as of the beginning of these periods:

|June 30,                            | 2004 | 2003
|----------------------------------- | ---- | ----
|Revenue                             |      |     
|Net (loss) income                   |      |     
|available to common stockholders    |      |     
|Net (loss) earnings per common shar |      |     
|Basic                               |      |     
|Diluted                             |      |     
|Pro forma weighted-average number o |      |     
|common shares outstanding:          |      |     
|Basic                               |      |     
|Diluted                             |      |     
|                                   

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

The change in the carrying amount of goodwill for the year ended 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 June 30, 2004             |  |  | $ | 86,964 | 
|                                              |  |  |   |       

Approximately $79,091
of the Company's  June 30, 2004 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:

|                 | 2004 | 2003
|---------------- | ---- | ----
|
|Customer         |      |     
|relationships    |      |     
|Non-compete      |      |     
|agreements       |      |     
|Employment       |      |     
|agreements       |      |     
|Trade name       |      |     
|Company know how |      |     
|                
|                 |      |     
|                
|                 |      |     

The
weighted average remaining amortization period for all intangible assets is approximately
6.1 years at June 30, 2004. Amortization period by intangible asset class is as follows:

|Asset Class            | Amortization Period
|---------------------- | -------------------
|Customer relationships |                    
|Non-compete agreements |                    
|Employment agreements  |                    
|Trade name             |                    
|Company know how       |                    
|                       |                    

The
aggregate amortization expense was approximately $896 for the year ended June 30, 2004,
and the estimated amortization for future years ended June 30 is as follows:

|Year ending June 30, |  | 
|-------------------- |  | 
|2005                 |  | 
|2006                 |  | 
|2007                 |  | 
|2008                 |  | 
|2009                 |  | 
|Thereafter           |  | 
|                    
|                     |  | 
|                    
|                     |  | 

The
Company follows the provisions of SFAS Nos. 141 and 142, Business Combinationsand
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, 2004 there is no impairment to the goodwill recorded on the accompanying
balance sheet.

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, 2004 and 2003.

4.
          PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS.

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

|June
        30,         | 2004 | 2003 | Estimate Useful
      Life
|------------------------ | ---- | ---- | --------------------------
|Equipment                |      |      | $                         
|Software                 |      |      |                           
|Leasehold improvements   |      |      |                           
|Automobile               |      |      |                           
|Equipment acquired under |      |     
|                        
|capital leases           |      |      |                           
|                        
|                         |      |      |                           
|Accumulated depreciation |      |     
|and amortization         |      |      |                           
|                        
|                         |      |      |                           
|                        
|                         |      |     

Accumulated
depreciation on equipment acquired under capital lease obligations was $1,613 and $1,240
as of June 30, 2004 and 2003, respectively.

Depreciation
and amortization expense on property, equipment and software development costs for the
years ended June 30, 2004, 2003, and 2002, was approximately $4,810, $3,634, and $2,898,
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 81⁄2% 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, 2004, 2003, and 2002, the amount of interest income accrued
related to this note was approximately $9,163, and $206, respectively.

On
Feb 8, 2001, the former President gave to the Company his Promissory Note in the amount of
$34 as evidence of the loan by the Company to the former President. On April 12, 2002, the
Promissory Note was amended and the Company agreed to increase the loan to $100. The loan
bore interest at 8%, and was due on April 25, 2003. The interest rate was lowered
effective July 1, 2002 to the rate at which the Company borrows money. The repayment
obligation under the Promissory Note, including accrued interest has been satisfied
through a set-off from the bonus paid to the former President in July 2003 as part of his
annual compensation.

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 is 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.

The
Company has accrued approximately $12 of interest income from affiliates arising from the
three loans described above during the year ended June 30, 2004.

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

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,                      | 2004   | 2003      | 2002   
|Software
      maintenance and           |        |           |        
|related
      services and supplies (a)  | $    0 | $       0 | $   496
|                                        
|Management
      and consulting fees (b) | 35     | 84        | 303    
|                                        
|Administrative,
      accounting        
|services
      and supplies (c)          | 260    | 236       | 548    
|                                        
|Rent
      and utilities (d)             | 634    | 542       | 542    
|                                        
|                                         | $929   | $   862   | $1,889 
|                                        

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

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

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

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

Notes
receivable  stockholders represented a loan to a stockholder to purchase the
Companys stock. This note bore interest at 8.5% and had a repayment date of July 1,
2002. The note was paid in full in January 2002.

For
the years ended June 30, 2004, 2003 and 2002, 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
will be repaid to the Company upon the payment of the policys benefits to the
beneficiary.

6.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts
payable and accrued expenses consist of the following:

|June 30,                            | 2004     | 2003    
|----------------------------------- | -------- | --------
|Claims payable                      | $102,259 | $ 76,195
|Rebates payable to sponsors         | 33,451   | 24,082  
|Trade payables and accrued expenses | 8,179    | 3,127   
|Other payables                      | 3,683    | 3,271   
|                                    | $147,572 | $106,675

---

7.CAPITAL
DEBT

On
January 29, 2002, the Company and certain of its subsidiaries entered into a $40,000
secured revolving credit facility (the Facility) with HFG Healthco-4 LLC, a
specialty finance company. In connection with the Facility, the Company and certain of its
subsidiaries have agreed to transfer, on an on-going basis, their accounts receivable to
Funding. Funding utilizes those receivables as collateral to secure borrowings under the
Facility. The Facility has a three year term, provides for borrowings of up to $40,000 at
the London InterBank Offered Rate (LIBOR) plus 2.40% (3.76% at June 30, 2004) and is
secured by receivables and other assets of the Company and certain of its subsidiaries as
defined. Borrowings of $28,700 under the Facility were used to finance part of the
purchase price of the Centrus Acquisition (see Note 3 - Business Acquisitions) and will also be used by the Company and certain
of its subsidiaries for working capital purposes and future acquisitions in support of its
business plan. The outstanding balance as of June 30, 2004 was approximately $53, which
was all classified as short-term debt. The Facility requires the Company to remain in
compliance with certain financial and other covenants. The financial maintenance covenants
include: 1) consolidated net worth (total assets less total liabilities), 2) consolidated
tangible net worth (consolidated net worth less intangible assets), 3) quarterly EBITDA,
4) accounts receivable turnover (revenue divided by accounts receivable), 5) debt to
consolidated net worth, 6) current assets to current liabilities, 7) consolidated interest
coverage ratio (EBITDA less capital expenditures divided by interest expense, 8) annual
capital expenditures, and 9) debt service coverage (EBITDA divided by interest expense
plus short-term debt excluding borrowings under the Facility). Other covenants under the
Facility restrict the Companys ability to pay dividends, incur senior debt, and sell
assets other than in the ordinary course. The Company was in compliance with all covenants
at June 30, 2004.

On
January 22, 2002 the Company completed a convertible note offering (the Note
Offering) in the aggregate principal amount of $11,600, which was subordinated to
the Facility. Pursuant to the Note Offering, subscribers received a promissory note (each
a Note) paying interest quarterly on the unpaid principal balance at the rate
of 12% per annum. The subscribers, including two who are directors of the Company, were
all accredited investors. The Notes had a term of one year, unless otherwise extended
pursuant to the terms of the Note. The Notes were convertible at any time at the election
of the holders into shares of the common stock, par value $.001 per share (the
Common Stock) of the Company (Conversion Shares) at a conversion
price of $12.00 per share, the fair value of the Common Stock on January 22, 2002. The
Note holders were granted certain registration rights. Proceeds from the Note Offering
were used to finance part of the purchase price of the Centrus Acquisition. The Notes were
repaid in full on June 26, 2002.

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,
2004:

|                                                  |        
|------------------------------------------------- | -------
|Payments
      for the year ending June 30, 2005  | $349   
|Total minimum
      lease payments                | $349   
|Less amount
      representing interest           | 9      
|Present value
      of net minimum lease payments | $340   
|Less current
      portion                        | 327    
|Long-term
      lease obligations                 | $    13

---

9.
      MAJOR CUSTOMERS AND PHARMACIES

For
the year ended June 30, 2004, approximately 30% and 10% of revenue was from two plan
sponsors, MVP Health Plan, Inc. and Boston Medical Center Health Net, administering
multiple plans. For the year ended June 30, 2003, approximately 28% of revenue was from
one plan sponsor.  For the year ended June 30, 2002, approximately 15% and 10% of revenue
was from two plan sponsors.  Amounts due from the respective sponsors at June 30, 2004 and 2003
approximated $12,301 and $7,049, respectively. One of the Companys former major
sponsors terminated its contract as of June 30, 2002 and another one terminated its
contract as of December 31, 2002.

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.
For the year ended June 30, 2002, approximately 22% of the cost of claims was from
one pharmacy chain.  Amounts payable to the two pharmacy chains at June 30, 2004 and 2003
was approximately $18,478 and $23,189, respectively.

10.    TAXES
ON INCOME

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

| | Year ended June 30, |  | 2004    |  | 2003    |   | 2002    |  
| | ------------------- |  | ------- |  | ------- | - | ------- | -
| |                     | 
| | Current:            |  |         |  |         |   |         |  
| | Federal             |  | $ 2,806 |  | $ 3,953 |   | $ 2,149 |  
| | State               |  | 905     |  | 1,085   |   | 738     |  
| |                     | 
| |                     |  | 3,711   |  | 5,038   |   | 2,887   |  
| |                     | 
| | Deferred:           |  |         |  |         |   |         |  
| | Federal             |  | 1,496   |  | (356    | ) | 23      |  
| | State               |  | 317     |  | (80     | ) | (10     | )
| |                     | 
| |                     |  | 1,813   |  | (436    | ) | 13      |  
| |                     | 
| | Total provision     |  | $ 5,524 |  | $ 4,602 |   | $ 2,900 |  
| |                     | 
| |                     |  |         |  |         |   |         |  

| | Year ended
      June 30,                |  | 2004 |   | 2003 |   | 2002 |  
| | ---------------------------------------- |  | ---- | - | ---- | - | ---- | -
| |                                          | 
| | Statutory
      rate                     |  | 34.0 | % | 35.0 | % | 34.0 | %
| | State taxes
       net of federal taxes |  | 6.8  |   | 6.7  |   | 5.1  |  
| | Permanent
      differences              |  |     |   | 0.1  |   | 0.3  |  
| | Other                                    |  | 0.2  |   |     |   |     |  
| |                                          | 
| |                                          |  | 41.0 | % | 41.8 | % | 39.4 | %
| |                                          | 

| | June 30,                                   |  |  | 2004 |       | 2003 |  
| | ------------------------------------------ |  |  | ---- | ----- | ---- | -
| |                                            | 
| | Accounts
      receivable allowances       |  |  | $    | 952   |      | $
| | Vacation
      expense accrual             |  |  |      | 196   |      |  
| | Management/stockholder
      bonus accrual |  |  |      | 912   |      |  
| | Deferred
      revenue/gains               |  |  |      | 492   |      |  
| | Other                                      |  |  |      | 159   |      |  
| |                                            | 
| |                                            |  |  |      | 2,711 |      |  
| |                                            | 

Deferred
income tax liabilities of $4,704 and $2,245 at June 30, 2004 and 2003, 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 26 Harbor
Park Drive, Port Washington, New York 11050 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 and current director (the
Affiliate). The Affiliate leases the Leased Premises from the Nassau County
Industrial Development Agency (NCIDA) pursuant to a lease that was entered
into by NCIDA and the Affiliate in July 1994, which expires in March 2005. The Affiliate
has the right to purchase the Leased Premises upon expiration 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. While formerly the Company made
estimated monthly real estate tax, utilities and maintenance-expense payments to the
Affiliate, the Lease provided that the Company would pay its pro-rata share of such
expenses directly, to the entities to whom payment must be made. 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 $580 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, 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, 2004 and 2003 were approximately $1,906 and
$1, respectively.

Pursuant
to a lease dated August 10, 1998 and expiring on August 31, 2005, Health Card occupies
approximately 1,500 square feet at 63 Manorhaven Boulevard, Port Washington, New York,
which is used currently for office storage space. The landlord for these premises is 61
Manorhaven Boulevard, LLC, of which the Companys former Chairman and current
director is the sole member. The current rent is $2 per month. The annual rent increases
by 5% per year. Additional rent, in the form of certain expenses, is also payable.

In
addition, Health Card rents a two family house in Port Washington, New York (near the
Companys offices) from P.W. Capital, LLC, (a company affiliated with Health
Cards former Chairman and current director of the Board) which is used for
out-of-town employees. Health Card evaluated the cost of hotels for these individuals and
determined it was more cost efficient to rent the house at an annual rent of $66. For the
same reasons, Health Card rents two houses from Living In Style, LLC, an entity owned by
three of Health Cards executive officers. Pursuant to leases dated May 1, 2002 and
expiring April 30, 2007, Health Card paid an aggregate of $133 in rent for these two
facilities during the fiscal year ended June 30, 2004. 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; 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 $194; for leased space in Tulsa, approximately $24; for Miramar,
approximately $142; for Portland,  approximately $120; for Latham, approximately $383;
and for Dallas, approximately $168 through January 31, 2005. The Company intends to
move its current office space in Dallas to a less costly space in Dallas and has
delivered a notice of termination to the landlord of the Dallas space, effective January
31, 2005.

Real
estate rental expense, including utilities, for the years ended June 30, 2004 2003, and
2002, was approximately $2,147, $1,792, and $1,169, respectively. Of these amounts,
approximately $634, $542, 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, 2004 are as follows:

|Year ending June 30, |       
|-------------------- | ------
|2005                 | $5,615
|2006                 | 5,097 
|2007                 | 4,531 
|2008                 | 1,792 
|2009                 | 1,728 
|Thereafter           | 4,413 
|                     | 23,176

---

---

In
addition to the operating leases above, the Company has entered into two sale leaseback
operating leases of certain fixed assets (principally computer hardware and externally
developed software), one of which is with an affiliate of the Companys Vice
Chairman. The minimum future operating lease payments at June 30, 2004 are as follows:

|Year ending June 30, |     
|-------------------- | ----
|2005                 | $288
|2006                 | 140 
|2007                 | 70  
|                    
|                     | $498
|                    

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 alleges, among other things, that the parties entered into
a contract dated July 1999 (the Agreement), and further alleges that the
Company has overcharged MHP for the administration of prescription benefit services in
contravention to the terms of the Agreement and breached its fiduciary duties by making a
profit. MHP is seeking $3,000 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 Midwests failure to pay under a contract. In late June 2002, Midwest agreed to
make two payments in the amount of $1,340 and $1,360 to partially settle the
Companys claims against Midwest. Midwest has now added a fiduciary duty claim. The
Company continues to have counterclaims totaling over $200 against Midwest for
Midwests failure to pay the amounts it agreed to pay Health Card for goods and
services. The Company agrued its motion for partial summary judgment and motion to dismiss
the fiduciary duty claim in February 2004 and is currently awaiting the courts
decision on such motions. The Company intends to vigorously defend the action. The Company
is unable to provide an estimate of any particular loss, if any, which may be associated
with the MHP claims.

The
Company has entered into employment agreements with its Chief Executive Officer and
President, Chief Marketing Officer, Chief Financial Officer, Treasurer, President of PBM
Services, and Chief Information Officer. 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 one
year of salary for all of these senior executives.

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.

12.    
          STOCK OPTIONS AND WARRANTS

During
the years ended June 30, 2004, 2003, and 2002, 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, 2002, 2003, and 2004:

| | Number of
      Options                    |  | Weighted-Average
      Exercise Price
      Per Share | 
| | ------------------------------------------ |  | ----------------------------------------------------- | 
| |                                            | 
| | Outstanding
      options at June 30, 2001 |  |                                                       | 
| | Canceled                                   |  |                                                       | 
| | Granted                                    |  |                                                       | 
| | Exercised                                  |  |                                                       | 
| |                                            | 
| | Outstanding
      options at June 30, 2002 |  |                                                       | 
| | Canceled                                   |  |                                                       | 
| | Granted                                    |  |                                                       | 
| | Exercised                                  |  |                                                       | 
| |                                            | 
| | Outstanding
      options at June 30, 2003 |  |                                                       | 
| | Canceled                                   |  |                                                       | 
| | Granted                                    |  |                                                       | 
| | Exercised                                  |  |                                                       | 
| |                                            | 
| | Outstanding
      options at June 30, 2004 |  |                                                       | 
| |                                            | 

The following table summarizes  information about stock options outstanding
at June 30, 2004:

|                       | Outstanding |  | Exercisable
|---------------------- | ----------- |  | -----------
|
|
|                       |             |  |            
|$
      1.67 to $ 2.51 |             |  |            
|$ 2.52 to
      $ 3.78 |             |  |            
|$ 3.79 to
      $ 5.69 |             |  |            
|$ 5.70 to
      $ 8.55 |             |  |            
|$ 8.56 to
      $12.84 |             |  |            
|$12.85 to
      $19.28 |             |  |            
|$19.29 to
      $28.94 |             |  |            
|$28.95 to
      $36.66 |             |  |            
|                       |             |  |            
|$ 1.67 to
      $36.66 |             |  |            
|                       |             |  |            

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 Chairman of the Board and are exercisable for four
years commencing on July 29, 2000. Subsequent to June 30, 2004, 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, 2004, 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

Supplemental
cash flow information is as follows:

|Year ended June 30,                                          | 2004 | 2003 | 2002
|------------------------------------------------------------ | ---- | ---- | ----
|Cash paid:                                                   |      |      |     
|Interest                                                     |      |      | $   
|Income taxes                                                 |      |      |     
|Noncash investing and financing activities:                  |      |     
|Issuance of common stock in connection with the              |      |     
|acquisition of PAI                                           |      |      |     
|Beneficial conversion feature                                |      |      |     
|Compensation charge related to acceleration of stock options |      |     
|and stock options issued in lieu of a bonus transaction      |      |      |     

---

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, 2004, 2003, and 2002 were approximately $283, $228 and $79, respectively.

16.    EARNINGS
PER SHARE

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

|Year ended June 30,                    | 2004 | 2003 | 2002
|-------------------------------------- | ---- | ---- | ----
|                                      
|Basic                                  |      |      |     
|Effect of assumed exercise             |      |     
|of employee stock options              |      |      |     
|Effect of assumed exercise of warrants |      |      |     
|Contingently issuable shares           |      |     
|(see Note 3)                           |      |      |     
|                                      
|Diluted                                |      |      |     
|                                      

Outstanding
options and warrants to purchase shares of common stock which were antidilutive were not
included in the computation of diluted earnings per share (see Note 12- Stock Options and Warrants). These options
were as follows:

|Year ended June 30,             | 2004        | 2003        | 2002      
|------------------------------- | ----------- | ----------- | ----------
|Number of options and warrants  | 1,610,595   | 922,787     | 435,700   
|Weighted-average exercise price | $     13.52 | $     10.47 | $    12.23

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

|Description                     | Balance atBeginning of Year | AdditionsCharged toCosts andExpense(a) | Write-Offs | OtherChanges | Balanceat Endof Year
|------------------------------- | --------------------------- | -------------------------------------- | ---------- | ------------ | --------------------
|Reserves and allowances         |                             |                                        |            |              |                     
|deducted from asset             |                             |                                       
|accounts:                       |                             |                                       
|Allowance for doubtful accounts |                             |                                       
|Year ended June 30, 2002        |                             |                                        | $          | 1,847        |                     
|Year ended June 30, 2003        |                             |                                        |            | 2,248        |                     
|Year ended June 30, 2004        |                             |                                        |            | 2,014        |                     

---