SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
(Mark One)

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

     For the fiscal year ended                      June 30, 1999
                               -------------------------------------------------

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

     For the transition period from                 to

     Commission file number       000-26749

                   NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
             (Exact Name of Registrant as Specified in its Charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
  Title of Each Class                Name of Each Exchange on Which Registered
            None

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

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

     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. [X]

     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  of the registrant.  The aggregate market value shall be
computed by reference to the price at which the common  equity was sold,  or the
average bid and asked  prices of such  common  equity,  as of a  specified  date
within 60 days prior to the date of filing: $17,222,091 as of August 2, 1999.

             (APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes No .

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
     Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date: 6,912,496 shares outstanding as of August 31,
1999.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


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                             INTRODUCTORY STATEMENTS

Forward Looking Statements

     When used herein,  the words "believe,"  "anticipate,"  "think,"  "intend,"
"will be," "expect" and similar expressions identify forward-looking  statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not guarantees of future  performance  and involve  certain risks
and uncertainties  discussed herein,  which could cause actual results to differ
materially from those in the forward-looking  statements.  Readers are cautioned
not to place undue reliance on the  forward-looking  statements which speak only
as of the date hereof.  Readers are also urged to carefully  review and consider
the various  disclosures  made by National  Medical  Health Card  Systems,  Inc.
("Health Card") which attempt to advise interested  parties of the factors which
affect Health Card's business,  including,  without limitation,  the disclosures
made under the caption "Business" in Item 1 hereof and "Management's  Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 hereof.

Reverse Stock Split

     Except as otherwise  noted,  all  references in this Form 10-K to shares of
common  stock of Health  Card  give  retroactive  effect  to a  .1278447-for-one
reverse stock split of Health Card's shares of common stock  effectuated  in May
1999.

                                     PART I

Item 1. BUSINESS.

General

     Health Card is an independent  company,  established in 1981, that provides
comprehensive  prescription benefit management services.  Health Card's programs
are designed to assist prescription benefit plan sponsors by:

          o    containing the cost of prescription drugs,
          o    monitoring the cost and quality of prescription services,
          o    providing sophisticated consulting services, and
          o    providing disease information services.

     Sponsors of  prescription  benefit  plans  managed by Health  Card  include
managed care organizations,  local governments,  unions,  corporations and third
party health care plan administrators. Health Card focuses its marketing efforts
on prospective sponsors with plans covering up to 100,000 participants, although
it seeks and services  sponsors with plans covering less or  significantly  more
plan  participants.  As of June 30, 1999,  plans  managed by Health Card covered
over 521,000 eligible employees, retirees, members and their dependents.




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     Health  Card  provides  sponsors  with  integrated   prescription   benefit
management services, including:

          o    electronic point-of-sale pharmacy claims management,
          o    retail pharmacy network management,
          o    mail pharmacy claims management,
          o    benefit design consultation,
          o    preferred drug management programs,
          o    drug review and analysis programs,
          o    consulting services,
          o    disease information services,
          o    data access, reporting and information analysis, and
          o    physician profiling.

Each of these services is described below under the heading "Services."

     Each plan participant  receives an identification card which may be used at
any pharmacy  participating  in Health Card's pharmacy network and the sponsor's
plan. The card entitles the plan participant to purchase  prescription drugs and
certain  other   physician-prescribed   items  by  paying  a  deductible  and/or
"co-payment"  amount as determined by the plan sponsor. As of June 30, 1999, the
pharmacy  network  included  an  aggregate  of  over  44,000  retail  chain  and
independent pharmacies as well as three mail order pharmacies. See "Services."

     Health  Card  assists  each  sponsor  to  establish  the   deductible   and
"co-payment"  amounts and the  availability  of benefits  under its plan.  Plans
generally cover (i) prescriptions for legend drugs,  which are drugs that cannot
be dispensed without a prescription, (ii) prescriptions requiring compounding of
ingredients,  one of  which is a  legend  drug,  (iii)  prescribed  insulin  and
prescribed insulin syringes,  and (iv) needles and test strips.  Items generally
excluded from coverage include diet supplements, over-the-counter drugs (whether
or not prescribed by a physician),  medical  appliances (such as glucometers and
blood  pressure  monitors),  bandages,  heat lamps,  experimental  drugs,  drugs
furnished by a hospital to inpatients, and blood and blood plasma.

     Health Card attempts to contain the cost of sponsors'  plans by negotiating
favorable  pricing  arrangements  with pharmacies  participating in its pharmacy
network.  Health  Card also  provides  additional  cost  management  through the
real-time  electronic  communication  of claims data and plan  criteria  between
those  pharmacies  and Health Card. The claims  submission,  review and approval
generally occur in a matter of seconds.  See  "Information  Systems." Claims are
processed through multiple reviews in order to:

          o    confirm plan conformity,
          o    verify plan participant eligibility,
          o    verify correct pharmacy payment, and
          o    conduct drug review and analysis.


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Concurrently,  information is sent by Health Card's  information  systems to the
pharmacist about:

          o    drug interactions,
          o    premature refills of prescriptions,
          o    duration or duplication of therapy, and
          o    geriatric or pediatric precautions

based on Health Card's  prescription  claims  history for the plan  participant,
FDA-approved   standards  and  Health  Card's  recommended  drug  and  treatment
guidelines.  These situations or circumstances  are collectively  referred to as
"contraindications."

     The final claim  approval or denial is immediately  communicated  by Health
Card to the pharmacy. If a claim is approved, the communication  establishes the
claim for payment and  indicates  the  co-payment or deductible to be charged to
the plan participant.

     Drug  manufacturers  may issue rebates for the use of certain  prescription
drugs. Pursuant to an agreement with Foundation Health  Pharmaceutical  Services
d/b/a Integrated Pharmaceutical Services ("Integrated"), a rebate administrator,
Health Card submits  claims for rebates to  Integrated.  These rebates relate to
certain   prescriptions   filled  under  plans  that  Health  Card  administers.
Integrated  submits these rebate  claims,  and may submit such claims along with
rebate  claims of others,  to the  appropriate  drug  manufacturer,  pursuant to
agreements Integrated has negotiated with various drug manufacturers.  All, part
or none of the  rebates  received  by Health  Card may be remitted to certain of
Health Card's sponsors, depending upon the terms of Health Card's agreement with
each sponsor.  Through rebates from drug manufacturers,  Health Card has reduced
its cost of  claims.  See Item 7 hereof  and  "Services  --  General  --  Rebate
Administration."

     Health  Card's  disease  information  services  are  designed to inform and
educate sponsors, plan participants, pharmacies and prescribing physicians about
drug and treatment  guidelines for various  diseases.  Health Card prepares drug
and  treatment   guidelines   for  various   diseases   based  on  a  review  of
professionally  prepared health care literature which is publicly available.  In
compiling  the drug  and  treatment  guidelines,  Health  Card may also  utilize
clinical  guidelines  that  are  issued  by  medical  specialty  boards  and are
available  to the public.  The drug and  treatment  guidelines  are  reviewed by
medical and  pharmacology  experts and  submitted  to Health  Card's  Pharmacy &
Therapeutics  Committee  for  review and  approval.  If  approved,  the drug and
treatment   guidelines  may  be  made  available  to  interested   sponsors  and
physicians.  Health Card believes that the use of disease  information  services
represents a market trend in the prescription benefit management  industry.  Its
use is designed to:

          o    meet  sponsors'  growing  need for  information  to address  cost
               management pressures,
          o    enhance  the  quality,   efficiency  and   cost-effectiveness  of
               pharmacy benefit utilization by plan participants, and
          o    reduce costs to sponsors.


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In  providing  these  services,  Health  Card may  utilize  its drug  review and
analysis  programs.  These  programs  include a series of on-line  reviews which
examine a plan  participant's  claims  history  for a number of  contraindicated
drugs or inappropriate  dispensing patterns, among other things. Although Health
Card has only  recently  commenced  disease  information  services and currently
offers such  services to only one  sponsor,  Health Card  believes  that disease
information   services  will  encourage   plan   participant   compliance   with
physician-recommended  therapy and physician  adherence to recommended  drug and
treatment  guidelines.  In turn, this conformity should improve plan participant
health care while reducing costs.

     Health Card began its business as a provider of  computerized  prescription
claims   processing   services  to  sponsors  and  subsequently   increased  its
capabilities  to  become  a  provider  of  comprehensive   prescription  benefit
management  services.  In 1995,  Health Card's  management began to redirect the
focus of its business,  with the goal of becoming a leading national independent
company providing  comprehensive  prescription benefit management  services.  In
particular,  Health Card  concentrated  on (i) attracting a management team with
significant  industry  experience,  (ii)  implementing  a multi-state  marketing
effort and (iii) enhancing its information systems. See Items 10 and 13 hereof.

     Health Card's  competitors  include both independent  prescription  benefit
management   companies   and  those  that  are   affiliated   either  with  drug
manufacturers or with retail pharmacy  companies.  Health Card has developed its
business by focusing on information systems and consulting services without many
of the restrictions  that management  believes are inherent in the relationships
of its affiliated competitors. Health Card therefore believes that its formulary
management and other business  activities are more objective than certain of its
competitors.  Health  Card  also  believes  that  its  information  systems  and
consulting   services  are  superior  to  that  of  many  of  its   competitors.
Accordingly,  based on such  beliefs,  Health  Card is well  positioned  to take
advantage  of the  increasing  information  and  cost  management  needs  of the
prescription benefit management services market.

Industry Background

     In response to escalating  health care costs,  cost containment  efforts in
the health  care  industry  have led to rapid  growth in managed  care and other
containment  efforts.  Despite  these  efforts,  continued  advances  in medical
technology,  new drug  development and increasing drug  utilization  have led to
significant  increases  in health care  costs.  This has created a need for more
efficient,   cost-effective  drug  delivery  mechanisms.   Prescription  benefit
management  companies  evolved to address this need. These companies  created an
opportunity  for plan  sponsors to provide  prescription  drug benefits to their
plan members in a cost-effective manner through:

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

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while often improving  patient  compliance with  recommended  drug and treatment
guidelines.   An  industry  source  estimates  that  1997  U.S.   purchases  for
prescription  drugs totaled  approximately $83 billion,  of which purchases from
retail outlets were approximately $53 billion and purchases from mail order were
approximately  $9 billion.  Such industry  source  indicates that  prescriptions
managed by prescription  benefit  management  companies  represent an increasing
proportion of such purchases.

     Traditionally,  prescription benefit management companies focused primarily
on cost containment by:

          o    managing  prescription claims to reduce or eliminate  duplication
               of  treatment   (i.e.,   redundant   drug   therapies  and  other
               treatments),
          o    encouraging substitution of generics for branded medications,
          o    obtaining price discounts from participating pharmacies through a
               pharmacy network, and
          o    obtaining rebates from drug manufacturers.

     Over the last several  years,  in response to  increasing  sponsor  demand,
prescription  benefit management  companies have begun to develop  sophisticated
computerized   information   systems  which  (i)  help  sponsors   manage  their
formularies and (ii) provide data, analysis and detailed reporting,  which allow
sponsors  to make  informed  decisions  about  drug use and costs.  Health  Card
believes  that  sponsors  have also  increasingly  focused  on the  quality  and
efficiency  of care,  emphasizing  disease  prevention  and health  enhancement.
Health  Card and its  competitors  have  addressed  these  demands by  combining
traditional  prescription  benefit management  services with consulting services
and disease  information  programs  that exploit the  sophisticated  information
systems.

Services

General

     Sponsors retain Health Card to manage the prescription drug plans that they
maintain for the benefit of their plan  participants.  Health Card consults with
sponsors to assist them in customizing their prescription drug plans to meet the
particular  sponsor's needs. Health Card has also developed and is continuing to
expand its consulting and disease  information  services to meet (i) the growing
needs of sponsors to address cost management pressures,  and (ii) the increasing
needs of plan  participants,  particularly  those requiring costly long-term and
recurring therapies.

     Health Card's claims  management  services are rendered through its on-line
real time computerized claims management system,  which is sometimes referred to
in this Form 10-K as the "on-line claims management system." This on-line claims
management  system reduces the  administrative  burdens of processing claims and
managing plan benefits for sponsors,  plan  participants and pharmacies.  Claims
are   typically   submitted   electronically   to  Health  Card  by   pharmacies
participating in the pharmacy  network.  They are processed for plan participant
eligibility,  plan coverage,  any deductible  limitations,  co-payment  amounts,
payment schedules and pharmacy eligibility.  Using its on-line claims management
system, Health Card is able to provide

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an accurate benefit payment to the pharmacy or plan participant.

     The on-line  claims  management  system manages the cost of the plan at the
point of service by confirming that:

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

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

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

     Plan  participants  present  their health card  together with a physician's
prescription  to  a  participating  pharmacy.  The  pharmacist,  using  standard
industry software,  enters each claim on the pharmacy's  computer;  the claim is
electronically  communicated to Health Card for on-line real time processing and
resolution.  In the ordinary case where the prescription is for a drug listed on
the sponsor's formulary, the pharmacist is advised of the appropriate co-payment
and  deductible,  if any, to be collected from the plan  participant  and of the
payment the pharmacy will receive from Health Card. Health Card's on-line claims
management  system sends  appropriate  messages  regarding  preferred  drugs and
contraindications,  based upon plan  participants'  existing claims history with
Health Card.  The  prescription  is then dispensed by the pharmacist to the plan
participant,  who pays the appropriate  co-payment  and/or deductible amount and
signs a signature log maintained by the participating pharmacy.

     Plan  participants are provided with a list of pharmacies  participating in
Health Card's pharmacy network.  Plan  participants may alternatively  choose to
fill prescriptions at a non-participating  pharmacy.  However, plan participants
who utilize non-participating pharmacies pay the full prescription amount, i.e.,
an amount  generally in excess of the negotiated  discount offered by pharmacies
in the  pharmacy  network.  Both  the plan  participant  and the  pharmacy  then
complete a direct  payment  claim  form,  which is mailed to Health Card for the
allowable payment amount to be paid to the plan participant.  Alternatively, the
non-participating  pharmacy  may elect to  immediately  enroll in Health  Card's
pharmacy network and participate in the on-line claims

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management system. See "Services--Pharmacy Network."

     Occasionally  a  plan  participant's  claim  is  rejected,  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.  Also, on occasion a claim is
presented and the  pharmacist is notified,  during the course of processing  the
claim, that prior  authorization from the sponsor is needed before the claim can
be approved.  In addition,  mail order claims processing  sometimes results in a
message to the pharmacist that a preferred drug is available for use in place of
the one prescribed.  In such an event, the pharmacist must contact the physician
directly for permission to substitute the preferred  drug; if such permission is
obtained, the pharmacist then contacts the plan participant to obtain his or her
permission to make such substitution.  Although preferred drug messages are also
capable of being  sent by Health  Card's  on-line  claims  management  system to
retail pharmacists, to date no sponsor has asked Health Card to do so.

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

     Rebate  Administration.  Pursuant to an  agreement,  dated January 1, 1996,
with Integrated,  Health Card submits to Integrated claims for rebates from drug
manufacturers  relating to certain  prescriptions filled under plans that Health
Card administers. Integrated submits Health Card's rebate claims, and may submit
such  claims  along  with  rebate  claims of  others,  to the  appropriate  drug
manufacturer. Health Card receives a percentage of the total rebates received by
Integrated from drug manufacturers regarding products dispensed to Health Card's
sponsors' plan  participants,  with Integrated  retaining a portion of the total
rebates as an  administrative  fee. This agreement is terminable by either party
with or  without  cause on 90 days'  prior  written  notice.  These  claims  are
submitted  quarterly.  As of the date of this Form  10-K,  the  volume of claims
processed by Health Card may not be  sufficient  to enable it to obtain  rebates
directly from drug  manufacturers  in the same  aggregate  amounts that could be
obtained under the Integrated agreement. See Item 7 hereof.

     Rebates  accounted for reductions of cost of claims of 1.4%,  1.6% and 2.1%
for the years ended June 30, 1997, 1998 and 1999, respectively,  but contributed
approximately  12%,  17% and 20% of total gross  profit for the years ended June
30, 1997, 1998 and 1999, respectively.  Rebates accounted for approximately 68%,
105% and 87% of income before taxes for the years ended June 30, 1997,  1998 and
1999, respectively. All, part or none of the rebates received by Health Card may
be required to be remitted to certain of Health Card's sponsors, including Vytra
Health Plans Long Island, Inc. (formerly known as ChoiceCare Long Island,  Inc.)
("Vytra"),  a health  maintenance  organization,  and Suffolk County,  New York,
depending upon the terms of Health Card's

                                        7

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arrangement  with each sponsor.  Termination  of the agreement  with  Integrated
could have an adverse effect on Health Card's  business,  operating  results and
financial condition. See Item 7 hereof.

Pharmacy Network

     Retail Pharmacy Network Management. A comprehensive  multi-state network of
participating  pharmacies  is an  essential  element of Health  Card's  business
operations.  Furthermore, certain of Health Card's sponsors, including Vytra and
Suffolk  County,  require  Health  Card to  maintain  a  pharmacy  network  with
specified numbers of pharmacies in various locations to serve plan participants.
As of June 30,  1999,  Health  Card had a  multi-state  network  of over  44,000
pharmacies.  In  addition,  as of June 30,  1999,  three mail  order  pharmacies
participated in the pharmacy network.  See "Services -- Pharmacy Network -- Mail
Pharmacy Distribution and Management."

     As part of Health  Card's cost  containment  efforts,  Health Card contacts
selected  participating  pharmacies and plan  participants  by mail to audit the
validity of claims. The information requested includes:

          o    copies of original  prescriptions from participating  pharmacies,
               and
          o    written  confirmation  from plan participants of their receipt of
               prescribed drugs.

     Health  Card also  performs  on-site  audits of  records  of  participating
pharmacies.  Pharmacies are selected for an audit based upon parameters designed
into Health  Card's  computer  programs.  Additionally,  Health Card may audit a
pharmacy in response to, among other things, a complaint from a plan participant
or  sponsor,   or  comments  from  customer  service   representatives  of  drug
manufacturers.

     Both the retail and mail  order  components  of the  pharmacy  network  are
managed by Health Card's  on-line  claims  management  system.  See "Services --
Electronic Point-of-Sale Pharmacy Claims Management."

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

     Health Card presently has a non-exclusive  relationship  with Eckerd Health
Services d/b/a/ Express Pharmacy Services ("Express Pharmacy") pursuant to which
Express  Pharmacy acts as a  participating  pharmacy and dispenses drugs to plan
participants by mail. The agreement between

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Health  Card and  Express  Pharmacy  expires  on June  30,  2000;  however,  the
agreement is automatically renewable for successive 12 month terms. Either party
has the right to terminate  the  agreement as of June 30, 2000 and at the end of
any successive term, in each case on 90 days prior written notice. The agreement
provides that Express Pharmacy will:

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

     This agreement  further provides that Health Card will pay Express Pharmacy
for approved claims within 45 days after the two week processing  cycle in which
the claim occurs.

     As of June 30, 1999,  three mail order  pharmacies  were  participating  in
Health Card's pharmacy network.  Plan  participants  using a mail order pharmacy
mail in their  prescriptions  to the  pharmacy.  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.  If the  claim is  deemed  eligible  under  the terms of the
appropriate plan, the  participating  mail order pharmacy mails the prescription
item to the plan participant.  The mail order pharmacy typically covers the plan
participant's mailing costs through the use of prepaid envelopes (used by a plan
participant  to submit  his/her  prescription)  and  typically  pays to ship the
prescribed item to the plan participant.

     Pharmacy  Relations.  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 they expect timely payment.  Health Card endeavors to
process claims  promptly and obtain funds from sponsors prior to making payments
to participating pharmacies; still, there can be no assurance that sponsors will
pay Health Card on time.

     No assurances can be made that pharmacies in Health Card's network will not
demand faster  payment in the future.  In particular,  in May 1996,  Health Card
restructured  $900,000 of outstanding  overdue claims payable to Genovese into a
promissory note obligating  Health Card to pay such amount over 18 months.  That
note has been  repaid  in full.  Health  Card  believes  that  there has been no
material negative effect on its business resulting from its payment schedule and
it believes that its relationships with pharmacies are generally good.

     Health Card may be required to pay participating  pharmacies whether or not
it has been  paid by its  sponsors.  The loss of a  substantial  portion  of the
pharmacies  in the  pharmacy  network  could have a material  adverse  effect on
Health Card's business,  operating results and financial  condition.  See Item 7
hereof.




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Benefit Design Consultation

     Health Card has a sales and marketing staff and pharmacists  experienced in
prescription drug benefit plan design.  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.  Using both
sponsor-specific  and general  claims  experience  data, the sales and marketing
staff makes recommendations of benefit features such as:

          o    levels of co-payments,
          o    covered and excluded drugs,
          o    generic substitution guidelines,
          o    number of days supply of medication per prescription,
          o    maximum  benefit cost,
          o    maximum plan participant out-of-pocket cost, and
          o    coverage for  prescription  drugs dispensed by  non-participating
               pharmacies.

     The clinical services staff, with occasional assistance from the operations
staff,   produces  customized  periodic  reports,   and  disseminates   publicly
available,  peer  reviewed,  nationally  recommended  treatment  data  regarding
generic substitution  guidelines.  Once a plan design has been implemented,  the
sales  and  marketing  staff  monitors  plan  performance  periodically  and may
recommend changes to the plan.

Preferred Drug Management

     Through its preferred drug programs,  Health Card encourages physicians and
plan participants to use drugs that are preferred by plan sponsors,  usually for
lower cost but sometimes for efficacy. Health Card does this, typically, through
contacts with physicians. Almost all of Health Card's sponsors use its preferred
drug management and generic substitution  programs.  In administering  preferred
drug programs, Health Card may recommend that a sponsor offer incentives so that
the lower cost brand name drug listed on its formulary is prescribed rather than
a more  expensive  therapeutically  equivalent  drug.  With  such a  therapeutic
interchange program,  typically the savings are distributed,  for the first year
of the program,  among the sponsor, the pharmacy, and Health Card; starting with
the second year,  all of the savings are  received by the sponsor.  This type of
program is most frequently used in connection with long-term therapies.  Through
a generic substitution  program, a plan participant pays a lower co-payment than
he would otherwise,  and thereby benefits directly from the savings. Health Card
believes  there are  substantial  savings to be  realized  by  encouraging  plan
participants  to use generic  instead of brand name  drugs,  since the cost of a
generic  prescription  drug can be as much as 91%  (typically  30% to 55%) lower
than the cost of the therapeutically equivalent brand name prescription drug.

     Plan  participants  are encouraged by Health Card to use generic drugs by a
variety of methods. These methods include:


                                       10

<PAGE>



          o    utilizing  differential  co-payments  (that is,  allowing  a plan
               participant  accepting a generic  drug to pay a lower  co-payment
               than if the same  prescription  were  filled  with the brand name
               drug),
          o    requiring the plan participant to pay the difference  between the
               brand and generic price, and
          o    offering  a   financial   incentive   to   pharmacists   to  fill
               prescriptions   using  generic  drugs,  when  permitted  by  law,
               therapeutically  permissible  and in  all  cases  subject  to the
               physician's prior approval.

     The differential co-payment is the method most commonly used by Health Card
to encourage acceptance of generic substitutes for brand name drugs.

     If a physician  prescribes a specific drug and the prescription  includes a
"dispense  as written"  ("DAW")  notation,  a  pharmacist  is not  permitted  to
substitute a generic drug without the physician's  consent.  In such event,  the
pharmacist  must contact the physician  directly for  permission to substitute a
generic equivalent or a less expensive brand name drug.  Depending on state law,
if no DAW notation is made, the  pharmacist  must obtain the consent of only the
plan  participant  to  dispense  a generic  substitute.  In New York,  if no DAW
notation  is  made  and  the  physician  does  not  prohibit  substitution,  the
pharmacist  is required to dispense the generic  equivalent  if it is available.
Other states may have  different  laws,  rules and  regulations.  Health  Card's
detailed  quarterly reports to sponsors assist in determining if this program is
being utilized effectively.  See "Services -- Data Access, Reporting Information
and Analysis."

     Health Card also provides therapeutic interchange and formulary management.
These  programs are based upon the  effectiveness,  quality and cost of specific
drugs.  Programs of interchange or formulary  inclusion are  implemented to give
sponsors lower cost with equal quality.  All chosen drugs are reviewed by Health
Card's  Pharmacy & Therapeutics  Committee in terms of their  efficacy,  quality
(including  side effects) and cost.  See  "Services --  Consulting  Services and
Disease Information Services."

Drug Review and Analysis

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

          o    drug interactions,
          o    premature refills of prescriptions,
          o    duration or duplication of therapy,
          o    pregnancy and breast feeding precautions,
          o    geriatric or pediatric precautions,
          o    compliance with prescriptions, both as to dosage and timing, and
          o    other contraindications.

                                       11

<PAGE>




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

Consulting Services and Disease Information Services

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

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

          o    provides information to sponsors to ensure that the covered drugs
               of each plan reflect the current standard of medical practice and
               pharmacology,
          o    evaluates drugs for inclusion in a plan as a preferred drug,
          o    analyzes   current   literature   for   safety,    efficacy   and
               cost-effectiveness of covered drugs,
          o    provides recommendations on drug therapy and utilization,
          o    evaluates drug review and analysis programs and criteria,
          o    determines those drugs which require prior authorization from the
               sponsor, and
          o    reviews the associated guidelines for those drugs' proper use.

     The P&T Committee currently consists of six members: Martin Edelstein, M.D.
and Paul Cohen, M.D., each of whom is a practicing  physician and medical school
professor,  Jack M. Rosenberg,  a university  professor of clinical pharmacy and
pharmacology,  Joseph B. Laudano,  a manager of medical  affairs of a major drug
company, Howard G. Levine, a pharmacist who is the

                                       12

<PAGE>



Chairman of the Board of an independent  pharmacy group,  and John Ciufo, who is
Health Card's Vice  President of Clinical  Services and its liaison with the P&T
Committee.  Mr.  Ciufo  is the  only  member  of  the  P&T  Committee  otherwise
affiliated with Health Card.  Vytra has the right to designate one member of the
P&T  Committee,  but has not  exercised  its  right.  Each  Committee  member is
requested to disclose his or her affiliation with any drug company.  Mr. Laudano
and Mr. Rosenberg have disclosed a current affiliation with drug companies.

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

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

By  analyzing  plan  participants'  pharmacy  claims  patterns,  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  treatment  or  medication.  Health Card has  developed  disease
information  systems covering  cardiovascular and  gastrointestinal  conditions,
migraines, diabetes, and asthma, among others.

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

     Health Card is currently  marketing its disease  information  programs on a
very limited basis,  and is actually  providing this service to only one sponsor
presently but  anticipates  that it will be providing  these services to another
sponsor in the near future. Health Card believes that sponsors' demand for these
services will grow as their needs for  information  to address cost  containment
increase.




                                       13

<PAGE>



Data Access, Reporting and Information Analysis

     Data Access.  Health  Card's  computerized  information  systems allow each
sponsor  to access  on-line  data  relating  to the  sponsor's  plan.  With this
capability,  the  sponsor  is able  to  maintain  and  update  plan  participant
eligibility information and override denials of claims if it so chooses.

     Reports.  Sponsors receive quarterly  executive reports and ad-hoc reports,
in addition to the executive and billing reports which accompany invoices. Based
on these reports,  Health Card  representatives  provide  information and assist
sponsors  regarding  benefit  design,  cost  containment  initiatives,   disease
information initiatives and formulary management.

     Decision Support Systems.  Health Card's proprietary  computerized  HCFocus
decision  support tool is part of Health  Card's  report  generation  system and
utilizes Health Card's proprietary database. Sponsors can use HCFocus to analyze
particular information, including, among other things:

          o    comparison  of  physician  prescription  practices  compared to a
               selected peer group,
          o    analysis and review of a plan participant's drug history,
          o    analysis of the top drugs dispensed by number or dollar value,
          o    analysis of generic drug for brand name drug substitution  rates,
               and
          o    analysis of the dispensing patterns of particular pharmacies.

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. Presently, Vytra is the only Health Card sponsor using the physician
profiling  services,  although one more sponsor has expressed  interest in using
this service later in 1999 or 2000. Health Card believes that other sponsors may
be interested in this service in the future.

Sponsors

     Sponsors include managed care  organizations,  local  governments,  unions,
employers and third party health care plan  administrators  of prescription drug
programs. As of June 30, 1999, Health Card was servicing 73 sponsors of benefits
plans covering over 521,000  participants (such number of sponsors includes each
third party  administrator  client as one sponsor),  with  concentrations in the
Northeast, Southeast and West Coast. For the fiscal year ended June 30, 1999, 29
new sponsors began utilizing Health Card's services.


                                       14

<PAGE>



     Health  Card's  sponsors  are  typically  asked to sign a standard  form of
managerial  agreement that governs Health Card's relationship with that sponsor.
Pursuant to this standard agreement, Health Card pays claims and furnishes other
related  services  through a network of  pharmacies.  The sponsor  provides  the
details of the plan to be managed, along with a list of all covered participants
and  eligibility  updates.  The  sponsor is liable for all  charges  incurred by
unauthorized people unless Health Card was notified in writing of ineligibility.
If the participant receives  prescription drugs from a non-member pharmacy,  and
the plan provides for  reimbursement  of some or all of the cost of prescription
drugs  purchased from a non-member  pharmacy,  a claim for direct  reimbursement
must be made.  Health Card is  obligated  to ensure  that an adequate  number of
member  pharmacies  are  available,  furnish  a  description  of the plan to the
pharmacies,   require  such  pharmacies  to  comply  with  the  member  pharmacy
agreement,  process  claims and determine  whether  claims  qualify for payment.
Health Card is also  obligated to furnish the sponsor  with a bi-weekly  account
statement  which sets forth 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 reimburse
Health Card the cost of claims to Health Card (less any cash  advances  paid) as
the bi-weekly  statements  are received by the sponsor.  The  bi-weekly  account
statement  will also  include  an amount  due to Health  Card for the  auditing,
approval  and  payment of claims  processed  during the  preceding  period.  The
contracting  party agrees to make all payments  within five  business  days from
receipt of the bi-weekly account  statement,  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,  in electronic form,  current and complete files
of all  claims  received,  and  records to  establish  the cost of drugs to each
sponsor.  The  sponsor can review  these  records.  While most of Health  Card's
larger sponsors  negotiate other agreements with Health Card, many sponsors sign
the standard form or a modified version of the standard form. The specific terms
of  each  managerial  agreement,   including  any  incentive  arrangements,  are
negotiated  by Health Card on a case by case basis.  While  Health Card may take
into  account  factors  such as the  number of plan  participants,  margins  and
economies of scale,  among others,  in determining the terms of its arrangements
with  sponsors,   Health  Card  generally  does  not  use  set  guidelines  when
determining these terms. See Item 7 hereof.

Significant Sponsors

     Health  Card  depends on a limited  number of  sponsors  for a  significant
portion of its revenue.

     For the fiscal years ended June 30, 1998 and 1997, Vytra and Suffolk County
were the only sponsors that accounted for 10% or more of Health Card's revenues.
For the fiscal year ended June 30, 1999,  Vytra,  Suffolk  County and  Operating
Engineers  Trust Funds were the only sponsors that  accounted for 10% or more of
Health  Card's  revenues.  The loss of any one of these  sponsors  would  have a
material  adverse  effect on  Health  Card's  business,  operating  results  and
financial  condition.  The business  relationship with each of these sponsors is
detailed in the immediately following sections.


                                       15

<PAGE>



Vytra

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

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

                  1997                         45%                   128,404
                  1998                         44%                   166,840
                  1999                         37%                   150,061

     Health Card has been providing services to Vytra since 1990.

     A. Prescription Arrangement

     Health Card  provides  prescription  benefit  management  services to Vytra
under  two  separate   arrangements.   Pursuant  to  a  series  of  letters  and
conversations,  Health Card provides services to Vytra under an arrangement that
began under a written  agreement  that,  as amended,  expires in December  1999.
Under this arrangement,  as amended (the "Prescription  Arrangement"),  National
Medical Health Card IPA, Inc.  ("Health Card IPA"),  Health Card's  wholly-owned
subsidiary,  has agreed to provide services to Vytra through Health Card. Health
Card  is  in  the  process  of  negotiating  a  more  formal  amendment  to  the
Prescription  Arrangement.  Health  Card  cannot be certain  that a more  formal
amendment  with Vytra will be signed,  or that any agreement that is signed will
contain terms as favorable to it as the current arrangement.

     Under the  Prescription  Arrangement,  Health  Card  provides  prescription
benefit  management  services and charges a preset amount based on the number of
plan  participants  covered at the beginning of each month.  The amount  payable
under this arrangement is adjusted  retrospectively  to take into account actual
utilization and cost of claims. The party that benefitted from any difference in
such  amount  pays an  adjustment  to the other  party.  Vytra pays  Health Card
additional fees for certain  information  services,  claims  processed and other
services.

     The Prescription  Arrangement  accounted for the approximate  percentage of
Health Card's revenues indicated in the following table:

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

                   1997                      34%
                   1998                      34%
                   1999                      30%


                                       16

<PAGE>



     Pursuant to the  Prescription  Arrangement,  Health Card is Vytra's primary
provider of prescription  benefit  management  services.  Vytra has the right to
place a  percentage  of its claims with other  prescription  benefit  management
companies,  individual physicians or groups of physicians associated with Vytra.
If Vytra  processes more than such  percentage of its claims with other parties,
Health Card can  terminate  the  Prescription  Arrangement  or  renegotiate  the
present amount charged to Vytra based on the number of plan participants.  Under
the Prescription Arrangement, should Health Card offer rates more favorable than
those   offered  to  Vytra  to  a  competing   sponsor  whose  plan  design  and
demographics,   service  area  and  services   received  from  Health  Card  are
substantially similar to those of Vytra, Health Card must promptly notify Vytra.
Vytra then may:

          o    terminate the Prescription Arrangement,  if the competing sponsor
               has more  participants  (but less than twice more) than Vytra and
               Health Card does not offer the same rates to Vytra; and

          o    receive the more  favorable  rates,  retroactive  to the date the
               more favorable  rates were offered to the competing  sponsor,  if
               the number of the competing sponsor's participants is equal to or
               less than the number of Vytra's participants.

As a  result  of  adoption  of new  contract  drafting  guidelines  for HMOs and
independent practice associations ("IPAs") in New York, Health Card IPA will not
be permitted to offer this same contract benefit.

     The  Prescription  Arrangement  requires  Health  Card to  arrange  for and
maintain an adequate and accessible pharmacy network for Vytra plan participants
(i.e., a specified number of pharmacies). Health Card meets this standard if one
or more  participating  pharmacies  are  located  in each zip code in the  Vytra
service area, which as of this date includes Queens,  Nassau and Suffolk County,
in the State of New York,  unless  either (i) no  pharmacy  exists  within a zip
code,  or (ii) a pharmacy will not  participate  and such  non-participation  is
beyond the  reasonable  control of Health Card.  In  addition,  Health Card must
exercise  its  best  efforts  to  maintain  pharmacy  network  participation  in
accordance with certain historical levels. Health Card is not responsible if the
number of  pharmacies  in the network  declines  because of  pharmacy  closings,
consolidations  or changes in the  pharmacy  payment  schedule.  Health Card has
agreed  with Vytra that it will not  terminate  a major  chain of  participating
pharmacies  during  the term of the  Prescription  Arrangement  without  Vytra's
consent.  However,  if Vytra does not  consent and the  inclusion  of such chain
results in higher  actual costs to Health  Card,  then Vytra will be required to
pay such increase on a quarterly  basis.  In addition,  Vytra may require Health
Card to add specific  pharmacies  to the  pharmacy  network.  Similarly,  if the
inclusion  of such  pharmacies  results in higher  actual  costs to Health Card,
Vytra will be responsible for the increase.

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

          o    processing certain percentages of claims within certain periods,
          o    making all  reasonable  efforts to  process  all claims  within a
               maximum period,

                                       17

<PAGE>



          o    answering all calls within a specified average time,
          o    ensuring that a certain  percentage  of mail order  prescriptions
               which do not  require  pharmacy  or  physician  intervention  are
               dispensed within certain periods,
          o    making  all  reasonable  efforts  to make  sure  all  mail  order
               prescriptions are dispensed within a maximum time period,
          o    reaching certain generic substitution rates, and
          o    maintaining a certain level of rebates per claim.

Health Card is required to pay a penalty for failing to meet certain guarantees.

     Health Card must maintain a Pharmacy &  Therapeutics  Committee.  Vytra has
the  right  to  designate  one   representative  to  serve  on  the  Pharmacy  &
Therapeutics  Committee,  but has not  exercised  that right.  See  "Services --
Clinical Consulting and Disease Information." Until recently, Vytra received all
of the  rebates  received  by Health Card in  connection  with the  Prescription
Arrangement.  Health  Card  currently  retains a portion  of such  rebates.  See
"Services -- General -- Rebate Administration."

     Pursuant to the Prescription  Arrangement,  a portion of certain  financial
risks is shifted from Vytra to Health Card.  Vytra is an HMO  established  under
the laws of the State of New York.  Under  New York law,  an HMO may share  risk
only with  reinsurers or,  pursuant to a written  agreement  which complies with
certain  drafting  guidelines  issued by the Department of Health ("DOH"),  with
"providers" and IPAs.  Recently,  Health Card acquired Health Card IPA, which is
an IPA under the laws of New York State.  Pursuant to a letter  agreement signed
in March 1999,  Vytra has agreed that the  Prescription  Arrangement will govern
its  relationship  with  Health Card and Health Card IPA. As of the date of this
Form 10-K,  Health Card is performing the services under this  arrangement  with
Vytra.  While  the  letter  agreement  does not  comply  with  the DOH  drafting
guidelines,  the parties have discussed a more formal amendment, and Health Card
anticipates  that,  if such an amendment is executed,  it will comply fully with
the DOH drafting guidelines.

     As of September  25, 1998,  Health Card  executed a letter  agreement  with
Vytra which  extended the term of the original  Prescription  Arrangement  until
December 31, 1998.  This letter  agreement also listed new and additional  terms
which were to be included in a formal amendment to the Prescription Arrangement.
Among  other  things,  the March 1999 letter  agreement  extends the term of the
September letter to December 31, 1999. Even though Health Card,  Health Card IPA
and Vytra signed the March 1999 letter agreement, Health Card anticipates that a
more formal amendment will be signed and govern the parties'  relationship  from
January 1 to December 31, 1999, and will include,  among other things, the terms
of a proposal  issued by Health Card in response to a request for proposal which
was issued by Vytra,  as  contemplated  to be modified by the September 25, 1998
letter. As of the date of this Form 10-K, the more formal amendment has not been
entered into.  Although  negotiations  are  continuing and Health Card expects a
more formal amendment to be executed by both parties, no assurances can be given
that a more formal  amendment  will be executed,  or that it will be executed on
terms  favorable to Health Card. If Health Card were to lose Vytra as a sponsor,
or lose a  significant  portion  of Vytra's  business,  it would have a material
adverse  effect on Health  Card's  business,  operating  results  and  financial
condition.

                                       18

<PAGE>




     B. Fee for Service Agreement

     Health Card also provides prescription benefit management services to Vytra
under an  agreement  that  commenced  March  15,  1990  (the  "Fee  for  Service
Agreement")  with an initial term ended on March 31,  1991.  The Fee for Service
Agreement renews annually from year to year,  unless terminated by either party.
Under this  agreement,  Health Card  performs  prescription  benefit  management
services and charges a fee based on the number of claims processed and paid.

     The Fee for Service Agreement  accounted for the approximate  percentage of
Health Card's revenues indicated in the following table:

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

                  1997                             11%
                  1998                             10%
                  1999                              7%

Suffolk County

     Health Card has been providing  prescription benefit management services to
Suffolk County,  a municipal  corporation of the State of New York,  since 1992.
Health Card is  currently  providing  services to Suffolk  County  under an oral
agreement, terminable by either party, the economic terms of which are otherwise
substantially  similar to those of a written  agreement that expired on December
31, 1998.

     In  March  1999,  Suffolk  County  provided  Health  Card  with a  proposed
amendment  to the  written  agreement  which  Health Card has signed but Suffolk
County has not. Health Card cannot be certain that the proposed amendment to the
agreement with Suffolk County will be signed.

     Suffolk  County has accounted  for a  substantial  portion of Health Card's
business, as indicated in the following table:

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

                 1997                     18%                       37,833
                 1998                     16%                       38,893
                 1999                     14%                       39,688

     Health  Card  guarantees  an  effective  blended  average  wholesale  price
discount per

                                       19

<PAGE>



prescription and an average blended dispensing fee per prescription. Health Card
is required to pay certain  percentages of rebates to Suffolk County pursuant to
a complex formula and maintain a pharmacy network at a specified  level.  Health
Card offers  Suffolk  County a minimum  initial  rebate  guarantee for each paid
claim,  which applies until the rebate per claim equals a threshold amount.  The
percentage  rebate to which  Suffolk  County is  entitled  increases  based on a
formula tied to the per claim rebate amount.

Operating Engineers

     On  December  1, 1997,  Health Card began  providing  prescription  benefit
management   services  to  Operating   Engineers  Trust  Funds,  IUOE  Local  12
("Operating  Engineers"),  a construction workers' union in Southern California.
As of June 30,  1999,  Operating  Engineers  covered  approximately  42,000 plan
participants.  As of the  date of  this  Form  10-K,  Health  Card is  providing
services  pursuant  to an  oral  agreement  but  is  negotiating  for a  written
agreement.  No assurances can be given that a formal agreement will be executed,
or that it will be executed on terms favorable to Health Card.  Pursuant to such
oral agreement,  Health Card is required to pay a certain  percentage of rebates
to  Operating  Engineers.  For the fiscal  year ended June 30,  1999,  Operating
Engineers accounted for approximately 12% of Health Card's revenues.

     In the event that any of these sponsors choose to discontinue  using Health
Card's  services,  or if the  terms of Health  Card's  arrangements  with  these
sponsors  unfavorably  change,  Health Card's  business,  operating  results and
financial condition will be materially  adversely affected.  In the event of the
loss of any of these  sponsors,  there can be no assurance that Health Card will
be able to replace such sponsors.

Sales and Marketing

     Health Card markets its services  through a sales and marketing  department
led by the  Executive  Vice  President  of Sales  and  Marketing.  The sales and
marketing  department  includes a  marketing  manager,  marketing  assistant,  a
proposal writer, one regional sales manager, six sales executives, and one sales
coordinator.  Health Card's sales  executives  target the  following  geographic
sales regions -- Eastern, Mid-Atlantic,  Southeast, Southwest, Midwest, West and
the New York Metro area. In addition, Health Card contracts with brokers 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 attends numerous trade shows and utilizes  advertising,  public
relations and marketing literature for sales support. Additionally,  Health Card
employs  the  services of a public  relations  and media firm for  exposure  and
publication  in  newspapers,  periodicals  and  journals  which are  targeted to
employee benefit and managed care specialists.

     Further,  Health  Card is  continuing  to expand  its World  Wide Web site.
Currently,  the Web site describes Health Card's products and services and lists
frequently asked questions,  among other things.  It is anticipated that the Web
site will have a page dedicated to on-line services which will

                                       20

<PAGE>



allow plan  participants to fill out customer service surveys and direct payment
claims  forms,  and to access the  pharmacy  network  listings.  The Web site is
anticipated  to be available for physician  access to the Health Card  formulary
drug listing.  Security firewalls have been developed and implemented to protect
patient confidentiality.

Competition

     Health Card  competes  with  numerous  companies  which provide the same or
similar services.  Many of Health Card's  competitors have been in existence for
longer periods of time and are far better  established than Health Card. Many of
them also have:

          o    broader public recognition,
          o    financial  and  marketing  resources  substantially  greater than
               Health Card,
          o    more experienced management, and
          o    far more  extensive  facilities  than those  available  to Health
               Card.

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.

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

          o    a broad base of  experience  in the  information  technology  and
               pharmacy benefit management industries,
          o    flexible  and  sophisticated  on-line  computerized   information
               systems, and
          o    a focus on customer service.

     There can be no  assurance  that  Health Card will  remain  competitive  or
successfully  market integrated  prescription  benefit  management  services and
disease information services to existing and new sponsors. Furthermore, there is
a distinct possibility that consolidation and alliances within the industry will
adversely  impact the  operations  and  prospects for  independent  prescription
benefit management companies such as Health Card.

Employees

     As of June 30, 1999, Health Card had 93 employees.  Health Card's employees
are not subject to collective  bargaining  agreements  and Health Card considers
its relations with its staff to be satisfactory. See Item 13 hereof.





                                       21

<PAGE>



Information Systems

     Health Card's information systems integrate all of the:

          o    data input,
          o    reporting,
          o    analysis, and
          o    access functions

provided by Health Card, and Health Card believes that its  information  systems
provide it with a competitive advantage. See Item 7 hereof.

     Health Card's  on-line  claims  management  system depends in large part on
software licensed from Prospective  Health  Incorporated  ("PHI").  By a license
agreement dated February 18, 1998,  Health Card was granted a non-exclusive  and
nontransferable  perpetual  license to use PHI's  claims  adjudication  software
system.  This  system  is an  integral  part of  Health  Card's  on-line  claims
management  system. The agreement required Health Card to pay an initial license
fee of $400,000,  of which $100,000 was paid upon execution of the agreement and
$25,000 paid monthly through March 1999. In addition,  if certain milestones are
met, based on the number of processed  claims,  as defined,  the initial license
fee increases incrementally by up to an additional $500,000 over the term of the
license. A milestone has been met which has increased the initial license fee by
$150,000 due to increased  annualized volume of claims processed.  The agreement
also  provides  for the monthly  payment of a fee for  maintenance  and updating
services, aggregating annually to 18% of the initial license fee, as defined.

     In addition,  Health Card entered into a non-exclusive  licensing agreement
on March 16, 1998 with  Medi-Span,  Inc. for a three-year  term.  This agreement
permits  Health Card to use  Medi-Span's  master  drug  database,  certain  drug
utilization review databases,  price-checking  software and state  claims-review
programs for New York and  Virginia.  Health Card pays  license  fees  annually,
which increase as the number of claims  processed and number of dedicated  users
of Medi-Span's  software increases.  Health Card pays an annual license fee of a
minimum of $302,200. On June 1, 1998, Health Card entered into an agreement with
Sandata,  Inc.,  of which  Bert E.  Brodsky,  Chairman  of the  Board  and Chief
Executive  Officer of the  Company,  is the  Chairman  of the Board,  President,
Treasurer and a principal stockholder.  This agreement, which was amended on the
same  date,  relates to the hiring of 11  Sandata  employees  by Health  Card to
provide  development,  enhancement and maintenance of Health Card's  information
systems  internally.  Health Card paid  Sandata  $208,000 in  consideration  for
Sandata's  assigning to Health Card certain rights  relative to such  employees.
Health Card also  assumed a liability  of $86,000  relating to these  employees.
Sandata is expected to continue to provide, through its subsidiaries, consulting
services  related  to  Health  Card's  information  systems  on such  terms  and
conditions  as may be agreed to between  the  parties  from time to time.  Also,
Sandata confirmed Health Card's proprietary rights in certain software developed
by Sandata for Health Card, among other things. See Item 10 hereof.

     A significant portion of Health Card's information systems has historically
been developed,

                                       22

<PAGE>



enhanced,   modified  and  maintained  by  Sandsport  Data  Services,   Inc.,  a
wholly-owned  subsidiary of Sandata.  Furthermore,  Health Card leases  computer
hardware  for its data  processing  center  at a monthly  cost of  approximately
$33,000  (as of the date of this Form 10-K) from  Sandsport  pursuant to an oral
agreement. See Item 13 hereof.

Government Regulation

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

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

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

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

Anti-Kickback Regulations

     The federal  Anti-Kickback  Statute prohibits knowingly paying or receiving
remuneration in return for referring an individual for the furnishing of an item
or service, or for the purchasing, ordering or arranging for any item or service
for which  payment  may be made in whole or in part under a federal  health care
program, including Medicare or Medicaid. The term "remuneration" in

                                       23

<PAGE>



the statute expressly includes any kickback,  bribe or rebate. Violation of this
law  is  a  felony,  punishable  by  fines  up  to  $25,000  per  violation  and
imprisonment  for up to five  years.  Violation  may  also  give  rise to  civil
penalties of up to $50,000 per  violation  and  exclusion  from the Medicare and
Medicaid programs.

     Safe harbor  regulations have been adopted under the Anti-Kickback  Statute
which immunize certain  remuneration  arrangements which might otherwise violate
that statute.  Failure to fall within a safe harbor, however, does not mean that
such practice constitutes a violation of the law.

     Health  Card  believes  that it is not in  violation  of the  Anti-Kickback
Statute because (i) it does not receive any remuneration directly from Medicare,
Medicaid or any other government sponsored health care program, and (ii) it does
not believe the payments to it from any of its sponsors,  other than Vytra,  are
derived from funds from Medicare, Medicaid or other federal government sponsored
health care programs. Health Card believes that its arrangement with Vytra falls
within the HMO safe harbor exemption to the  Anti-Kickback  Statute because that
safe harbor applies to any written risk sharing  arrangement with an HMO. Health
Card cannot be sure,  however,  that a government  regulatory agency or judicial
tribunal would not view the receipt and sharing of rebates as a violation of the
federal Anti-Kickback Statute.

     With  respect to other  sponsors,  although  Health  Card does not have any
knowledge  to the  contrary,  it cannot be sure that no portion  of a  sponsor's
payment is  derived  from a  government  health  care  program  source,  thereby
implicating the Anti-Kickback  Statute.  However, even if Health Card were found
to receive  indirectly a benefit from such a  government  sponsored  health care
program  in the form of a rebate  from  Integrated  or  otherwise,  Health  Card
believes that its conduct does not violate the Anti-Kickback  Statute because it
receives  and  shares  rebates  with  its  sponsors  and   participates  in  the
therapeutic  interchange program, only to share cost savings and reduce the cost
of prescription benefit services and not to induce referrals.

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

     Health Card is not aware of any instance in which the Anti-Kickback Statute
has been applied (i) to prohibit  independent  prescription  benefit  management
companies from receiving rebates from drug manufacturers  based on drug sales by
pharmacies to plan participants,  formulary management programs,  or therapeutic
substitution  programs,  or  (ii)  to  the  contractual   relationships  between
independent  prescription  benefit  management  companies and their sponsors and
participating pharmacies.

     In the last few years, private citizens have commenced litigation, known as
Qui Tam actions,

                                       24

<PAGE>



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

State Insurance Regulations

     One of Health Card's  arrangements with Vytra involves the shifting of some
of the financial  risk of providing  prescription  benefits from Vytra to Health
Card.  Under New York law,  financial risk sharing  arrangements  may constitute
engaging in the business of insurance  which  requires a license from the state.
Health  Card  recently  acquired  Health  Card  IPA,  an  independent   practice
association  licensed in New York State.  Health Card, Health Card IPA and Vytra
entered into a letter agreement in March 1999 which  contemplates  that services
to Vytra will be  performed by Health Card IPA through  Health  Card.  As of the
date of this Form  10-K,  Health  Card is  performing  the  services  under this
arrangement  with Vytra.  Health Card IPA is also expected to be the contracting
party to the more formal  amendment  or any new  agreement  with  Vytra.  To the
extent it enters into risk  sharing  agreements  with HMOs or  providers  in the
future, Health Card intends that Health Card IPA will be the contracting party.

     In negotiating  the terms of the formal  amendment or new agreement,  Vytra
and  Health  Card plan to  follow  the DOH  drafting  guidelines.  However,  the
existing  agreement  with Vytra does not follow  those  guidelines.  Health Card
cannot be sure that its  arrangement  with  Vytra will not be subject to a claim
that it is engaged in the unlicensed business of insurance.  Health Card has not
determined,  and does not  believe  that it could  determine  with any degree of
accuracy, the nature or extent of any sanctions that might be imposed on it as a
result of such a claim.

Independent Practice Association Regulations

     Health Card IPA is an independent  practice  association  under the laws of
New York.  Under New York law,  an HMO may share risk only with  reinsurers  or,
pursuant to a written agreement which complies with certain drafting  guidelines
issued by the DOH,  with  "providers"  and  independent  practice  associations.
Health Card intends that the IPA will be the  contracting  party with respect to
any  contracts  with  HMOs  or  providers   containing  financial  risk  sharing
provisions.  Health Card IPA is subject to the  regulatory  authority of the DOH
and  the  laws,  rules  and  regulations   applicable  to  independent  practice
associations in New York. Under such laws,  rules and  regulations,  Health Card
IPA's  contracts  with HMOs and providers  will be subject to the DOH's contract
drafting guidelines and must be reviewed and approved by the DOH.

     In July  1998,  the DOH issued new HMO and  contract  drafting  guidelines.
These  guidelines are to be used in connection with the approval process for HMO
and IPA contracts. Health Card has

                                       25

<PAGE>



negotiated  with  Vytra  to  incorporate  into  their  anticipated  more  formal
amendment the provisions required by the drafting guidelines. Health Card cannot
be sure that Vytra will sign the more formal amendment, which failure would have
a material  adverse  effect on its  business,  operating  results and  financial
condition.  While  Health Card does not believe that the  implementation  of the
contract  drafting  guidelines  will  have  a  material  adverse  effect  on its
business, operating results and financial condition, it cannot be sure that DOH,
in the  exercise of its  discretion,  will not withhold or delay its approval of
the more formal  amendment with Vytra,  which could have such a material adverse
effect.

Pharmacy Regulations

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

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

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

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

     Health Card receives  rebates from  Integrated  through  contracts  between
Integrated  and  pharmaceutical  companies to which Health Card has agreed to be
joined.  While  Health  Card  shares  the  proceeds  of those  rebates  with its
sponsors, it does not share any rebates with pharmacies.

     In connection  with its  formulary  management  program,  the P&T Committee
considers the net cost of various drugs as one factor in determining which drugs
should be included in the Health

                                       26

<PAGE>



Card  formulary.  While the  determination  to include or exclude drugs from the
formulary is primarily based on the quality and efficacy of the drugs, their net
cost after any available  rebate is also  considered.  If Health Card chooses to
include certain drugs in its formulary for which it receives rebates,  it may be
required  under the terms of its  agreements  with  Integrated  and the  joinder
agreements with pharmaceutical companies to exclude certain other drugs from its
formulary in order to receive those rebates.

     Under its  therapeutic  interchange  program,  Health Card  shares  savings
realized as a result of  participating  pharmacies'  dispensing lower cost drugs
instead of more expensive  prescribed drugs.  Health Card also has agreements to
pay  brokers  to market  its plan  administration  services  to other  potential
sponsors.

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

Regulations Regarding Certain Rights of Privacy and Confidentiality

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

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

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

                                       27

<PAGE>



area of its business that Health Card believes gives it a competitive  advantage
and is anticipated to be an important element of its future success.

     The Secretary of Health and Human Services has  circulated  recommendations
regarding legislation intended to protect the privacy of personally identifiable
health  information.  Several  legislative  bills on the subject  have also been
introduced in the U.S.  Senate.  While none of these  measures have been adopted
into law,  Health Card cannot be sure that the subject  will not be addressed in
one manner or another at the federal level.  If federal  legislation  regulating
access to and  dissemination of personally  identifiable  health  information is
adopted,  it could have an adverse  effect on the business  operations of Health
Card as currently conducted.

Regulations Applicable to Health Care Professionals

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

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

Utilization Review Regulations

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

FDA Regulation

     The  United  States  Food  and Drug  Administration  has  asserted  general
authority to regulate promotional  activities of, and materials disseminated by,
prescription  benefit  management  companies  that are owned or influenced by or
subject to contractual  relationships with drug companies.  In January 1998, the
FDA published a draft guidance concerning certain promotional

                                       28

<PAGE>



practices performed by such prescription benefit management companies. Among the
practices  discussed in the FDA's  commentary to the draft guidance were the use
of  product-specific  financial  incentives  to  influence  drug  selection  and
prescribing decisions, disease information programs, and the use of specified or
preferred drug formularies.

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

Regulation in Other States

     Health Card is in the process of evaluating its  involvement  with sponsors
and plan  participants  located in states  other than New York.  Health  Card is
conducting that review systematically, focusing its attention initially on those
states where it has the most sponsors and/or plan  participants.  As a result of
that review,  Health Card has determined  that it is required to become licensed
as a  third  party  administrator  of  insurance  benefits  in  several  states,
including  Ohio,  Florida,  Tennessee,  Kentucky and  Michigan.  Health Card has
applied to become a third party administrator or is in the process of completing
such application in each of these states and has received a license in Ohio.

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

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

     Health  Card has  retained  special  counsel to advise it about  insurance,
health,  licensure and certain  other  regulatory  matters  governed by New York
State laws and federal laws. Health Card has

                                       29

<PAGE>



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

Item 2. PROPERTIES.

     Health Card occupies approximately 14,600 square feet of space at 26 Harbor
Park Drive,  Port Washington,  New York under an amended lease at a monthly cost
of $31,000  (including  utilities).  The  lessor is BFS  Realty,  LLC,  which is
affiliated with Mr. Brodsky.  The lease expires as of March 30, 2004. Rent under
the lease increases by 5% annually. The BFS lease was assigned by Sandata to BFS
in November 1996. Mr. Brodsky is the Operating  Manager and holder of a majority
of the membership  interests of BFS. Health Card believes that the terms of this
lease are as fair to it as those which could be  obtained  from an  unaffiliated
third party. Pursuant to an oral agreement entered into in 1994 with BFS, Health
Card paid $700,000 in June 1995 in connection with certain  allocated  leasehold
improvements.  Health  Card  began  occupying  space at 26 Harbor  Park Drive in
October 1994 and began making rental  payments for such space in December  1994.
See Item 13 hereof.

     Health  Card  has   completed  a  new  customer   service   center  at  its
headquarters.  It has  initially  been equipped  with  approximately  30 service
representatives'  desks,  and  there  is  space  for an  additional  30  service
representative  work areas.  The customer service center opened on May 14, 1999,
and the  additional  30 service  representative  work areas will be equipped and
become  operational  as needed.  Management  believes that Health Card's current
offices will be adequate for Health Card's purposes for the foreseeable  future,
without  giving  effect  to any  significant  increase  in need due to  possible
acquisitions. In addition, Health Card is considering the possibility of leasing
approximately  10,000 to 15,000 square feet of additional offsite space to house
a disaster recovery center.

     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 will be used as a pharmacy.  The landlord for
these premises is 61 Manorhaven Boulevard, LLC. Bert Brodsky is the sole member.
The rent for the 12 month period ended August 31, 1999 was $1,500 per month; the
annual rent  increases by 5% per year.  Additional  rent, in the form of certain
expenses, is also payable.

     Pursuant to a lease commencing  December 15, 1998, and expiring on December
14,  1999,  Health  Card  leases an  apartment,  for use by two  members  of its
management,  at premises located at 77 Juniper Road, Port Washington,  New York.
The  annual  rent  is  $20,400.   Utilities  and  maintenance  service  (if  any
maintenance  service is contracted for) are payable by Health Card as additional
rent.


                                       30

<PAGE>



Item 3. LEGAL PROCEEDINGS.

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

     By letter dated  February 9, 1999,  Health Card was informed by counsel for
the  West  Contra  Costa  Unified  School  District  that  it and an  individual
plaintiff had filed suit in the Superior Court of Contra Costa,  in the State of
California, against Health Card. The complaint was filed with the Superior Court
on December 8, 1998, and  enumerates  six grounds for its claim to damages.  The
case has been  removed to Federal  Court.  The  complaint  alleges,  among other
things,  that the parties entered into a contract effective in November of 1996,
and  that on  December  11,  1996,  Health  Card  unilaterally  terminated  that
contract,  effective  December 16, 1996. The complaint further alleges that this
termination  was in  violation  of the terms of the  contract and of one or more
statutory  provisions;  that the  termination  resulted  in the School  District
incurring  approximately $150,000 in additional costs due to its having to enter
then into a fee for  service  arrangement  with Health Card in order to continue
providing  prescription  benefits  to its plan  members;  and  that,  due to the
wrongful termination of the contract, the school district was forced to secure a
replacement  for the benefits and services that were to have been provided under
the contract with Health Card. The complaint  alleges,  in connection  with this
last  circumstance,  that the  School  District  incurred  roughly  $400,000  in
additional  expenses as a result.  The complaint also seeks treble  damages.  If
treble  damages were  allowable in this case,  and a judgment were to be entered
against  Health Card,  Health Card could be liable for damages in excess of $1.5
million.  Health Card denies the  allegations  set forth in the  complaint,  and
intends to vigorously defend against the allegations made in the complaint,  and
has  engaged  local  counsel  in Los  Angeles  to  assist  it in  such  defense.
Notwithstanding  the foregoing,  because of the uncertainties of litigation,  no
assurances can be given as to the outcome of this litigation.  In the event that
Health  Card  were not to  prevail  in this  litigation,  Health  Card  could be
required to pay significant damages to the School District,  which could in turn
have a material adverse effect on Health Card's business,  operating results and
financial condition.

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

     At an Annual Meeting of  Shareholders  of Health Card held on May 10, 1999,
the shareholders of Health Card (i) elected a Board of five directors consisting
of Bert E. Brodsky,  Gerald  Shapiro,  Gerald  Angowitz,  Richard J. Strauss and
Kenneth J.  Daley,  (ii)  approved  the  adoption of a Restated  Certificate  of
Incorporation (which included certain elections by Health Card to be governed by
various  provisions of the Business  Corporation  Law of the State of New York),
(iii) approved the adoption of a Certificate of Amendment to the  Certificate of
Incorporation  of Health  Card  pursuant to which the number of shares of Common
Stock that Health Card is authorized to issue was reduced from  200,000,000 from
25,000,000  and the number of issued and  outstanding  shares of common stock of
Health Card was  reduced by virtue of  .1278447-for-one  reverse  stock split of
Health Card's shares of common stock from 41,554,302 to 5,312,497, (iv)

                                       31

<PAGE>



approved the adoption of new By-Laws, (v) approved the adoption of Health Card's
1999 Stock  Option Plan and (vi)  approved  and  ratified  the making of certain
loans and  guarantees  by Health  Card to and on behalf of  certain  persons  as
described in Item 13 hereof.  The number of affirmative votes and negative votes
with regard to the foregoing was as follows:

     (i)  Election of Directors:

          Nominee                        Vote for Election
          -------                        -----------------

          Bert E. Brodsky                    39,951,253
          Gerald Shapiro                     39,951,253
          Gerald Angowitz                    39,951,253
          Richard J. Strauss                 39,951,253
          Kenneth J. Daley                   39,951,253

     (ii) Approval of Restated Certificate of Incorporation:

          For:   39,951,253            Against:   0               Abstain:  0


     (iii) Approval of Certificate of Amendment to Certificate of Incorporation:

          For:   39,951,253            Against:   0               Abstain:  0

     (iv) Approval of New By-Laws:

          For:   39,951,253            Against:   0               Abstain:  0

     (v)  Approval of 1999 Stock Option Plan:

          For:   39,951,253            Against:   0               Abstain:  0

     (vi) Approval of Loans and Guarantees:

          For:   39,951,253            Against:   0               Abstain:  0


                                       32

<PAGE>



                                     PART II

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

     Upon  completion of Health Card's public offering of shares of common stock
on July 28, 1999 (the  "Public  Offering"),  Health  Card's  common  stock began
trading under the symbol "NMHC" on the Nasdaq National Market. Prior to July 28,
1999, there was no public trading market for Health Card's securities.

Holders

     The Company  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 23, 1999 was 45.

Dividend Policy

     Health  Card has not  declared or paid any cash  dividends  in the past and
does not anticipate doing so in the foreseeable  future.  Health Card intends to
retain any earnings to finance its growth. Any future payments of dividends will
be at the discretion of the Board of Directors and will depend upon such factors
as the Board of Directors deems relevant.  No assurance can be given that Health
Card will pay dividends in the foreseeable future.

Recent Sales of Unregistered Securities

     Health Card sold the following  unregistered  securities  during the fiscal
year ended June 30, 1999:

     On October 30, 1998,  Bert E. Brodsky  purchased  340,919  shares of common
stock of Health Card for $2,000,000  cash. The funds used for this purchase were
borrowed from Marine  Midland  Bank.  The  indebtedness  of $2,000,000 to Marine
Midland Bank was secured by 340,919  shares of common stock of Health Card owned
by Mr.  Brodsky on October  30,  1998.  Health Card also  executed an  unlimited
continuing  Guaranty  Agreement for the  indebtedness  of Mr.  Brodsky to Marine
Midland Bank. In January 1999, Mr. Brodsky paid such promissory note in full. On
April 8, 1999, HSBC (formerly  Marine Midland Bank) advised Health Card that its
unlimited guaranty of Mr. Brodsky's $2,000,000 loan was released.

     The foregoing  transaction was a private transaction not involving a public
offering and was exempt from the  registration  provisions of the Securities Act
of 1933, as amended (the "Act"),  pursuant to Section 4(2) thereof. The sales of
the  shares  of common  stock was  without  the use of an  underwriter,  and the
certificate  evidencing  the shares of common  stock  relating to the  foregoing
transaction bears a restrictive legend permitting the transfer thereof only upon
registration of such

                                       33

<PAGE>



securities or an exemption under the Act.

Item 6. SELECTED FINANCIAL DATA.

     The following tables summarize certain selected  financial  information for
each of the  years in the five  year  period  ended  June 30,  1999 and  provide
certain  supplemental data. The selected  consolidated income statement data for
the years  ended  June 30,  1997,  1998 and 1999 and the  selected  consolidated
balance  sheet  data as of June 30,  1998 and 1999  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 year ended June
30, 1996 and the selected  consolidated  balance  sheet data as of June 30, 1996
have been derived from the audited  consolidated  financial statements of Health
Card which are not included in this Form 10-K. The selected  consolidated income
statement  data for the year ended June 30, 1995 and the  selected  consolidated
balance  sheet  data as of June  30,  1995  have  been  derived  from  unaudited
financial  statements  of Health Card which 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 the notes  thereto,  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" included in Item 7 hereof.

<TABLE>
<CAPTION>
                                                                           Year Ended June 30,
                                         1995           1996              1997           1998             1999
                                    -----------       ----------      -----------      ----------      --------------
                                    (unaudited)
Income Statement Data:
<S>                                 <C>              <C>             <C>             <C>              <C>
Revenues..........................  $45,230,912      $54,308,872     $70,405,168     $98,528,384      $134,031,026
Cost of claims....................   42,316,738       48,843,261      63,293,699      89,770,402       121,536,733
Gross profit......................    2,914,174        5,465,611       7,111,469       8,757,982        12,494,293
Selling, general and
  administrative expenses*........    3,394,577        4,216,259       5,855,282       7,192,027        10,171,314
                                     ----------       ----------      ----------      ----------       -----------
Operating income (loss)...........     (480,403)       1,249,352       1,256,187       1,565,955         2,322,979
Other income (expense)............       17,723           21,530          42,595        (180,507)          592,032
                                     ----------       ----------      ----------      ----------       -----------
Income before income taxes
  (loss)..........................     (462,680)       1,270,882       1,298,782       1,385,448         2,915,011
Provision for income taxes
  (benefit).......................          850         (185,275)       (189,984)        569,000           976,000
                                     ----------       ----------      ----------      ----------       -----------
Net income (loss).................  $  (463,530)     $ 1,456,157     $ 1,488,766     $   816,448      $  1,939,011
                                     ===========      ==========      ==========      ==========       ===========

Earnings (loss) per common share:
    Basic.........................  $     (0.19)     $      0.47     $      0.46     $      0.16      $       0.37
                                     ===========      ==========      ==========      ==========       ===========
    Diluted.......................  $     (0.19)     $      0.35     $      0.37     $      0.16      $       0.37
                                     ===========      ==========      ==========      ==========       ===========

Weighted average number of common
  shares outstanding:
    Basic..........................   2,447,057        3,093,085       3,258,459       4,966,885         5,205,084
    Diluted........................   2,447,057        4,182,909       4,008,481       4,969,166         5,205,084
------------------------
*Includes amounts charged by
  affiliates aggregating........... $ 2,342,352      $ 2,868,974     $ 4,511,144     $ 4,904,514      $  2,816,982
</TABLE>

                                       34

<PAGE>



<TABLE>
<CAPTION>
                                                                                                                         As of
                                                                    As of June 30,                                      June 30,
                                          1995           1996            1997             1998            1999            1999
                                     --------------   -----------     ----------      ----------       ----------     -------------
                                      (unaudited)                                                                     (Pro forma)(1)
Balance Sheet Data:
<S>                                 <C>              <C>             <C>             <C>              <C>               <C>
Cash and cash equivalents.........  $      30,629    $    11,137     $ 1,782,597     $ 1,305,792      $ 2,815,863       $15,698,963
Working capital (deficit).........     (5,760,534)    (7,530,351)     (7,436,095)     (8,658,324)      (6,680,593)        6,202,507
Total assets......................      3,975,483      8,531,507      11,871,820      18,343,900       30,846,011        40,572,833
Long-term debt (including
  current portion)................         25,346        869,437         263,648           9,742            1,950             1,950
Total stockholders' equity
  (deficit).......................     (4,527,246)    (3,663,125)     (2,343,671)     (2,006,282)       1,998,315        11,725,137
</TABLE>

<TABLE>
<CAPTION>
                                                                     As of June 30,
                                           1995          1996             1997            1998             1999
                                       -----------    ----------      -------------    ----------       ----------
Supplemental Data(2):
Retail pharmacy claims
<S>                                     <C>            <C>             <C>             <C>              <C>
  processed.......................      1,463,247      1,675,490       1,990,976       2,405,627        3,066,098
Mail pharmacy processed
  claims..........................         17,889         28,238          62,413         131,611          171,295
Estimated plan participants
  (at period end).................        230,000        271,784         291,446         401,226          521,150
------------
</TABLE>
(1)  Gives retroactive effect to (a) the consummation by Health Card of a public
     offering of its shares of common stock on August 2, 1999  pursuant to which
     it received net proceeds of $10,890,200  and (b) the receipt by Health Card
     of $1,992,900,  in partial  satisfaction of certain debt owed by affiliates
     of Health Card, in connection with a  contemporaneous  public offering by a
     selling  stockholder  of shares of common stock of Health Card. See Items 7
     and 13 hereof.
(2)  This data has not been audited. See Items 1 and 7 hereof.

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

Overview

     Health  Card  derives  its  revenue  from the  provision  of  comprehensive
prescription  benefit  management  services to sponsors of prescription  benefit
plans.  Sponsors  of such plans  managed by Health  Card  include  managed  care
organizations,  local governments,  unions,  corporations and third party health
care plan administrators. Health Card's prescription benefit management services
include electronic  point-of-sale  pharmacy claims  management,  retail pharmacy
network   management,   mail  pharmacy   claims   management,   benefit   design
consultation,  preferred  drug  management  programs,  drug review and analysis,
consulting services,  disease information programs,  data access,  reporting and
analysis  and  physician  profiling.  As of  June  30,  1999,  Health  Card  had
approximately  521,000 plan participants and a pharmacy network of approximately
44,000

                                       35

<PAGE>



participating pharmacies.

     Significant revenues currently include:

          o    administrative   fees  (which  may  be  per  claim  or  per  plan
               participant per month), and
          o    charges  relating  to  pharmaceuticals  dispensed  by  pharmacies
               participating in Health Card's pharmacy  network,  including mail
               service pharmacies.

     Revenue from each sponsor is comprised of one or a  combination  of both of
the components identified above. Health Card prices services in some combination
of these revenue sources, taking into consideration the cost of claims which can
vary  according  to Health  Card's  arrangements,  including  those  relating to
rebates,  with each sponsor.  The  balancing of these  components of revenue and
cost of claims is part of the contract  negotiation  and/or quote process -- for
some sponsors the process is through a negotiation  as the contract is finalized
and for others the process is a bid in response to a request for proposal.

     Revenue is earned when Health Card provides services.  Substantially all of
the  services  that Health  Card  provides  to its  sponsors  are related to the
adjudication of the drug claims at the point of service.  At this time, the plan
participant is checked for eligibility of coverage, the prescription is compared
to the plan  parameters  established  with 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. Accordingly,  Health Card recognizes administrative fees at
the time of claims adjudication.

     Revenue is earned and recognized as follows: Administrative fees are either
per  claim  charges  of an  amount  agreed  upon  with the  sponsor  or per plan
participant  per month charges agreed upon with the sponsor.  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  following  table sets forth the  breakdown  of Health  Card's  charges
relating to pharmaceuticals dispensed and administrative fees.

                                                Years Ended June 30,
                                       1997             1998           1999
                                       ----             ----           ----
Charges relating to
  pharmaceuticals..............     $69,551,998     $97,558,390   $132,889,359
Administrative fees...........          853,170         969,994      1,141,667
                                     ----------      ----------    -----------
     Total Revenues.............    $70,405,168     $98,528,384   $134,031,026
                                     ==========      ==========    ===========

     Health  Card  does  not  take   possession   or  legal   ownership  of  the
pharmaceutical  drugs  dispensed by the pharmacy  network,  although Health Card
assumes the legal responsibility and

                                       36

<PAGE>



financial  risk of paying for  dispensed  pharmaceuticals  whether or not Health
Card is paid by its sponsors.

     Health  Card  utilizes a  comprehensive  prescription  benefit  database to
perform outcome studies and to develop  disease  information  programs which are
used to reduce overall healthcare costs. These programs do not currently produce
significant  revenue.   Because  Health  Card  believes  that  information-based
services are becoming a more  important  component of managed care,  Health Card
believes that its disease information programs will provide an increasing source
of revenue in the future.

     Three sponsors,  Vytra, Suffolk County and Operating  Engineers,  accounted
for  approximately  63% of revenues  during the year ended June 30, 1999.  As of
June 30, 1999, Vytra,  Suffolk County and Operating  Engineers  accounted for an
aggregate  of 44% of Health  Card's plan  participants.  Effective  May 1, 1999,
Health Card added two new sponsors, representing approximately 90,000 additional
plan  participants,  an increase in the aggregate number of plan participants of
more than 20%. The successful  implementation  of Health Card's  acquisition and
growth  strategy  would  likely  further  reduce  Health  Card's  level  of plan
participant concentration. However, no assurances can be made that such strategy
will be successful or such results achieved.

     Health  Card's  arrangements  with  Vytra,  Suffolk  County  and  Operating
Engineers are either oral,  short-term,  terminable by the sponsor or subject to
continuing negotiation. For example, Health Card is currently negotiating a more
formal  agreement  with  Vytra,  which will be subject to review by the New York
Department of Health. Failure to gain DOH approval could lead to the significant
revision  of its  arrangements  with  Vytra or the loss of all or a  portion  of
Vytra's business. If Health Card were to lose Vytra, Suffolk County or Operating
Engineers  as a sponsor,  or lose a  significant  portion of any such  sponsor's
business or if the terms of these  arrangements  were to  adversely  change,  it
would have a material  adverse  effect on its  business,  operating  results and
financial  condition.  As discussed above, Health Card believes that its sponsor
base is growing and  diversifying  and expects the  percentage  of total revenue
contributed  by its  largest  current  customers  to  continue to decline in the
future.

     Under one of Health Card's  arrangements  with Vytra, the written agreement
sets forth a formula which determines  Health Card's  financial  commitment with
respect to the price of covered  drugs.  Health Card has verbally  advised Vytra
that it has been  paying less than the amounts  called for by such  formula.  In
management's  opinion,  the formula  reflected in the agreement  determines  the
maximum  prices payable to  pharmacies,  although this is not expressly  stated.
Management  believes  that it would  not be  reasonable  to  conclude  that such
formula determines  minimum prices payable to pharmacies,  because neither Vytra
nor  Health  Card  would  reasonably   mandate  minimum  prices  in  a  business
relationship  intended to reduce sponsor cost. Based upon this  assumption,  and
the fact that Health Card verbally  advised Vytra of this practice over one year
ago and Vytra has not objected,  Health Card believes that the risk of refunding
any amounts to Vytra is remote. Although Vytra has not objected to Health Card's
paying less, Health Card cannot assure that Vytra will not object in the future,
nor can Health Card assure that its objection will not result in its losing the

                                       37

<PAGE>



relationship with Vytra under this arrangement, or all of its business.

     Cost of claims includes:

          o    the amounts paid to network  pharmacies,  including  mail service
               pharmacies, for pharmaceutical claims; and
          o    reductions resulting from rebates from drug manufacturers.

     Rebates  accounted for reductions of cost of claims of 1.4%,  1.6% and 2.1%
for the years ended June 30, 1997, 1998 and 1999, respectively,  but contributed
approximately  12%,  17% and 20% of total gross  profit for the years ended June
30, 1997, 1998 and 1999, respectively.  Rebates accounted for approximately 68%,
105% and 87% of income before taxes for the years ended June 30, 1997,  1998 and
1999,  respectively.  Due to the  expected  growth  and  diversification  of the
business mentioned above,  Health Card also expects rebates,  as a percentage of
cost of claims, to increase and continue to account for a significant percentage
of total gross profit and income before taxes. Certain of Health Card's sponsors
are  entitled  to all or a portion of rebates  received  by Health  Card,  which
portion varies by sponsor.  For example,  until recently,  Vytra received all of
the  rebates  received  by  Health  Card in  connection  with  the  Prescription
Arrangement.  Health Card currently  retains a portion of such rebates.  If such
rebate  programs  were  to  be   discontinued  or  adversely   altered  by  drug
manufacturers, or if the terms of Health Card's rebate sharing arrangements with
its sponsors were adversely altered,  it would have a material adverse effect on
Health Card's business, operating results and financial condition. Health Card's
rebate  administrator was recently acquired by one of its competitors and Health
Card  is not  sure  what  effect,  if any,  such  acquisition  will  have on its
business.

     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  retains net of amounts due to the  sponsors and a 10%
fee retained by Integrated  as an  administrative  fee.  Rebates are earned from
drug  manufacturers  based on drugs utilized by plan participants at the time of
dispensing.  Health Card's estimated  portion of these rebates,  which varies by
sponsor, is recorded monthly based upon the claims adjudicated in that month and
Health Card's historical  experience as to its rebate per claim for the previous
quarter.

     Health Card estimates rebates because it has contracted with a third party,
Integrated, as a rebate administrator, which enters into contracts directly with
the  pharmaceutical  manufacturers  in connection with its  arrangements  with a
number of pharmacy benefit managers,  HMOs and other plan sponsors.  Pursuant to
Health Card's agreement with Integrated, Health Card has entered into agreements
which obligate it to the terms of Integrated's  agreements  with  pharmaceutical
manufacturers.  Health  Card does not  participate  in the  negotiation  of such
agreements;  therefore,  Health  Card cannot  control the level of market  share
minimums  required and the amounts of rebates  provided for in future  contracts
between Integrated and drug manufacturers.


                                       38

<PAGE>



     Because  Integrated  may  combine  rebate  claims  for drugs used by Health
Card's sponsor's plan participants  with the claims of others,  and the level of
rebates in some of the agreements with the drug  manufacturers is computed based
on achieving market share minimums  calculated on a quarterly basis, Health Card
does not have the  information to calculate  precisely the amount of rebates due
at the time quarterly or annual financial statements are prepared.  Market share
is generally defined as the percentage of utilization of a certain drug or drugs
within its  therapeutic  class.  Historically,  this market  share has been very
predictable and consistent with the prior quarter.

     Health Card has been advised by its rebate  administrator  that none of the
rebate  administrator's  contracts  with  pharmaceutical  companies  contain any
contingencies based on annual performance. Based upon the foregoing,  management
of Health Card believes that there are no known contingencies  arising under the
agreement with Integrated that could result in a material  forfeiture of revenue
previously recognized.

     There may be a  difference  between  the  estimated  rebate  amount and the
ultimate  amount  paid  because  Health  Card is not basing  its  accrual on the
individual contracts with pharmaceutical manufacturers, but rather on the number
of claims  processed each period and Health Card's  historical  experience as to
Health Card's  rebate per claim for the previous  quarter.  Historically,  there
have  been  slight  differences  between  the  amount  accrued  and  the  amount
ultimately  paid.  The  amount  that  Integrated   estimates  is  based  on  its
calculations  and  submissions  to the  pharmaceutical  manufacturers,  but  the
ultimate  collections  by it may also  vary  slightly,  when it  receives  final
payment  from the  pharmaceutical  manufacturers,  based on further  analysis or
differing national market share data, which is not calculated by Health Card.

     Due to changing market conditions and competition,  it is possible that the
percentage of rebates retained by Health Card based on its arrangements with the
sponsors  may  change  when  these  arrangements  expire  and  may be  lower  in
arrangements  with new  sponsors.  Any such change in the  percentage of rebates
retained  and  recorded as a reduction  of cost of claims  could have a material
adverse  effect on Health  Card's  business,  operating  results  and  financial
condition.

     Under the contract, Integrated remits to Health Card 80% of its estimate of
the  total  amount  to be  collected  120  days  after  the end of the  quarter.
Management believes it is common industry practice for rebate administrators not
to advance funds until collected from the  pharmaceutical  manufacturers,  which
can take significantly longer than 120 days.  Integrated's  estimate is compared
and  reconciled to the  Company's  estimate.  Historically  this has resulted in
immaterial  increases to the amount of rebates recognized.  The remaining 20% is
collected over the next few quarters,  and remitted to Health Card by Integrated
as it collects funds from the manufacturers.

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


                                       39

<PAGE>



     The  prescription  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 prescription benefit management  services.  Given the pressure on all
parties  to reduce  healthcare  costs,  Health  Card  expects  this  competitive
environment to continue for the foreseeable future.

     Health  Card  plans to  continue  its  internal  growth  through  increased
marketing  of its  services  and by  expanding  the range of  services  offered,
particularly to include value added  consulting and  information-based  services
which  Health  Card  believes  to be in growing  demand  within  the  healthcare
industry.  In  addition,  Health  Card  intends  to use a large  portion  of the
proceeds of the public  offering  described  below to  supplement  its  internal
growth by making  acquisitions of other prescription  benefit management service
providers. Health Card expects such acquisitions, if any, to result in increased
revenue and rebates in future periods.

Public Offering

     On August 2, 1999,  Health Card  completed the sale of 1,600,000  shares of
its common stock in an  underwritten  public  offering (the "Public  Offering").
Pursuant  to  the  Public  Offering,   Health  Card  received  net  proceeds  of
approximately  $10,890,200.  Concurrently,  the Bert E. Brodsky  Revocable Trust
(the "Brodsky  Trust") sold 400,000  shares of common stock of Health Card in an
underwritten  offering.  Of the proceeds  received by the Brodsky Trust, it used
approximately  $1,992,900 to repay to Health Card, in part, certain indebtedness
owed by certain  affiliates  of the Brodsky  Trust to Health  Card.  See Item 13
hereof.

Results of Operations

Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998

     Revenues increased $35.5 million,  or approximately 36%, from $98.5 million
for the fiscal  year ended June 30,  1998 to $134  million  for the fiscal  year
ended  June 30,  1999.  The  increase  resulted  primarily  from a $6.8  million
increase  in fees  related to the  increase  in the number of plan  participants
under an  arrangement  with one of Health  Card's  major  sponsors  and includes
approximately $500,000 in additional revenue recorded in September 1998 when the
amount of the adjustment became determinable,  upon Health Card receiving verbal
acceptance of the calculation  under the provisions of the arrangement to adjust
for the  increased  cost of drugs  primarily  related to the prior year.  Claims
under the plan of  another  major  sponsor  increased  by 190,190  claims  which
resulted in an increase in revenues of approximately $8.3 million. The remaining
increase of  approximately  $20.4  million was due  primarily to other  existing
sponsors as a result of higher charges relating to  pharmaceuticals,  new drugs,
plan participant growth and an increase in the average number of claims per plan
participant.  New  business,  as  a  percentage  of  revenue  growth,  increased
throughout  the fiscal year ended June 30, 1999.  Health Card  anticipates  that
revenue  increases  which may occur in the future will more likely be due to the
addition  of new  sponsors  as  opposed to  increased  utilization  by  existing
sponsors.



                                       40

<PAGE>



     Cost of claims increased $31.8 million,  or  approximately  35%, from $89.8
million for the fiscal year ended June 30, 1998 to $121.5 million for the fiscal
year ended June 30, 1999. As a percentage of revenues,  cost of claims  remained
unchanged at approximately 91%.

     Gross profit increased $3.7 million,  from $8.8 million for the fiscal year
ended June 30, 1998 to $12.5  million  for the fiscal year ended June 30,  1999,
primarily as a result of the increase in revenues, offset by the increase in the
cost of claims.

     Selling, general and administrative expenses, which include amounts charged
by affiliates, increased $3 million, or approximately 42%, from $7.2 million for
the fiscal year ended June 30,  1998 to $10.2  million for the fiscal year ended
June 30, 1999.  The  increase  resulted  primarily  from an increase of $550,000
representing  additional  reserves  against  certain  receivables.  Health  Card
evaluated its accounts  receivable as of June 30, 1999 taking into consideration
the  expiration  of  certain  contracts  during  the  period  and the  status of
negotiations to renew those contracts. As consideration for the renewal of these
contracts,  Health Card  determined  that it would be necessary to negotiate the
receivable  balance  due from these  contracts  and that Health Card most likely
would not be able to collect the full amount. As a result, Health Card estimated
and  recorded a reserve  for the amount  that may not be  collectible.  In prior
periods,  due to the status of these contracts,  these additional  reserves were
not  required  based upon Health  Card's  analysis.  The  remaining  increase in
selling,  general  and  administrative  expenses  resulted  from an  increase of
$37,500   in   the   bad   debt   reserve,   a   $170,000   bonus   to   certain
officers/stockholders, a $360,000 compensation accrual to an officer/stockholder
and a $1.9 million increase in compensation,  benefits,  sales and marketing and
other expenses related to the expansion of Health Card's business.

     General and  administrative  expenses charged by affiliates  decreased $2.1
million,  or approximately 43%, from $4.9 million for the fiscal year ended June
30, 1998 to $2.8 million for the fiscal year ended June 30,  1999.  The decrease
resulted  primarily  from a decrease  of $2.1  million  due to  compensation  of
employees hired by Health Card who were previously engaged through an affiliated
service  vendor and a decrease of $905,000 for software  maintenance,  offset by
increases of $340,000 for equipment rental, $200,000 for data processing related
charges and $362,000 for other operating expenses.

     Other  income  increased  $773,000  from a net expense of $181,000  for the
fiscal year ended June 30, 1998 to income of $592,000  for the fiscal year ended
June 30, 1999, due to a $382,000 increase in interest accrued on a loan due from
an affiliate, a $29,000 increase in interest earned on short term investments of
excess cash balances and a $362,000 decrease in public offering costs.

     The  provision  for income taxes  increased  $407,000 from $569,000 for the
fiscal year ended June 30,  1998 to $976,000  for the fiscal year ended June 30,
1999,  as a result  of  increased  taxable  income  after  utilization  of a net
operating loss carryforward in the amount of approximately $595,000.



                                       41

<PAGE>



Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997

     Revenues increased $28.1 million,  or approximately 40%, from $70.4 million
in fiscal 1997 to $98.5 million in fiscal 1998. The increase resulted  primarily
from a $9.6  million  increase in fees  related to the increase in the number of
plan participants under an arrangement with one of Health Card's major sponsors.
Claims  under the plan of another  sponsor  increased  by 217,040  claims  which
resulted in an increase in revenues of approximately $8.1 million. The remaining
increase of  approximately  $10.4  million was due  primarily to other  existing
sponsors as a result of higher charges relating to  pharmaceuticals,  new drugs,
plan participant growth and an increase in the average number of claims per plan
participant.

     Cost of claims increased $26.5 million,  or  approximately  42%, from $63.3
million in fiscal  1997 to $89.8  million in fiscal  1998.  As a  percentage  of
revenues,  cost of claims  increased  from  approximately  90% in fiscal 1997 to
approximately 91% in 1998, due primarily to a higher number of claims processed,
at a reduced billing rate,  under an arrangement with one of Health Card's major
sponsors.

     Gross profit  increased $1.7 million,  from $7.1 million for fiscal 1997 to
$8.8 million for fiscal 1998, as a result of the increase in revenues, offset by
the increase in the cost of claims.

     Selling, general and administrative expenses, which include amounts charged
by affiliates,  increased $1.3 million,  or approximately 22%, from $5.9 million
in fiscal 1997 to $7.2 million in fiscal 1998. The increase  resulted  primarily
from $881,000 of additional  compensation and benefits for personnel required to
process  additional  claims  and to expand  Health  Card's  sales and  marketing
efforts.  In  addition,   $321,000  of  the  increase  resulted  from  increased
administrative,  marketing and consulting fees incurred with related parties and
$90,000 of marketing and consulting  costs that were incurred with a third-party
consultant.  As a percentage of revenues,  selling,  general and  administrative
expenses decreased from 8.3% in fiscal 1997 to 7.3% in fiscal 1998.

     General  and  administrative   expenses  charged  by  affiliates  increased
$400,000,  or approximately 9%, from $4.5 million in fiscal 1997 to $4.9 million
in fiscal 1998. The increase resulted primarily from an increase of $484,000 for
salaries,  $78,000 for consulting and $97,000 for miscellaneous expenses, offset
by decreases of $259,000 for software maintenance.

     Other income decreased  approximately  $224,000,  from income of $43,000 in
fiscal  1997 to a net expense of  $181,000  in fiscal  1998,  due to $445,000 of
public  offering  expenses.  This was offset by a $114,000  increase in interest
accrued on stockholder  loans, a $30,000  increase in interest accrued on a loan
due from an affiliate  and a $77,000  increase in interest  earned on short term
investments of excess cash balances.

     The  provision  for  income  taxes  increased  $759,000,  from a benefit of
$190,000 in fiscal 1997 to an expense of $569,000 in fiscal 1998, as a result of
the  increase in taxable  income and a decrease in the  deferred  tax  valuation
allowance in the 1997 period.

                                       42

<PAGE>



Liquidity and Capital Resources

     As of June 30, 1998 and 1999, Health Card had a working capital  deficiency
of $8.7 million and $6.7 million, respectively.

     Net cash provided by operating  activities was approximately  $3.5 million,
$922,000 and $1.5  million for the fiscal  years ended June 30,  1997,  1998 and
1999,  respectively.   During  fiscal  1998,  net  cash  provided  by  operating
activities  resulted  primarily  from net income  and an  increase  in  accounts
payable,   offset  by  an  increase  in  accounts  receivable  and  due  to/from
affiliates.  The increases in accounts  receivable and accounts payable were due
to an increase in the volume of business.  For fiscal 1999, net cash provided by
operating  activities  resulted  primarily  from net income and an  increase  in
accounts  payable  and  accrued  expenses,  offset by an  increase  in  accounts
receivable.  Health Card evaluated its accounts  receivable as of June 30, 1999,
taking into  consideration the expiration of certain contracts during the period
and the status of negotiations to renew those contracts.  As  consideration  for
the  renewal  of  these  contracts,  Health  Card  determined  that it  would be
necessary to negotiate the receivable  balance due from these contracts and that
Health  Card most  likely  would not be able to collect  the full  amount.  As a
result,  Health Card estimated and recorded a reserve of $550,000 for the amount
that  may not be  collectible.  In prior  periods,  due to the  status  of these
contracts,  these additional reserves were not required based upon Health Card's
analysis.

     Historically,  the timing of Health Card'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 Health Card's pharmacy network on the other hand. These terms generally lead
to Health  Card's  payments to  participating  pharmacies  being slower than its
corresponding  collections  from plan  sponsors.  Health Card believes that this
situation is not unusual in the  prescription  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,  Health Card could require additional financing.
There can be no assurance that such  financing  could be obtained at rates or on
terms acceptable to Health Card, if at all.

     Net cash used in investing  activities amounted to approximately  $477,000,
$416,000 and $1.7  million for the fiscal  years ended June 30,  1997,  1998 and
1999,  respectively.   These  uses  of  cash  resulted  primarily  from  capital
expenditures, and advances and payments of amounts due to/from stockholders.

     Net  cash  (used  in)   provided  by  financing   activities   amounted  to
approximately  ($1.2 million),  ($983,000) and $1.7 million for the fiscal years
ended June 30, 1997,  1998 and 1999,  respectively.  These uses of cash resulted
primarily  from capital  distributions  and repayment of debt. The cash provided
for financing  activities for fiscal 1999 resulted primarily from 340,919 shares
of common stock purchased for $2 million by the principal stockholder.


                                       43

<PAGE>



     In  February   1998,   Health  Card  entered  into  an  agreement  with  an
unaffiliated  third  party  for  computer  software  products  and  professional
services.  The agreement  required  Health Card to pay an initial license fee of
$400,000, of which $100,000 was paid upon execution of the agreement and $25,000
paid monthly  through March 1999. In addition,  if certain  milestones  are met,
based on the number of processed  claims,  as defined,  the initial  license fee
increases  incrementally  by up to an  additional  $500,000 over the term of the
license. A milestone has been met which has increased the initial license fee by
$150,000 due to increased  annualized volume of claims processed.  The agreement
also  provides  for the monthly  payment of a fee for  maintenance  and updating
services aggregating annually to 18% of the initial license fee, as defined.

     The  registration  statement  for  Health  Card's  Public  Offering  became
effective on July 28, 1999 and Health Card  consummated  the Public  Offering on
August 2, 1999.  Health Card received net proceeds of  $12,883,100 in connection
with the Public Offering  (inclusive of $1,992,900,  in partial  satisfaction of
indebtedness  owed by affiliates of Health Card,  from net proceeds  received by
the Brodsky Trust). See Item 13 hereof.

     Health Card  anticipates  that the net proceeds of the Public  Offering and
the  repayment  of  certain  affiliate  and  shareholder  debt,   together  with
anticipated  cash flow from  operations,  will be sufficient  to satisfy  Health
Card's  contemplated  cash requirements for at least 24 months following the end
of fiscal 1999.  This is based upon current levels of capital  expenditures  and
anticipated operating results for the next 24 months.  Alternatively,  revolving
credit lines and debt  financing are being  evaluated as backups to  anticipated
cash  needs.  Additionally,  effective  June  1,  1998,  Health  Card  hired  11
programmers,  at lower  costs  than  previously  charged by an  affiliate  which
provided software  development  consulting  services to Health Card. The primary
difference in cost  resulting from hiring the  programmers is an  administrative
fee of  approximately  7%  which  had been  charged  by the  affiliate  based on
compensation and related costs.  Health Card believes this will further increase
cash flow. In the event that Health Card's plans change or its assumptions prove
to be inaccurate or the proceeds of the Public  Offering  otherwise  prove to be
insufficient to fund operations and implement  Health Card's proposed  expansion
strategy, Health Card could be required to seek additional financing sooner than
anticipated.

Other Matters

Inflation

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

Year 2000 Readiness

     The Year 2000  problem is the result of  computer  programs  being  written
using two digits, rather than four, to define the applicable year. Programs that
have  time-sensitive  software may  recognize a date using "00" as the Year 1900
rather  than the Year 2000,  which  could  result in  miscalculations  or system
failures. Health Card implemented a Year 2000 compliance review

                                       44

<PAGE>



designed  to  ensure  that  its  computer  systems,  applications  and  embedded
operating  systems will function  properly beyond 1999.  This compliance  review
involved  assessing  the  risks  of  the  Year  2000  issue,  and  planning  and
instituting  mitigation actions to minimize those risks.  Health Card's standard
for compliance  requires that, for a computer  system or business  process to be
Year 2000  compliant,  it must be designed to operate  without error in date and
date-related  data prior to, on and after January 1, 2000.  Health Card believes
that  all of its  "mission  critical"  systems  have  been  identified,  and has
completed compliance testing.

     Health Card has participated with the National Health  Information  Network
in the NHIN Y2K  Processor  Testing  Program  which is designed to test the Year
2000 compliance of pharmacy software.  Chain pharmacy and member information was
submitted  to  NHIN  and  NHIN  submitted  claim  data  to  test  Health  Card's
compliance.  NHIN acted as a pharmacy and  transmitted  claims to NDC,  which is
Health  Card's switch  vendor.  Health Card set its clocks and dates to simulate
the Year 2000 and leap year  within  the Year  2000.  Health  Card has  received
certification in all appropriate submission and reconciliation formats.

Information Technology Systems

     Health Card recently  completed a  comprehensive  review of its information
technology  systems and has updated its information  systems and applications in
preparation for the Year 2000. Health Card has incurred,  and may be expected to
continue to incur,  internal staff costs as well as outside consulting and other
expenditures related to this initiative. Historical and anticipated expenditures
related to remediation,  testing,  conversion,  replacement and upgrading system
applications  in  connection  with the Year 2000  problem are  expected to total
approximately $100,000. Total expenses,  including depreciation and amortization
of new package  systems,  are not  expected to have a material  impact on Health
Card's financial  condition during the conversion  process.  Year 2000 costs are
expensed as incurred.

Non-IT Technology

     An  inventory  and  assessment  of  all  non-IT  systems  (including  items
containing embedded chips, such as elevators, electronic door locks, telephones)
has been completed.  The great majority of these non-IT systems are not believed
to be potential  sources of  significant  disruption,  although the  contingency
plans  (described  below) will  address  non-IT Year 2000  failure as well as IT
systems  failure.  Health Card's  telephone system was determined to be the only
non-IT system not Year 2000 compliant.  A new system was purchased and installed
and certified to be Year 2000 compliant by the vendor.

     Health Card's management has developed a "worst-case scenario" with respect
to Year 2000  non-compliance  and  contingency  plans  designed to minimize  the
effects of such scenario.  The contingency  plans involve analysis of the use of
alternative,  non-IT methods of processing claims,  including manual processing,
in the event of IT system  failure  on the part of outside  parties.  The manual
processing of claims would also be assisted,  in a worst case  scenario,  by the
use of paper

                                       45

<PAGE>



claim forms rather than the computer formats  currently being used. As to claims
management, the worst case scenario would require that another switching company
be used  to  process  claims.  This  option  has  already  been  researched  and
contingency plans formulated.  Switching companies electronically route pharmacy
claims to the appropriate  prescription benefit management company.  Health Card
is  currently  testing  its  switching  network.  One  major  vendor  of  claims
management  services  with which Health Card does  business,  PHI, has certified
that software  licensed from it is Year 2000 compliant.  All client formats have
been  reviewed  and have been  found to be either  Year 2000  compliant  or very
nearly so.  There has also been  communication  between  vendors and Health Card
with respect to the exchange of billing tape formats, in an effort to be certain
that Health Card's formats are acceptable to the vendors, and vice versa.

     Health Card is attempting  to contact  vendors and others on whom it relies
to assure that their  systems will be converted  in a timely  fashion.  However,
there can be no  assurance  that the systems of other  companies on which Health
Card's systems rely will also be converted in a timely fashion, so that any such
failure to convert by another company would not have an adverse effect on Health
Card's information systems.  Furthermore,  no assurance can be given that any or
all of Health Card's information systems are or will be Year 2000 compliant,  or
that the  ultimate  costs  required to address Year 2000 issues or the impact of
any failure to achieve substantial Year 2000 compliance will not have a material
adverse  effect on Health  Card's  business,  operating  results  and  financial
condition.

     There is still  uncertainty  about the broader scope of the Year 2000 issue
as it may  affect  Health  Card  and  third  parties  that are  critical  to its
operations.  For example,  lack of readiness by electrical and water  utilities,
financial  institutions,  governmental  agencies or other  providers  of general
infrastructure  could pose  significant  impediments to Health Card's ability to
carry on its  normal  operations.  In the event  that  Health  Card is unable to
complete its remedial  actions and is unable to implement  adequate  contingency
plans in the event that  problems  are  encountered,  there  could be a material
adverse effect on its business, operating results and financial condition.

Recent Pronouncements

     In June 1997,  the  Financial  Accounting  Standards  Board  issued two new
disclosure standards.

     Statement  of  Financial  Accounting  Standards  No. 130 ("SFAS No.  130"),
Reporting Comprehensive Income,  establishes standards for reporting and display
of comprehensive income, its components and accumulated balances.  Comprehensive
income is defined to include all changes in equity except those  resulting  from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements.

     Statement  of  Financial  Accounting  Standards  No. 131 ("SFAS No.  131"),
Disclosures  about  Segments of an  Enterprise  and Related  Information,  which
supersedes SFAS No. 14, Financial

                                       46

<PAGE>



Reporting for Segments of a Business Enterprise,  establishes  standards for the
way that public  enterprises  report  information  about  operating  segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes   standards  for  disclosures   regarding   products  and  services,
geographic areas, and major customers.  SFAS No. 131 defines operating  segments
as components of an enterprise  about which  separate  financial  information is
available that is evaluated  regularly by the chief operating  decision maker in
deciding how to allocate resources and in assessing performance.

     Both of these new standards are  effective  for  financial  statements  for
years beginning after December 15, 1997 and require comparative  information for
earlier  years to be restated.  Health  Card's  financial  position,  results of
operations and disclosures  were unaffected by the  implementation  of these new
standards.

     In February 1998, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No.  132  ("SFAS  No.  132"),   Employers'
Disclosure about Pensions and Other Postretirement  Benefits, which standardized
the disclosure requirements for pensions and other postretirement  benefits. The
adoption of SFAS No. 132 in 1998 is not  expected to  materially  impact  Health
Card's current disclosures.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Investments
and Hedging  Activities Income ("SFAS No. 133"), which requires the recording of
all  derivative  instruments  as assets or  liabilities  measured at fair value.
Among  other  disclosures,  SFAS  No.  133  requires  that  all  derivatives  be
recognized  and  measured at fair value  regardless  of the purpose or intent of
holding the derivative.

     SFAS No. 133 is effective  for  financial  statements  for years  beginning
after June 15,  1999.  Health Card has no  derivative  investments  and does not
participate in hedging activities; therefore, its financial position, results of
operations and disclosures will be unaffected by the adoption of this standard.

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

     Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The  audited  financial  statements  of Health Card as of June 30, 1999 and
1998 and for the years ended June 30,  1999,  1998 and 1997 are included in this
Form 10-K following Item 14 hereof.

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

     None.

                                       47

<PAGE>



                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Executive Officers and Directors

     Certain  information  concerning  the  executive  officers and Directors of
Health Card is set forth below:

                       Name             Age            Positions Held

Bert E. Brodsky.....................    56       Chairman of the Board and Chief
                                                 Executive Officer
Gerald Shapiro......................    69       Vice Chairman of the Board and
                                                 Secretary
Marjorie G. O'Malley................    49       President and Chief Operating
                                                 Officer
Linda Portney.......................    54       Executive Vice President of
                                                 Operations
Mary Casale.........................    60       Executive Vice President of
                                                 Sales and Marketing
Barry Denaro........................    43       Treasurer and Chief Financial
                                                 Officer
Kenneth J. Daley....................    61       Director
Richard J. Strauss, M.D., F.A.C.S...    53       Director
Gerald Angowitz.....................    49       Director

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

                                       48

<PAGE>




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

     Marjorie G. O'Malley has served as President and Chief Operating Officer of
Health  Card  since  December  7, 1998.  From July 1995 to  December  1998,  Ms.
O'Malley was the  Principal of Strategic  Healthcare  Consultants,  a consulting
firm to various  health care  companies,  pharmacy  benefit  managers,  pharmacy
chains and  pharmaceutical  companies.  Ms.  O'Malley  served as a consultant to
Health Card from July 1995 to July 1998. From 1980 until July 1995, Ms. O'Malley
was employed by CIGNA Corporation in a variety of positions. Ms. O'Malley formed
and  served as  President  of  RxPrime,  CIGNA  Corporation's  pharmacy  benefit
management business,  from 1993 until July 1995. From 1990 to 1993, Ms. O'Malley
was Vice  President,  Finance  and  Planning  for CIGNA  HealthCare,  one of the
largest health care  management  organizations  in the United  States.  Prior to
joining CIGNA  Corporation,  Ms.  O'Malley  served as Senior Vice  President and
Treasurer of Old Stone Bank and Old Stone Corporation, a bank holding company.

     Linda  Portney has served as  Executive  Vice  President of  Operations  of
Health  Card since June 1998.  Ms.  Portney  served as a Director of Health Card
from 1982 until May 1999,  and as  Secretary  of Health  Card from June 26, 1998
until October 28, 1998.  From 1995 until  December  1998,  Ms. Portney served as
President of Health Card,  and as Vice  President  and  Secretary of Health Card
from 1983 to 1995. Ms. Portney has been employed by Health Card since 1981.

     Mary Casale has served as Executive  Vice  President of Sales and Marketing
of Health Card since June 1, 1998. She served as a Vice President of Health Card
from March 1996 to June 1, 1998. Ms. Casale  previously served as Vice President
of Managed  Care Sales and Union  Related  Accounts at ValueRx,  a  prescription
benefit management company,  from March 1995 to February 1996, Vice President of
Sales for the  Eastern  Region  at  Diagnostek,  Inc.,  a  prescription  benefit
management company that was acquired by ValueRx, from August 1994 to March 1995,
National  Vice  President  of Customer  Development  for Sales and  Marketing at
Diagnostek  from  January  1994 to  August  1994 and a  consultant  for  special
accounts for Sales and Marketing at Diagnostek from 1989 to 1993.

     Barry  Denaro has served as Chief  Financial  Officer for Health Card since
June 1997 and as  Treasurer  for Health Card since  February  1998.  Mr.  Denaro
served as Controller of NDA Clinical

                                       49

<PAGE>



Trial  Services Inc., a provider of laboratory  testing and data  collection for
clinical  drug  trials,  from April  1996  through  November  1996 and served as
Controller of North Shore Agency, a collection agency, from October 1993 through
July 1995. Mr. Denaro is an attorney  licensed to practice in New York State and
a certified public accountant.

     Kenneth  J. Daley has  served as a  Director  of Health  Card since May 10,
1999.  For more than the five years prior to January  1999,  Mr. Daley served as
Senior Vice President of Chase Manhattan Bank.

     Richard J. Strauss,  M.D., F.A.C.S. has served as a Director of Health Card
since June 26, 1998.  Since 1979, Dr. Strauss has owned and operated the medical
practice of Richard J.  Strauss,  M.D.,  P.C. Dr.  Strauss also has served as an
Associate  Clinical  Professor of Surgery at Albert Einstein College of Medicine
since 1990, and as an Instructor of Clinical  Surgery at Cornell  Medical Center
since 1978.

     Gerald  Angowitz  has  served as a Director  of Health  Card since June 26,
1998. Mr.  Angowitz has served as Senior Vice  President of Human  Resources and
Administration for RJR Nabisco, Inc. ("RJR"), a consumer products  manufacturer,
since March 1995.  Mr.  Angowitz  previously  served as Vice  President of Human
Resources  for RJR from  February  1994 to March  1995  and  Vice  President  of
employee benefits at RJR from January 1992 to February 1994. Mr. Angowitz is the
brother-in-  law  of  Hugh  Freund,  a  Vice  President,   Secretary,  principal
stockholder and Director of Sandata.

     Each of Health  Card's  Directors  is elected  for a period of one year and
serves until his successor is duly elected and qualified.  During the last three
fiscal years,  no  Directors'  fees were paid.  Each of the  executive  officers
serves at the pleasure of Health Card's Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

     During  the  fiscal  year  ended  June  30,  1999,  none of  Health  Card's
securities were registered pursuant to Section 12 of the Securities Exchange Act
of 1934,  as amended.  Accordingly,  no reports as to  beneficial  ownership  of
Health Card's  securities were required during such fiscal year by Health Card's
officers, Directors or 10% stockholders.

Item 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

     The  following  table sets forth  certain  information  with respect to the
compensation  paid or awarded by Health Card to the Chief Executive  Officer and
other executive officers, as well as a certain other officer (collectively,  the
"Named  Executive  Officers"),  whose salary and bonus exceeded  $100,000 in all
capacities for the fiscal year ended June 30, 1999:



                                       50

<PAGE>

<TABLE>
<CAPTION>
                                                           Annual  Compensation                 Long-Term Compensation
                                                                                                        Awards
                                                                                                ----------------------
                                                                               Other Annual           Securities
Name and Principal Position                 Year        Salary       Bonus     Compensation       Underlying Options
---------------------------                 ----        ------       -----     ------------     ----------------------

Bert E. Brodsky, Chairman of the
<S>                                          <C>    <C>           <C>           <C>                       <C>
 Board and Chief Executive Officer........   1999   $403,867(1)   $487,500(2)   $90,717(3)                --
                                             1998   $751,096(1)   $ 30,000(2)   $47,377(3)                --
                                             1997   $474,000(1)       --        $13,714(3)                --

Linda Portney, Executive Vice
 President of Operations .................   1999   $125,000          --        $20,027(4)                --
                                             1998   $125,000          --        $19,514(4)                --
                                             1997   $125,000      $ 50,000      $13,828(4)                --

Mary Casale, Executive Vice
  President of Sales and Marketing .......   1999   $100,000      $103,300(5)   $ 4,800(6)(7)             --
                                             1998   $100,000      $ 50,031(5)   $ 4,800(6)(7)          255,689(8)
                                             1997   $100,000      $ 15,000(5)   $ 4,800(6)                --

Kenneth Hammond, Vice President
  of Operations ..........................   1999   $103,135      $ 10,250         --                     --
                                             1998   $100,327          --           --                     --
                                             1997   $ 13,462(9)       --           --                     --
------------------
</TABLE>

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

(2)  Includes an accrued  bonus of $360,000 for 1999 and $30,000 for 1998.  This
     bonus was approved by the Board of Directors on June 1, 1998.

(3)  Includes automobile lease payments and life insurance premiums to an entity
     affiliated with Mr. Brodsky. See Item 13 hereof.

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

(5)  Represents $0, $15,000 and $15,000 in bonus and $103,300, $35,031 and $0 in
     commissions  for the  fiscal  years  ended  June 30,  1999,  1998 and 1997,
     respectively.  Pursuant to Ms.  Casale's  current  arrangement  with Health
     Card,  she is entitled to  commissions  as follows:  .5% of gross  revenues
     received from direct accounts sold and .25% of gross revenues received from
     accounts sold by sales people under her management.

(6)  Represents automobile allowances paid to Ms. Casale.

                                       51

<PAGE>


(7)  Does not include  annual  payments  of $20,400  made by Health Card for the
     lease of an  apartment  for the  benefit  of Ms.  Casale  and  Marjorie  G.
     O'Malley.

(8)  Includes a currently unexercisable option granted by Mr. Brodsky on July 1,
     1997 to purchase an aggregate of 255,689 shares of Health Card common stock
     from Mr.  Brodsky  at a price of $5.87  per  share.  Such  option  vests in
     increments  of  20%  on  the  second,   third,   fourth,  fifth  and  sixth
     anniversaries of such option,  respectively,  and must be exercised,  if at
     all, within one year after the termination of Ms. Casale's  employment with
     Health Card, or by July 1, 2005, whichever is earlier.

(9)  Represents  amounts  paid  to Mr.  Hammond  from  the  commencement  of his
     employment with Health Card on April 28, 1997 until June 30, 1997.

     Marjorie G. O'Malley,  Health Card's President and Chief Operating Officer,
has served in such  capacity  since  December 7, 1998.  Ms.  O'Malley's  current
annual salary is $175,000.  Beginning with the fiscal year ending June 30, 2000,
Ms.  O'Malley is entitled to  participate  in a bonus pool  allocated for senior
executives  equal to 15% of any increase in pre-tax profits over the prior year.
In addition,  on December 7, 1998, Mr. Brodsky granted an option to Ms. O'Malley
to purchase  63,922  shares of Health Card  common  stock from Mr.  Brodsky at a
price of $5.87 per share.  Such  option  vests in  one-third  increments  on the
first, second and third anniversaries of such option, respectively,  and must be
exercised,  if at all,  within one year from the date of the  termination of Ms.
O'Malley's  employment  with Health Card,  or by December 7, 2002,  whichever is
earlier.

     John T. Ciufo,  Health  Card's Vice  President  of Clinical  Services,  has
served in such capacity since  December 1998. Mr. Ciufo's  current annual salary
is  $130,000.  Mr.  Ciufo is also  entitled  to  participate  in the bonus  pool
beginning with the fiscal year ending June 30, 2000. In addition, on December 7,
1998,  Mr. Brodsky  granted an option to Mr. Ciufo to purchase  25,569 shares of
common stock of Health Card from Mr. Brodsky at a price of $5.87 per share. Such
option  vests  in  one-third   increments   on  the  first,   second  and  third
anniversaries of such option,  respectively,  and must be exercised,  if at all,
within one year from the date of the termination of Mr. Ciufo's  employment,  or
by December 7, 2003, whichever is earlier.

Option/SAR Grants in Last Fiscal Year

     There were no  individual  grants of stock  options  or stock  appreciation
rights to any Named  Executive  Officer  during the  fiscal  year ended June 30,
1999.

                                       52

<PAGE>

Aggregated  Option  Exercises  in Fiscal  Year  Ended  June 30,  1999 and Fiscal
Year-End Option Values

<TABLE>
<CAPTION>
                                                                 Number of Shares           Value of Unexercised
                                                              Underlying Unexercised        In-the-Money Options
                           Number of                            Options at Fiscal            at Fiscal Year End
                        Shares Acquired         Value                Year End                   Exercisable /
Name                     on Exercise           Realized       Exercisable/Unexercisable         Unexercisable
----                     -----------           --------       -------------------------         -------------

<S>                           <C>                  <C>             <C>                         <C>
Bert E. Brodsky                -0-                 -               - 0 - / - 0 -               - 0 - / - 0 -
Linda Portney                  -0-                 -               - 0 - / - 0 -               - 0 - / - 0 -
Mary Casale                    -0-                 -               - 0 - / 255,689             - 0 - / $416,773
Kenneth Hammond                -0-                 -               - 0 - / - 0 -               - 0 - / - 0 -
</TABLE>

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

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

     Mr. Brodsky agreed with Health Card that,  effective with the  consummation
of the Public Offering,  he was entitled to receive,  as the total  compensation
payable to him and his  affiliates  for services  rendered by Mr. Brodsky in his
capacity as Chairman of the Board and Chief Executive Officer of Health Card, an
annual salary of $200,000 plus a bonus and annual  adjustments  to be determined
by the Board of Directors.

     Pursuant to an agreement dated April 14, 1994 with P.W. Medical Management,
Inc. and assigned to P.W.  Capital  Corp.,  P.W.  Capital  provides  services in
connection with the day-to-day  activities of Health Card,  including marketing,
customer service,  financial advice and general business advice. Fees payable to
P.W. Capital are a minimum of $25,000 per year, payable in monthly installments.
Currently  actual fees are being paid at the rate of  approximately  $58,000 per
month,  although no  assurance  can be given that such amount will not be higher
for any  particular  month or months.  Although the  agreement  has no specified
term,  if either  P.W.  Capital or Health Card fails  materially  to fulfill its
obligations  under the agreement,  following  notice and an opportunity to cure,
the other party has the right to  terminate  this  agreement.  P.W.  Capital and
Health Card agreed that,  upon the  effectiveness  of the  employment  agreement
discussed below, this agreement would terminate.

     Pursuant to an Employment Agreement effective July 1, 1999, Mr. Brodsky has
agreed  to serve as Health  Card's  Chairman  of the  Board and Chief  Executive
Officer at an annual  salary of $200,000,  subject to adjustment by the Board of
Directors.  This agreement has a term of two years,  unless terminated by Health
Card for cause, or in the event Mr. Brodsky becomes  permanently  disabled.  The
agreement  provides for certain fringe  benefits  payable to or on behalf of Mr.
Brodsky,  such as the use of a car. In  addition,  the  agreement  provides  for
certain termination benefits payable to Mr. Brodsky,  which,  depending upon the
reason  for  termination,  can  be  equal  to  up to  two  years  salary.  It is
anticipated  that Mr.  Brodsky  may  devote a portion  of his  business  time to
business affairs unrelated to

                                       53

<PAGE>



Health Card,  provided that such  activities do not prevent him from  fulfilling
his obligations under the agreement.  The agreement does not quantify the amount
of time that Mr. Brodsky must devote to Health Card. However, it is contemplated
that Mr.  Brodsky will devote a substantial  portion of his business time to the
affairs of Health Card.

     Ms.  O'Malley,  Ms.  Portney,  Ms.  Casale,  Mr. Ciufo and Mr.  Hammond are
employed by Health Card pursuant to letters, employee covenant agreements and/or
confidentiality and non-disclosure  agreements reflecting the compensation terms
described under Item 11 hereof and/or  restricting the employee from engaging in
certain competitive activity and/or disclosing certain information.

Compensation Committee Interlocks and Insider Participation

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

     Effective May 10, 1999,  Health Card  established a Compensation  Committee
consisting of Messrs.  Shapiro and Angowitz and Dr.  Strauss.  The  Compensation
Committee is responsible  for making  recommendations  to the Board of Directors
regarding  compensation  arrangements  for  executive  officers of Health  Card,
including annual bonus compensation, and consults with management of Health Card
regarding  compensation policies and practices.  The Compensation Committee also
makes recommendations concerning the adoption of any compensation plans in which
management is eligible to  participate,  including the granting of stock options
or other benefits under such plans. Within 90 days following the consummation of
the Public  Offering,  it is anticipated that Mr. Daley will replace Dr. Strauss
on such committee.

     Gerald Shapiro, the Vice Chairman of the Board of Directors of Health Card,
and Bert E.  Brodsky,  Health Card's  Chairman of the Board and Chief  Executive
Officer,  are each  members of the Board of  Directors  and/or  officers  of the
following  companies  (unless  otherwise  stated,  such  affiliations  have been
maintained  for more  than the past  five  years):  (i) P.W.  Capital  Corp.,  a
consulting  services  firm (Mr.  Brodsky  since June 1996 and Mr.  Shapiro since
October 1994),  (ii) Brookhaven  M.R.I.,  Inc., a company that operates magnetic
resonance imaging machines,  (iii) Mobile Health  Management  Services,  Inc., a
provider of medical testing  services,  (iv) 780 Bay Walk Land Co., Inc., a real
estate  company  (since  August  1994),  (v)  Accutrak  Media,  Inc., a computer
duplication  disk  company,  (vi) Bert Brodsky  Associates,  Inc.,  an insurance
consulting firm (since February 1996),  (vii) Island Mermaid Restaurant Corp., a
company that operates a restaurant,  (viii)  Wilder Woods  Estates,  LLC, a real
estate company (since April 1997),  (ix) Document Storage and Management Inc., a
document  storage company (since 1994), (x) Lee Management  Associates,  Inc., a
billing and collections firm, (xi) United States  Information Corp., a facsimile
subscription  service company,  and (xii) Medical Arts Office Services,  Inc., a
company that provides  personnel and  administrative  services  (since  November
1998). See Item 13 hereof.



                                       54

<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth certain information,  as of August 31, 1999,
concerning the beneficial ownership of Health Card's common stock for:

          o    each  person  who is known by  Health  Card to be the  beneficial
               owner of more than five (5%) percent of Health  Card's  shares of
               common stock,
          o    each of the Named Executive Officers,
          o    each of Health Card's Directors, and
          o    all of Health Card's executive officers and Directors as a group.

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

                                                                 Approximate
                                      Number of  Shares         Percentage of
                                      of Common Stock         Outstanding Shares
Name and Address (1)                 Beneficially Owned         of Common Stock
--------------------                 ------------------      -------------------

Bert E. Brodsky.....................     4,051,164(2)               55.4%(2)
Irrevocable Trust of David
  C. Brodsky........................       383,559                   5.5%
Gerald Shapiro......................       383,534                   5.5%
Linda Portney.......................       219,162                   3.2%
Mary Casale.........................        51,138(3)                 *
Kenneth Hammond                               -                       -
Kenneth J. Daley....................         3,334(4)                 *
Richard J. Strauss, M.D.,
  F.A.C.S...........................         3,334(4)                 *
Gerald Angowitz.....................         3,334(4)                 *
All executive officers and
  Directors as a group (9 persons)..     4,716,667(2)(3)            67.6%(2)(3)
__________________                                (4)(5)                 (4)(5)

*    Less than 1%.

(1)  The  address  of each  person  named in the table is c/o  National  Medical
     Health Card Systems,  Inc. at 26 Harbor Park Drive,  Port  Washington,  New
     York 11050.

(2)  Includes (i) an aggregate  of 965,585  shares of common stock  beneficially
     owned by Mr.  Brodsky's  children's  trusts,  of  which  Mr.  Brodsky  is a
     trustee, (ii) 100,000 shares of common stock beneficially owned by the Bert
     E. Brodsky Revocable Trust, of which Mr. Brodsky's wife is the trustee, and
     (iii)  1,725  shares of common  stock  beneficially  owned by P.W.  Capital
     Corp., of which Mr. Brodsky is President.  Includes an aggregate of 345,179
     shares of common stock

                                       55

<PAGE>



     subject to options  granted to certain  executive  officers of Health Card,
     including those referred to in note (3) below. See Item 11 hereof.

(3)  Includes  51,138  shares  of  common  stock  subject  to  options  that are
     currently  exercisable.  Does not include an aggregate of 204,551 shares of
     common stock subject to currently unexercisable options.

(4)  Includes for each of Mr. Daley,  Dr. Strauss and Mr.  Angowitz 3,334 shares
     of common stock subject to options that are currently exercisable. Does not
     include for each of them 6,666 shares of common stock  subject to currently
     unexercisable options.

(5)  Includes 1,667 shares of common stock subject to options that are currently
     exercisable.  Does not include an aggregate of 3,333 shares of common stock
     subject to currently unexercisable options.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

Health Card's Relationship with Sandata

     On June 1, 1998, Health Card entered into an agreement with Sandata,  Inc.,
of which Mr.  Brodsky is the Chairman of the Board,  President,  Treasurer and a
principal  stockholder.  This  agreement,  which was  amended  on the same date,
relates to the  hiring of 11  employees  of  Sandata  by Health  Card to provide
development,  enhancement and maintenance of Health Card's  information  systems
internally.  Health Card paid Sandata  $208,000 in  consideration  for Sandata's
assigning to Health Card certain rights relative to such employees.  Health Card
also  assumed a  liability  of $86,000  relating  to these  employees.  Sandata,
through its subsidiaries, is expected to continue to provide consulting services
related to Health Card's  information  systems,  on such terms and conditions as
may be agreed to between the parties from time to time. Also,  Sandata confirmed
Health Card's  proprietary  rights in certain software  developed by Sandata for
Health Card, among other things.

     A significant portion of Health Card's information systems has historically
been  developed,  enhanced,  modified and maintained by Sandsport Data Services,
Inc., a  wholly-owned  subsidiary  of Sandata.  Furthermore,  Health Card leases
computer  hardware  for  its  data  processing  center  at  a  monthly  cost  of
approximately $33,000 (as of the date of this Form 10-K) from Sandsport pursuant
to an oral agreement,  terminable at will by either party.  Management of Health
Card  believes  that the terms of such lease are as fair to Health Card as those
that could be obtained from an unaffiliated third party, although no independent
fee quotes have been obtained.  Prior to November 1998, a significant portion of
Health Card's data processing  needs were provided by an  unaffiliated  company.
Starting in July 1998,  Health Card  obtained  equipment  under an oral month to
month  operating  lease  with  Sandsport  to enable it to  perform  its own data
processing  requirements.  Lease  payments  under this lease for the fiscal year
ended

                                       56

<PAGE>



June 30, 1999 totaled  $350,287 and were paid at a monthly rate of approximately
$22,000 for two months,  $24,000 for five months and are  currently  $32,857 per
month.

     The Company  purchased new  furniture and fixtures from Sandata  during the
fiscal year ended June 30, 1999 for  approximately  $236,000 in connection  with
Health Card's new customer  service center.  The price included a 20% purchasing
and handling fee  relating to  unpacking,  assembling  and  configuring  of such
furniture and fixtures.

     During the fiscal  years ended June 30,  1997,  1998 and 1999,  Health Card
incurred fees to Sandsport in the aggregate amounts of approximately $2,360,000,
$2,492,299 and $1,617,611,  respectively.  As of June 30, 1999, Health Card owed
$549,482 to Sandsport.

Employee Management Relationship with Medical Arts Office Services, Inc.

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

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

     During the fiscal  year ended June 30,  1999,  the total  payments  made by
Health Card to Medical Arts were  approximately  $237,307,  of which $75,000 was
paid for  bookkeeping  services,  $60,423 was paid for  paralegal  services  and
$101,884 was paid for administrative services.

     The hourly rates charged by Medical Arts for such services currently are as
follows:  paralegal services at $90 per hour, bookkeeping services at $6,250 per
month, and administrative  services at various rates per hour depending upon the
provider of the service.  Management  believes  that the hourly rates charged by
Medical Arts are as fair to Health Card as those that could be obtained  from an
unaffiliated third party, although no independent fee quotes have been obtained.

Consulting Fees

     For the  fiscal  year  ended  June 30,  1999,  Health  Card paid  aggregate
consulting  fees to P.W.  Capital  of  $353,867  for  services  rendered  by Mr.
Brodsky.

     Prior to the  consummation  of the Public  Offering,  in  consideration  of
consulting fees, Mr. Brodsky provided managerial expertise and advice, including
but not limited to advice  regarding  hiring of executive  management  and other
personnel,  marketing  and sales  matters,  and  negotiation  of contracts  with
sponsors  and  other  parties.  Mr.  Brodsky's  services  were  rendered  in his
capacities  as Chairman of the Board of Directors and Chief  Executive  Officer.
Pursuant to an agreement with Mr. Brodsky,  payment of the above consulting fees
ceased upon  consummation  of the Public Offering and, in  consideration  of the
provision  of such  executive  services,  Mr.  Brodsky  began  to  receive,  and
continues

                                       57

<PAGE>



to receive, remuneration as an employee of Health Card.  See Item 11 hereof.

     In addition,  during the fiscal year ended June 30, 1999,  Health Card paid
P.W.  Capital  $25,467  representing  lease  payments  for cars  leased  for Mr.
Brodsky's benefit.

Real Estate

     Health Card occupies approximately 14,600 square feet of space at 26 Harbor
Park Drive,  Port Washington,  New York under an amended lease at a monthly cost
of $31,000  (including  utilities).  The  lessor is BFS  Realty,  LLC,  which is
affiliated with Mr. Brodsky.  The lease expires as of March 30, 2004. Rent under
the lease increases by 5% annually. The BFS lease was assigned by Sandata to BFS
in November 1996. Mr. Brodsky is the Operating  Manager and holder of a majority
of the membership  interests of BFS. Health Card believes that the terms of this
lease are as fair to it as those which could be  obtained  from an  unaffiliated
third party, although no independent fee quotes have been obtained.  Pursuant to
an  agreement  entered into in 1994,  Health Card paid  $700,000 in June 1995 in
connection  with certain  allocated  leasehold  improvements.  Health Card began
occupying  space at 26 Harbor Park Drive in October 1994 and began making rental
payments for such space in December  1994.  In addition,  during the fiscal year
ended June 30, 1999,  Health Card paid another  affiliated  party  approximately
$15,833 in connection  with  improvements to the building in which Health Card's
offices are located. Sandata also occupies space at 26 Harbor Park Drive. Except
for  certain  common  areas,  Sandata and Health Card do not share space in such
facility.

     Pursuant to a lease dated  August 10, 1998 and expiring on August 31, 2005,
Health Card occupies  approximately  1,500 square feet of space at 63 Manorhaven
Boulevard,  Port  Washington,  New York,  which is licensed  as a pharmacy.  The
landlord  for these  premises  is 61  Manorhaven  Boulevard,  LLC,  of which Mr.
Brodsky is the sole  member.  The rent for the 12 month  period ended August 31,
1999 was $1,500 per month; the annual rent increases by 5% per year.  Additional
rent, in the form of certain expenses, is also payable.

Stock Transaction

     On October 30, 1998, Mr. Brodsky executed a promissory note made payable on
demand  to the  order  of  Marine  Midland  Bank  in  the  principal  amount  of
$2,000,000. Mr. Brodsky used the proceeds of the loan to purchase 340,919 shares
of common stock of Health Card. In addition,  Mr. Brodsky  pledged a like number
of shares to the bank as security for the loan. On October 30, 1998, Health Card
executed an unlimited  continuing Guaranty Agreement for the indebtedness of Mr.
Brodsky  to  Marine  Midland  Bank.  By  the  Guaranty  Agreement,  Health  Card
unconditionally guaranteed the full and prompt payment to Marine Midland Bank of
the  indebtedness of Mr. Brodsky.  On November 3, 1998, the promissory note from
Mr. Brodsky to Marine Midland Bank, dated October 30, 1998, was converted from a
demand note to an installment note, payable in full by October 28, 1999, bearing
interest  at a per annum rate of 7.72%.  This note was repaid in full in January
1999. On April 8, 1999, HSBC (formerly  Marine Midland Bank) advised Health Card
that its unlimited guaranty of Mr. Brodsky's $2,000,000 loan was released.


                                       58

<PAGE>



Indebtedness of Management

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

                                         Largest Aggregate
                                       Amount Owed by Debtor       Debt Owed
                                         During Fiscal Year          As of
           Debtor                        Ended June 30, 1999     June 30, 1999
           ------                      ---------------------     -------------

P.W. Capital LLC(1)...............           $4,553,680           $4,553,680
Port Charitable Foundation(2).....               14,000               14,000
Bert E. Brodsky(3)................            1,767,000            1,050,900
Hugh Freund(2)....................                8,000                  -0-
Carol Freund(2)...................                8,000                  -0-
Gerald Shapiro(4).................              338,250              312,750
Sandra Rothstein(5)...............               45,100                  850
Linda Portney(6)..................                2,374                2,374

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

(1)  On June 1, 1998,  Health Card  assigned  certain  indebtedness  aggregating
     $1,636,785 in principal and accrued interest,  if any, from certain persons
     and  entities,  including  Mr.  Brodsky,  to P.W.  Capital,  LLC, a company
     affiliated  with Mr.  Brodsky.  On June 1, 1998,  P.W.  Capital  executed a
     demand  promissory  note made  payable  to the order of Health  Card in the
     principal amount of $4,254,785 with interest at the rate of 8.5% per annum,
     payable  quarterly,  such amount  reflecting  the assigned debt and amounts
     then owed by P.W.  Capital to Health  Card.  On June 1, 1998,  Mr.  Brodsky
     executed an unconditional guaranty in favor of Health Card for the full and
     prompt payment to Health Card of all amounts payable under the P.W. Capital
     promissory  note  dated June 1,  1998.  Such note is  secured by  1,022,758
     shares of common stock of Health Card and is without recourse to the maker.

     As of January 2, 1999, P.W. Capital executed a demand  promissory note made
     payable without  interest to the order of Health Card to evidence  advances
     to P.W. Capital in the amount of $90,100.

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

(3)  Includes  principal  and  interest  due under a  non-recourse  (except  for
     interest) promissory note dated July 1, 1997 made payable by Mr. Brodsky to
     the order of Health Card in the original

                                       59

<PAGE>



     principal amount of $1,000,000,  secured by a pledge of 1,278,447 shares of
     common stock of Health Card. Interest on such note, at the rate of 8.5% per
     annum, is payable  quarterly.  The principal  amount of the note is payable
     five years from the date of the note.

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

(5)  Sandra Rothstein is Mr. Brodsky's  administrative  assistant. In July 1997,
     Ms.  Rothstein  purchased  51,137  shares of common stock of Health Card by
     delivery of a  promissory  note made payable to the order of Health Card in
     the original  principal  amount of $40,000.  This note is secured by 51,137
     shares of common stock of Health Card owned by Ms.  Rothstein and principal
     was without,  and interest is with,  recourse to Ms. Rothstein.  As of June
     30, 1999,  no principal  was  outstanding  with respect to Ms.  Rothstein's
     note, and $850 of interest was outstanding under such note.

(6)  Linda Portney is Executive Vice President of Operations of Health Card.

     The Bert E. Brodsky  Revocable  Trust (the "Brodsky  Trust") has repaid the
indebtedness   reflected  above  to  the  extent  of  approximately   $1,992,900
(representing  73% of the proceeds  from the sale of shares by the Brodsky Trust
pursuant to the Public Offering,  net of underwriting discounts and commissions,
a non-accountable  expense allowance and a financial advisory fee payable to the
representatives  of the  Public  Offering).  The net  proceeds  from the sale of
shares by the  Brodsky  Trust were  applied  first  100% to amounts  owed by Mr.
Brodsky to Health Card and the balance to amounts owed by P.W. Capital to Health
Card. In addition, Mr. Brodsky has agreed to pay in full, within one year of the
consummation of the Public  Offering,  the remaining  indebtedness  owed by P.W.
Capital,  reflected in the above table,  after  application  of the net proceeds
from the sale of shares by the  Brodsky  Trust in the  Public  Offering.  In the
event that P.W.  Capital does not pay amounts due as and when required under its
non-recourse  June 1998  promissory  note,  Health  Card's  recourse  will be to
exercise  its legal  remedies  with  respect to the Health  Card  shares held by
Health Card as collateral  and pursue legal action  against Mr.  Brodsky under a
related guaranty.  Such note does not provide for default interest or penalties.
Mr. Shapiro has orally agreed to pay in full the indebtedness reflected opposite
his  name  in the  above  table  within  one  year of the  consummation  of this
offering.  In the event that Mr.  Shapiro  does not pay  amounts due as and when
required under his July 1997 promissory note,  Health Card's recourse will be to
exercise  its legal  remedies  with  respect to the Health  Card  shares held by
Health Card as collateral and pursue legal action against Mr. Shapiro for unpaid
interest.  Such note does not provide for default  interest or penalties.  It is
not anticipated  that additional  advances to or on behalf of Mr. Brodsky or his
affiliates  will be  permitted in the future,  unless  approved by a majority of
Health Card's disinterested Directors.


                                       60

<PAGE>



SunStar Healthcare, Inc.

     SunStar Healthcare,  Inc., a Delaware corporation,  is engaged in providing
managed  health care  services in the state of Florida by  operating an HMO. Its
service  territory  covers 52 counties in central,  northern  and other parts of
Florida, including the metropolitan areas of Tampa, Orlando,  Jacksonville,  and
others.  As of November 1, 1998,  SunStar served  approximately  57,000 enrolled
plan members.  On February 19, 1999, Mr. Brodsky, as trustee for the irrevocable
trusts  of each  of his  children,  purchased  for  $250,000  (an  aggregate  of
$1,000,000) in preferred stock and warrants offered by SunStar. Effective May 1,
1999, Health Card began providing services to SunStar.

National Medical Health Card IPA, Inc.

     National  Medical Health Card IPA, Inc. was incorporated in September 1998.
Mr.  Brodsky's  son was its  initial  sole  shareholder.  In October  1998,  Mr.
Brodsky's  son  transferred  ownership  of Health Card IPA to Health Card for no
consideration.



                                       61

<PAGE>



                                     PART IV

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

(a)  1.   Financial Statements

          The  following  consolidated  financial  statements of Health Card are
          included herein:

<TABLE>
<S>                                                                                    <C>
          Report of Independent Certified Public Accountants                         F-2

          Consolidated Balance Sheets as of June 30, 1998 and 1999 and pro forma
          as of June 30, 1999                                                        F-3

          Consolidated Statements of Income for each of the years ended June 30,
          1997, 1998 and 1999                                                        F-4

          Consolidated Statements of Stockholders' Equity (Deficit) for each
          of the years ended June 30, 1997, 1998 and 1999                            F-5

          Consolidated  Statements of Cash Flows for each of the years ended
          June 30, 1997, 1998 and 1999                                               F-6

          Notes to Consolidated Financial Statements                                 F-7

     2.   Financial Statement Schedules

          Schedule II: Valuation and Qualifying Accounts                             S-1

     3.   Exhibits
</TABLE>

Exhibit
Number    Description of Exhibit

3.1       Restated Certificate of Incorporation of Health Card(1)
3.2       Certificate  of  Amendment,  filed May 25,  1999,  to  Certificate  of
          Incorporation of Health Card(1)
3.3       Restated Certificate of Incorporation of Health Card, as amended
3.4       Amended and Restated By-Laws of Health Card(1)
4.1       Form of Specimen Common Stock Certificate(1)
4.2       Form  of  Warrant  Agreement,   including  form  of   Representatives'
          Warrants(1)
10.1      Agreement,  dated April 1, 1990,  between  Health Card and  ChoiceCare
          Long Island, Inc. d/b/a Vytra Healthcare(1)

                                       62

<PAGE>

10.2      Prescription Drug Service  Agreement,  dated December 1, 1995, between
          Health   Card  and   ChoiceCare   Long   Island,   Inc.   d/b/a  Vytra
          Healthcare(1)(2)
10.3      Amendment to Prescription Drug Service Agreement,  dated September 25,
          1998, between Health Card and Vytra Healthcare(1)
10.4      Letter Agreement,  dated March 30, 1999, among National Medical Health
          Card Systems IPA, Inc., Health Card and Vytra Healthcare(1)
10.5      Agreement,  dated  January 1, 1995,  between  Health  Card and Suffolk
          County(1)
10.6      Agreement,  dated March 15, 1998,  between  Health Card and Medi-Span,
          Inc.(1)
10.7      Formulary  Agreement,  dated January 1, 1996,  between Health Card and
          Foundation   Health    Pharmaceutical    Services   d/b/a   Integrated
          Pharmaceutical Services(1)(2)
10.8      Mail Service Provider  Agreement,  dated July 1, 1996,  between Health
          Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services(1)
10.9      Amendment to Mail Service Provider  Agreement,  dated January 1, 1997,
          between  Health Card and Thrift  Drug,  Inc.  d/b/a  Express  Pharmacy
          Services(1)
10.10     Agreement,  dated  June 1,  1998,  between  Sandata,  Inc.  and Health
          Card(1)
10.11     Amendment to Agreement,  dated June 1, 1998, between Sandata, Inc. and
          Health Card(1)
10.12     Agreement,  dated June 16,  1998,  between  Sandata,  Inc.  and Health
          Card(1)
10.13     Bill of Sale,  dated June 1, 1998,  between  Sandata,  Inc. and Health
          Card(1)
10.14     Letter Agreement, dated June 1, 1998, between Sandata, Inc. and Health
          Card(1)
10.15     Software License Agreement and Professional  Service Agreement,  dated
          February 18, 1998, between Health Card and Prospective Health, Inc.(1)
10.16     1999 Stock Option Plan(1)
10.17     Letter, dated January 31, 1996, from Health Card to Mary Casale(1)
10.18     Employee Covenant Agreement,  dated June 15, 1998, between Health Card
          and Mary Casale(1)
10.19     Stock Option Agreement,  dated July 1, 1997,  between Bert Brodsky and
          Mary Casale(1)
10.20     Letter,  dated  November  30,  1998,  from  Health  Card  to  Marjorie
          O'Malley(1)
10.21     Employee Covenant  Agreement,  dated December 7, 1998,  between Health
          Card and Marjorie O'Malley(1)
10.22     Stock Option Agreement,  dated December 7, 1998,  between Bert Brodsky
          and Marjorie O'Malley(1)
10.23     Letter,  dated  November 3, 1998,  from  Health Card to John  Ciufo(1)
          10.24 Confidentiality and Non-Disclosure Agreement, dated November 19,
          1998, between Health Card and John Ciufo(1)
10.25     Stock Option Agreement,  dated December 7, 1998,  between Bert Brodsky
          and John Ciufo(1)
10.26     Employee Covenant Agreement,  dated June 16, 1998, between Health Card
          and Ken Hammond(1)
10.27     Employee Covenant  Agreement,  dated June 1, 1998, between Health Card
          and Linda Portney(1)
10.28     Lease, dated January 1, 1996, between Sandata, Inc. and Health Card(1)
10.29     Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
          LLC(1)
10.30     First Amendment to BFS Realty,  LLC Lease, dated June 1, 1998, between
          BFS Realty, LLC and Health Card(1)

                                       63

<PAGE>


10.31     Second  Amendment  to BFS  Realty,  LLC  Lease,  dated  April 1, 1999,
          between BFS Realty, LLC and Health Card(1)
10.32     Lease,  dated August 10, 1998,  between 61 Manor Haven Boulevard,  LLC
          and Health Card(1)
10.33     Promissory  Note,  dated July 1, 1997, made payable by Bert Brodsky to
          the  order  of  Health  Card  in  the  original  principal  amount  of
          $1,000,000(1)
10.34     Letter, dated June 3, 1999, from Bert Brodsky to Health Card(1)
10.35     Promissory Note, dated July 1, 1997, made payable by Gerald Shapiro to
          the  order  of  Health  Card  in  the  original  principal  amount  of
          $300,000(1)
10.36     Letter, dated June 3, 1999, from Gerald Shapiro to Health Card(1)
10.37     Promissory Note, dated June 1, 1998, made payable by P.W. Capital, LLC
          to the  order of  Health  Card in the  original  principal  amount  of
          $4,254,785(1)
10.38     Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor
          of Health Card(1)
10.39     Promissory  Note, dated October 30, 1998, made payable by Bert Brodsky
          to Marine Midland Bank in the principal amount of $2,000,000(1)
10.40     Agreement of Guaranty, dated October 30, 1998, by Health Card in favor
          of Marine Midland Bank(1)
10.41     Promissory  Note, dated November 3, 1998, made payable by Bert Brodsky
          to Marine Midland Bank in the principal amount of $2,000,000(1)
10.42     Letter,  dated  January  29,  1999,  from Marine  Midland  Bank to BDO
          Seidman(1)
10.43     Letter, dated June 4, 1999, from HSBC to Bert E. Brodsky(1)
10.44     Demand  Promissory  Note,  dated January 2, 1999, made payable by P.W.
          Capital,  LLC to the order of Health Card,  in the original  principal
          amount of $90,100(1)
10.45     Consulting  Agreement,  dated April 14,  1994,  between  P.W.  Medical
          Management, Inc. and Health Card(1)
10.46     Assignment,  dated July 1, 1996, between P.W. Medical Management, Inc.
          and P.W. Capital Corp.(1)
10.47     Letter, dated June 8, 1999, from P.W. Capital Corp. to Health Card(1)
10.48     Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card(1)
10.49     Letter,  dated June 8, 1999, from the Bert E. Brodsky  Revocable Trust
          to Health Card(1)
10.50     Letter  agreement,  dated June 30,  1999,  between the Bert E. Brodsky
          Revocable Trust and Health Card(1)
10.51     Employment Agreement, dated July 1, 1999, between Health Card and Bert
          E. Brodsky(1)
10.52     Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card(1)
10.53     Form of Lock-up Agreement(1)
21        Subsidiaries of Health Card(1)
27        Financial Data Schedule

----------

(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.

                                       64

<PAGE>



(2)  Contains  confidential  material  omitted  and  filed  separately  with the
     Securities  and  Exchange  Commission.  Brackets in document  denotes  such
     omission.

(b)  Reports on Form 8-K

     No  Report on Form 8-K was filed by Health  Card  during  the three  months
     ended June 30, 1999.



                                       65

<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary



                                               Consolidated Financial Statements
                                                       and Supplemental Material
                                For the years ended June 30, 1997, 1998 and 1999






<PAGE>



                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary



                                               Consolidated Financial Statements
                                                       and Supplemental Material
                               For the years ended June 30, 1997, 1998 and 1999






<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                                                        Contents




Report of Independent Certified Public Accountants                           F-2


Consolidated financial statements:

   Balance sheets as of June 30, 1998 and 1999 and
     proforma as of June 30, 1999                                            F-3


   Statements of  Income for each of the years ended June 30, 1997,
      1998 and 1999                                                          F-4


   Statements of Stockholders' Equity (Deficit) for each of the years
      ended June 30, 1997, 1998 and 1999                                     F-5


   Statements of Cash Flows for each of the years ended June 30, 1997,
      1998 and 1999                                                          F-6


   Notes to Financial Statements                                             F-7









                                      F-1


<PAGE>


Report of Independent Certified Public Accountants


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



We have audited the accompanying consolidated balance sheets of National Medical
Health Card Systems,  Inc. and  subsidiary as of June 30, 1998 and 1999, and the
related  consolidated  statements of income,  stockholders' equity (deficit) and
cash flows for each of the three years in the period ended June 30, 1999.  These
financial  statements  are the  responsibility  of the  management  of  National
Medical Health Card Systems, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.



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



In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of National Medical
Health Card Systems,  Inc. and  subsidiary as of June 30, 1998 and 1999, and the
results of their  operations  and cash flows for each of the three  years in the
period ended June 30, 1999 in  conformity  with  generally  accepted  accounting
principles.





BDO Seidman, LLP

Melville, New York


September 22, 1999




                                      F-2
<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary
<TABLE>
<CAPTION>
                                                     Consolidated Balance Sheets


                                                                                       June 30,                     June 30,
 ----------------------------------------------------------------------- -------------------------------------- ------------------
                                                                               1998                1999               1999
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
                                                                                                                     (Proforma)
                                                                                                                    (Note 12(a))
 Assets
 Current:
<S>                                                                          <C>                <C>                  <C>
    Cash and cash equivalents                                                $  1,305,792       $  2,815,863         $15,698,963
    Accounts receivable, less allowance for possible losses of
       $244,189 and $ 846,344                                                   6,079,079         13,233,760          13,233,760
    Rebates receivable                                                          4,064,868          5,303,786           5,303,786
    Deferred income tax                                                           141,000            530,000             530,000
    Other current assets                                                           98,514            283,694             283,694
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
         Total current assets                                                  11,689,253         22,167,103          35,050,203
    Property, equipment and software development costs, net                     1,596,443          2,754,522           2,754,522
    Due from affiliates                                                         4,300,902          4,579,280           3,628,880
    Due from stockholders                                                          10,774                  -                   -
    Other assets                                                                   12,528             15,728              15,728
    Deferred income tax                                                           734,000            166,000             166,000
    Deferred offering costs                                                             -          1,163,378                   -
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
                                                                              $18,343,900        $30,846,011         $41,615,333
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
 Liabilities and Stockholders' Equity
 Current:
    Accounts payable and accrued expenses                                     $19,730,110        $26,883,745         $26,883,745
    Current portion of long-term debt                                               7,137              1,950               1,950
    Due to officer/stockholder                                                     30,000            390,000             390,000
    Due to affiliates                                                             451,669            750,968             750,968
    Income taxes payable                                                           59,881            704,489             704,489
    Other current liabilities                                                      68,780            116,544             116,544
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
         Total current liabilities                                             20,347,577         28,847,696          28,847,696
    Long-term debt, less current portion                                            2,605                  -                   -
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
         Total liabilities                                                     20,350,182         28,847,696          28,847,696
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
 Commitments and Contingencies (Note 7)
 Stockholders' equity (deficit):
    Preferred stock $.10 par value; 10,000,000 shares authorized, none
       outstanding                                                                      -                  -                   -
    Common stock, $.001 par value, 25,000,000 shares authorized,
       4,971,577, 5,312,496 and 6,912,496 (proforma) shares issued and
       outstanding                                                                  4,972              5,313               6,913
    Additional paid-in capital                                                    901,128          2,868,573          12,593,795
    Retained earnings (deficit)                                                (1,458,482)           480,529             480,529
    Notes receivable - stockholders                                            (1,453,900)        (1,356,100)           (313,600)
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
         Total stockholders' equity (deficit)                                  (2,006,282)         1,998,315          12,767,637
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
                                                                              $18,343,900        $30,846,011         $41,615,333
 ----------------------------------------------------------------------- ------------------ ------------------- ------------------
</TABLE>

                                      F-3
See accompanying notes to consolidated financial statements.


<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary
<TABLE>
<CAPTION>

                                               Consolidated Statements of Income



                                                                                Years Ended June 30,
                                                         --------------------------------------------------------------------
                                                                    1997                   1998                   1999
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------

<S>                                                          <C>                    <C>                     <C>
 Revenues                                                    $70,405,168            $98,528,384             $134,031,026
 Cost of claims                                               63,293,699             89,770,402              121,536,733
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
    Gross profit                                               7,111,469              8,757,982               12,494,293

 Selling, general and administrative expenses*                 5,855,282              7,192,027               10,171,314
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------

 Operating income                                              1,256,187              1,565,955                2,322,979
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
 Other income (expense):
    Other income, net                                             42,595                264,666                  674,936
    Public offering costs                                              -               (445,173)                 (82,904)
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
                                                                  42,595               (180,507)                 592,032
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
 Income before income taxes                                    1,298,782              1,385,448                2,915,011
 Provision for income taxes (benefit)                           (189,984)               569,000                  976,000
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
 Net income                                                 $  1,488,766           $    816,448           $    1,939,011
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------

 Earnings per common share:
    Basic                                                   $       0.46           $       0.16           $         0.37
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
    Diluted                                                 $       0.37           $       0.16           $         0.37
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
 Weighted average number of common shares outstanding:
    Basic                                                      3,258,459              4,966,885                5,205,084
    Diluted                                                    4,008,481              4,969,166                5,205,084
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------

    *Includes amounts charged by affiliates
       aggregating:                                         $  4,511,144           $  4,904,514           $    2,816,982
 ------------------------------------------------------- ---------------------- ---------------------- ----------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4


<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

<TABLE>
<CAPTION>

                       Consolidated Statements of Stockholders' Equity (Deficit)



                        Notes
                                          Notes                                                       Additional         Retained
                                        Receivable       Preferred Stock          Common Stock          Paid-in          Earnings
                                       Stockholders      Shares    Amount     Shares        Amount      Capital          (Deficit)
                                       ------------      ------    ------     ------        ------      -------          ---------
<S>                                 <C>                     <C>       <C>    <C>          <C>         <C>               <C>
 Balance, June 30, 1996             $       (72,000)         -         -     3,258,459    $  3,259    $         -       $(3,594,384)
    Capital distribution, net of
       income taxes                               -          -         -             -           -              -          (169,312)
    Net income                                    -          -         -             -           -              -         1,488,766
 ---------------------------------- ----------------- ------------------- --------------- ---------  --------------   --------------
 Balance, June 30, 1997                     (72,000)         -         -     3,258,459       3,259              -        (2,274,930)
    Sale of stock                        (1,340,000)         -         -     1,713,118       1,713      1,338,287                 -
    Interest on notes receivable           (113,900)         -         -             -           -              -                 -
    Capital distributions, net of
       income taxes                               -          -         -             -           -       (437,159)                -
    Repayment of loan by
       stockholder                           72,000          -         -             -           -              -                 -
    Net income                                    -          -         -             -           -              -           816,448
 ---------------------------------- ----------------- ------------------- --------------- ---------  --------------   --------------
 Balance, June 30, 1998                  (1,453,900)         -         -     4,971,577       4,972        901,128        (1,458,482)
    Interest on notes receivable           (113,900)         -         -             -           -              -                 -
    Interest paid on notes
       receivable                           171,700          -         -             -           -              -                 -
    Principal paid on notes
       receivable                            40,000          -         -             -           -              -                 -
    Sale of stock                                 -          -         -       340,919         341      1,999,659                 -
    Capital distributions, net of
       Income taxes                               -          -         -             -           -        (32,214)                -
    Net income                                    -          -         -             -           -              -         1,939,011
 ---------------------------------- ----------------- ---------- -------- --------------- ---------- --------------   --------------
 Balance, June 30, 1999               $(  1,356,100)                         5,312,496    $  5,313    $ 2,868,573        $  480,529
 ---------------------------------- ----------------- ---------- -------- --------------- ---------- --------------   --------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

<TABLE>
<CAPTION>
                      Consolidated Statements of Cash Flows



                                                                                   Years Ended
                                                                                     June 30,
 ----------------------------------------------------------- ---------------------------------------------------------

                                                                      1997                1998             1999
 ----------------------------------------------------------- ------------------ ------------------- ------------------

 Cash flows from operating activities:

 Operating activities:
<S>                                                            <C>                <C>                   <C>
    Net income                                                 $ 1,488,766        $    816,448          $1,939,011
    Depreciation and amortization                                  240,744             368,644             772,389
    Bad debt expense                                               115,000              70,000              52,155
    Allowance for possible losses                                        -                   -             550,000
    Compensation expense accrued to officer/stockholder                  -              30,000             360,000
    Deferred income taxes                                         (200,000)            488,000             201,000
    Interest accrued on stockholders' loans                              -            (113,900)           (113,900)

    Changes in assets and liabilities:
       Accounts receivable                                        (974,319)         (2,836,750)         (7,756,836)
       Other current assets                                         (7,195)            (27,138)           (188,380)
       Rebates receivable                                          253,743          (2,577,201)         (1,238,918)
       Due to/from affiliates                                      511,512          (1,562,981)             20,921
       Accounts payable and accrued expenses                     2,104,949           6,175,665           6,233,083
       Income taxes payable                                              -              59,881             644,608
       Other liabilities                                           (38,900)             31,420              47,764
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Net cash provided by operating activities                       3,494,300             922,088           1,522,897
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Cash flows from investing activities:
       Capital expenditures                                       (444,646)           (864,108)         (1,930,468)
       Loans (to)/from stockholders                                (32,093)           (792,200)             10,774
       Repayment of loans by officer/stockholder                         -           1,167,919                   -
       Repayment of note by stockholder                                  -              72,000              40,000
       Interest received on notes from stockholders                      -                   -             171,700
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Net cash used in investing activities                            (476,739)           (416,389)         (1,707,994)
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Cash flows from financing activities:
       Sale of common stock                                              -                   -           2,000,000
       Capital distribution                                       (640,312)           (728,598)            (54,214)
       Repayment of debt                                          (605,789)           (253,906)             (7,792)
       Deferred offering costs                                           -                   -            (242,826)
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Net cash provided by (used in) financing activities            (1,246,101)           (982,504)          1,695,168
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Net increase (decrease) in cash and cash equivalents            1,771,460            (476,805)          1,510,071
 Cash and cash equivalents, beginning of period                     11,137           1,782,597           1,305,792
 ----------------------------------------------------------- ------------------ ------------------- ------------------
 Cash and cash equivalents, end of period                      $ 1,782,597         $ 1,305,792          $2,815,863
 ----------------------------------------------------------- ------------------ ------------------- ------------------

</TABLE>

See  accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


1.   Significant
     Accounting
     Policies       Nature of business

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

                    The Company  enters into two types of  arrangements  for the
                    payment of  administrative  fees, fee for service (per claim
                    charges)  and  capitation(per  plan  participant  per  month
                    charges). Under the fee for service arrangement, the Company
                    is paid by the  plans  for  their  disbursements  plus a set
                    transaction  fee.  Under  the  capitation  arrangement,  the
                    Company receives its fee based on the number of participants
                    per month and pays for the cost of prescriptions  filled and
                    thus shares the risk of operating  profit or loss with these
                    plans.

                    Basis of consolidation

                    In October  1998,  the  Company  acquired  National  Medical
                    Health  Card IPA,  Inc.,  which is an  independent  practice
                    association  under the laws of New York.  This wholly  owned
                    subsidiary is a recently  formed inactive  company  acquired
                    from  a  relative  of  the  principal   stockholder  for  no
                    consideration.  The Company intends that the IPA will be the
                    contracting  party with respect to any contracts with Health
                    Maintenance  Organizations or providers containing financial
                    risk  sharing   provisions.   The  IPA  is  subject  to  the
                    regulatory  authority  of the  Department  of Health and the
                    laws,  rules  and  regulations   applicable  to  independent
                    practice  associations  in New  York.  Activities  conducted
                    through June 30, 1999  included  organization,  planning and
                    development of the IPA's activities and securing  regulatory
                    approvals.

                                      F-7
<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


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

                    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.  Cash  equivalents  at June 30,  1999  includes
                    $838,000 which is restricted as to its use.

                    Revenue recognition and cost of claims

                    Revenue under the fee for service arrangement related to the
                    sales  of  prescription  drugs by the  Company's  nationwide
                    network of  pharmacies  are  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 revenues the Company's  administrative  fees and
                    charges  relating  to   pharmaceuticals   dispensed  by  the
                    Company's network of pharmacies. Cost of claims includes the
                    amounts  paid to the  Company's  network of  pharmacies  for
                    pharmaceutical   claims   reduced  by   rebates   from  drug
                    manufacturers. The Company does not take possession or legal
                    ownership  of  the  pharmaceutical  drugs  dispensed  by the
                    pharmacy  network,  although  the Company  assumes the legal
                    responsibility  and  financial  risk of paying for dispensed
                    pharmaceuticals  whether  or not the  Company is paid by its
                    sponsors.

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

                                      F-8
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements



                    The Company records the portion of the net rebates from drug
                    manufacturers,  which it retains as a  reduction  of cost of
                    claims.  These  rebates are  recognized  when the Company is
                    entitled  to  them  in  accordance  with  the  terms  of the
                    Company's arrangements with the rebate administrator 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.  The rebates are processed by
                    an  independent  rebate  administrator.  For the years ended
                    June 30, 1997,  1998 and 1999,  net rebates  recorded by the
                    Company  as a  reduction  of cost of claims  were  $883,243,
                    $1,460,537 and $2,541,959, respectively.

                    Property, equipment and software

                    Office  equipment  and  furniture  and  fixtures  are  being
                    depreciated  over  five  years  using  accelerated  recovery
                    methods,  which  approximate  the   double-declining-balance
                    method of depreciation.

                    Leasehold  improvements  are  amortized  on a  straight-line
                    basis over the term of the lease.

                    Expenditures  relating to the  development of software to be
                    used in the  claims  adjudication  process  are  charged  to
                    expense until technological  feasibility is established upon
                    completion of a working  model of the software.  Thereafter,
                    the remaining software development costs up to the date such
                    software is completed  are  capitalized  and included on the
                    balance  sheet as  software  development  costs.  During the
                    years ended June 30, 1998 and 1999,  $422,316 and $1,434,507
                    in   software    development    costs   were    capitalized,
                    respectively.

                    Amortization  of capitalized  amounts  commences on the date
                    the  software is placed  into use and is computed  using the
                    straight-line method over the estimated economic life of the
                    software,  primarily  five years.  Amortization  expense was
                    $182,949,  $213,340  and  $460,234  for the years ended June
                    30, 1997, 1998 and 1999, respectively.

                                      F-9
<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

                    A significant portion of the Company's computer software was
                    developed by a company  affiliated by common  ownership (See
                    Note  3(b)).  The  cost  includes  development  of  software
                    programs  and  enhancements,  which  may  either,  expand or
                    modify existing programs. To the extent that the Company has
                    capitalized  certain  amounts for software  development  and
                    those amounts  exceeded the costs incurred by the affiliate,
                    this  excess  has  been  charged  to  stockholders'   equity
                    (deficit) as a capital distribution.

                    Deferred offering costs

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

                    The deferred offering costs in connection with the Company's
                    Public   Offering   consummated   on  August  2,  1999  were
                    capitalized  and  subsequently  were  charged to equity upon
                    consummation of the Public Offering. (See Note 12(a)).

                    Long lived assets

                    Long lived assets are evaluated for  impairment  when events
                    or  changes  in  circumstances  indicate  that the  carrying
                    amount of the  assets  may not be  recoverable  through  the
                    estimated  undiscounted  future  cash  flows from the use of
                    these assets.  When any such impairment  exists, the related
                    assets  will  be  written  down  to  fair  value.   No  such
                    impairment existed through June 30, 1999.

                    Taxes on income

                    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.

                                      F-10
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements



                    Computation of earnings per common share

                    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,  in the periods in
                    which such options have a dilutive effect.

                    Accounting for stock based compensation

                    The  Company  has  adopted  the  intrinsic  value  method of
                    accounting  for employee stock options and will disclose the
                    pro forma impact on net income and earnings per share.

                    Concentration of credit risk

                    The Company may be subject to a concentration of credit risk
                    with respect to its trade receivables.  The Company performs
                    ongoing  credit  evaluations  of its customers and generally
                    does  not  require   collateral.   The   Company   maintains
                    allowances  to cover  potential  or  anticipated  losses for
                    uncollectible accounts. (See Note 5).

                    Financial  instruments which potentially subject the Company
                    to concentrations of credit risk are cash balances deposited
                    in  financial   institutions  which  exceed  FDIC  insurance
                    limits. Amounts on deposit with financial institutions which
                    exceeded the FDIC insurance limits at June 30, 1998 and 1999
                    were $2,954,241 and $3,177,895, respectively.

                    Use of estimates

                    The  preparation of financial  statements in conformity with
                    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 revenues
                    and expenses  during the reporting  period.  Actual  results
                    could differ from those estimates.

                                      F-11
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    Estimated fair value of financial instruments

                    The  carrying  amounts of financial  instruments,  including
                    cash,  accounts  receivable,  accounts  payable  and accrued
                    liabilities,  approximate  fair value because of the current
                    nature of these instruments. The fair value of the loans due
                    from  stockholders  and  affiliates is difficult to estimate
                    due to their related party  nature.  Certain  amounts due to
                    stockholders  do not bear interest and have no set repayment
                    terms.  Loans due from  affiliates are due on demand under a
                    note  receivable  agreement  personally  guaranteed  by  the
                    majority   stockholder   and  bear  market  interest  rates;
                    therefore,  the Company  believes  that the carrying  amount
                    approximates fair value.

                    Effect of recently issued accounting standards

                    In June  1997,  the  Financial  Accounting  Standards  Board
                    issued two new disclosure standards.

                    Statement of Financial  Accounting  Standards No. 130 ("SFAS
                    No.  130"),  Reporting  Comprehensive  Income,   establishes
                    standards for reporting and display of comprehensive income,
                    its  components  and  accumulated  balances.   Comprehensive
                    income is defined to include  all  changes in equity  except
                    those resulting from investments by owners and distributions
                    to owners.  Among other  disclosures,  SFAS No. 130 requires
                    that all items  that are  required  to be  recognized  under
                    current accounting  standards as components of comprehensive
                    income  be  reported  in  a  financial   statement  that  is
                    displayed  with  the  same  prominence  as  other  financial
                    statements.

                                      F-12
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    Statement of Financial  Accounting  Standards No. 131 ("SFAS
                    No. 131"),  Disclosures  about Segments of an Enterprise and
                    Related Information, which supersedes SFAS No. 14, Financial
                    Reporting for Segments of a Business Enterprise, establishes
                    standards  for  the  way  that  public   enterprises  report
                    information  about  operating  segments in annual  financial
                    statements  and requires  reporting of selected  information
                    about  operating  segments in interim  financial  statements
                    issued to the  public.  It also  establishes  standards  for
                    disclosures  regarding  products  and  services,  geographic
                    areas and major  customers.  SFAS No. 131 defines  operating
                    segments as components of an enterprise about which separate
                    financial   information   is  available  that  is  evaluated
                    regularly by the chief operating  decision maker in deciding
                    how to allocate resources and in assessing performance.

                    Both of these new  standards  are  effective  for  financial
                    statements for years  beginning  after December 15, 1997 and
                    require  comparative  information  for  earlier  years to be
                    restated.  The Company's  results of  operations,  financial
                    position,  and disclosures were unaffected by implementation
                    of these new standards.

                    In February 1998, the Financial  Accounting  Standards Board
                    issued Statement of Financial  Accounting  Standards No. 132
                    ("SFAS No. 132"),  Employers' Disclosures about Pensions and
                    Other  Postretirement   Benefits,   which  standardizes  the
                    disclosure    requirements    for    pensions    and   other
                    postretirement  benefits.  The  adoption  of SFAS No. 132 in
                    1998 is not  expected  to  materially  impact the  Company's
                    current disclosures.

                    In June  1998,  the  Financial  Accounting  Standards  Board
                    issued Statement of Financial  Accounting Standards No. 133,
                    Accounting for Derivative Investments and Hedging Activities
                    Income ("SFAS No. 133"), which requires the recording of all
                    derivative  instruments as assets or liabilities measured at
                    fair value. Among other  disclosures,  SFAS No. 133 requires
                    that all  derivatives  be  recognized  and  measured at fair
                    value  regardless  of the  purpose or intent of holding  the
                    derivative.

                                      F-13
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    SFAS No. 133 is effective for financial statements for years
                    beginning after June 15, 2000. The Company has no derivative
                    investments and does not participate in hedging  activities;
                    therefore, its financial position, results of operations and
                    disclosures  will  be  unaffected  by the  adoption  of this
                    standard.

2.   Property,
     Equipment and
     Software
     Development
     Costs          Property,  equipment and software  development costs consist
                    of the following:

                                                              June 30,
                                                       1998                1999
                                                ------------------- ------------
      Furniture and fixtures                    $   386,480          $  644,246
      Software                                    2,145,606           3,746,101
      Leasehold improvements                              -              72,207
      ----------------------------------------- ------------------- ------------
                                                  2,532,086           4,462,554
      Accumulated depreciation/amortization         935,643           1,708,032
      ----------------------------------------- ------------------- ------------
                                                 $1,596,443           2,754,522
      ----------------------------------------- ------------------- ------------


                    Depreciation  and  amortization  expense for the years ended
                    June 30,  1997,  1998 and 1999 was  $240,744,  $368,644  and
                    $772,389, respectively.


3.   Related Party
     Transactions   (a)  Distributions - capital

                    The Company leases office space in Port Washington, New York
                    from a  company  affiliated  by  common  ownership  under an
                    agreement  expiring  March 30, 2004 (Note  7(a)).  Leasehold
                    improvements  made to this space by a company  affiliated by
                    common  ownership  during the year ended June 30, 1999, were
                    approximately $72,207.

                    In September 1998 the Company leased space for a pharmacy in
                    Port  Washington,  New York,  from a Company  affiliated  by
                    common  ownership  under  a  seven-year  agreement  expiring
                    August 31, 2005 (Note 7(a)).

                                      F-14
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    Rent expense  including  utilities  for the years ended June
                    30, 1997, 1998 and 1999 under  operating  leases amounted to
                    $264,727, $304,193 and $284,828, respectively.

                    Due to  affiliates  represent  trade  payables for developed
                    software,  other  software  services,  operating  leases and
                    maintenance  costs.  During  1998 an  affiliate  charged the
                    Company   approximately   $208,000,   as  a  fee   to   hire
                    programmers,  which were formerly  employed by an affiliated
                    company. The Company assumed a liability of $86,000 relating
                    to these employees.

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



                                      1997            1998           1999
    ------------------------ --------------- -------------- ---------------

    Software development         $ 640,312       $ 520,122       $ 54,214

    Acquisition of
      employees                          -         208,476              -

    Tax effect*                   (471,000)       (291,439)       (22,000)
    ------------------------ --------------- -------------- ---------------

    Net charge to
      stockholders' equity
      (deficit)                  $ 169,312       $ 437,159       $ 32,214
    ------------------------ --------------- -------------- ---------------

     *    Approximately  $215,000  of the tax  benefit  for 1997 was offset by a
          decrease in the deferred income tax valuation reserve (Note 6).

                                      F-15
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    (b)  Other

                    Due from affiliates represents loans to companies affiliated
                    by common ownership or companies  controlled by the majority
                    stockholder.  Effective  June 1, 1998,  the  majority of the
                    loan balances were  consolidated  into a promissory  note in
                    the amount of  $4,254,785  due from one  affiliated  company
                    controlled  by the majority  stockholder.  Such amount bears
                    interest at 8.5% per annum,  payable  quarterly,  and has no
                    set  repayment  date.  Mr.  Brodsky  has agreed to repay the
                    promissory note and other amounts due from affiliates within
                    one  year  of  the   consummation  of  the  Public  Offering
                    completed on August 2, 1999.  This note has been  classified
                    as a  non-current  asset.  The  note  is  collateralized  by
                    1,022,758  shares  of $.001 par  value  common  stock of the
                    Company  registered in the name of the majority  stockholder
                    and  subject  to the  personal  guarantee  of  the  majority
                    stockholder. For the years ended June 30, 1998 and 1999, the
                    amount of interest  income accrued was $30,117 and $361,657,
                    respectively.  Interest  paid by the  affiliate  in December
                    1998  aggregated  $183,000.  Prior  to  June  1,  1998,  the
                    outstanding  balances did not bear any interest.  On January
                    2,  1999,  one of the  affiliates  executed  a  non-interest
                    bearing note payable to the Company in the amount of $90,100
                    to evidence  advances to the  affiliate  in the same amount.
                    Subsequent  to  the  year  end  and   concurrent   with  the
                    consummation  of the  Company's  Public  Offering,  a  trust
                    controlled  by  the  Company's  majority   stockholder  (the
                    "Selling  Stockholder")  sold 400,000 shares of common stock
                    from its holdings.  The Company received $1,992,900 from the
                    sale by the  Selling  Stockholder  of which  $1,042,500  was
                    applied to amounts owed by the Selling  Stockholder  and the
                    balance to amounts due from the affiliate. (See Note 12(a)).

                                      F-16
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements



                    Prior  to  June  1,  1998,  the  Company  leased  all of its
                    employees from an affiliated company at an agreed upon price
                    equal to the affiliate's cost plus a 7% administrative  fee.
                    Effective  June 1, 1998,  the Company hired these  employees
                    (which included programmers as discussed above) and paid its
                    own payroll and related costs.  For the years ended June 30,
                    1997, 1998 and 1999, the  administrative  fee charged by the
                    affiliate  was  approximately  $131,000,  $157,000  and  $0,
                    respectively.

                    Certain costs paid to the  affiliates  were  capitalized  as
                    software  development  costs.  For the years  ended June 30,
                    1998  and  1999,  the  amounts  charged  by  affiliates  and
                    capitalized were $422,315 and $612,906, respectively.

                    The  Company  purchased   furniture  and  fixtures  from  an
                    affiliate   during  the  year   ended  June  30,   1999  for
                    approximately  $236,000. The price included a 20% purchasing
                    and handling fee.

                    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  general   management,   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  the  stand-alone  basis,
                    management  believes that any variance in costs would not be
                    material.


                                      F-17
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


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



                                              Year ended June 30,
                                 ----------------------------------------------

                                       1997              1998         1999
 ------------------------------- --------------- --------------- ---------------

 Software maintenance and
   related services(i)           $1,443,470        $1,124,626     $770,396

 Management and consulting
   fees(ii)                         600,654           857,540    1,524,451

 Administrative and
   bookkeeping services(iii)      2,202,293         2,618,155      237,307

 Rent and utilities                 264,727           304,193      284,828
 ------------------------------- --------------- --------------- ---------------

                                 $4,511,144        $4,904,514    $2,816,982
 ------------------------------- --------------- --------------- ---------------


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

                    (ii) The Company  incurred fees to certain other  affiliated
                    companies for various  management and  consulting  services.
                    Pursuant  to an  agreement  with  one  of  these  affiliated
                    companies,  dated April 14,  1994,  minimum fees are $25,000
                    per year  payable in monthly  installments.  Actual  monthly
                    fees through June 30, 1999 were approximately $58,000.

                    (iii) A company  affiliated by common ownership provides the
                    Company   with   various   administrative    services.   The
                    arrangement  includes  the  leasing  of  all  the  Company's
                    employees   through  June  1,  1998  and  the  provision  of
                    bookkeeping   services  and  personnel  related   consulting
                    services.

                                      F-18

<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements



                    Due  from  stockholders  primarily  represent  loans  to the
                    majority  stockholder.  These loans do not bear interest and
                    have no set repayment dates.

                    On June 1,  1998,  the  Company  agreed to pay the  majority
                    stockholder  annual  compensation  of  $360,000  or a lesser
                    amount  if  mutually  agreed,  in the  form of a  bonus  for
                    continued services. The Company accrued $30,000 and $360,000
                    for the years ended June 30,  1998 and 1999,  as a result of
                    this  agreement.  At  June  30,  1999,  amounts  due to this
                    officer/stockholder aggregated $390,000.

                    For the year  ended  June 30,  1999,  the  Company  paid the
                    annual premium of approximately  $66,000 on a life insurance
                    policy  where  the  majority  stockholder  is the  owner and
                    beneficiary.

                    On October 23,  1998,  the Company  sold  340,919  shares of
                    common stock to the majority stockholder at $5.87 per share.
                    In   connection   with  this   transaction,   the   majority
                    stockholder  obtained a loan from a bank for  $2,000,000  to
                    pay for the shares. The Company  unconditionally  guaranteed
                    this loan which was due on January 28, 1999,  bore  interest
                    at an annual rate of 7.72% payable monthly,  and was secured
                    by all assets of the Company. As the guarantor,  the Company
                    had to comply with certain operational  covenants as defined
                    in the guarantee  agreement for the duration of the loan. On
                    January 28,  1999,  the loan to the bank was paid in full by
                    the majority  stockholder  and the  unconditional  guarantee
                    along with the security on the assets was terminated.

                                      F-19

<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


4.   Accounts
     Payable and
     Accrued
     Expenses       Accounts   payable  and  accrued  expenses  consist  of  the
                    following:

                                                               June 30
                                             -----------------------------------

                                                      1998                1999
   ----------------------------------------- ------------------- ---------------

   Claims payable                                $13,571,796         $17,553,036

   Rebates payable to sponsors                     4,470,404           7,062,159

   Other payables                                  1,687,910           2,268,550
   ----------------------------------------- ------------------- ---------------

                                                 $19,730,110         $26,883,745
   ----------------------------------------- ------------------- ---------------


5.   Major
     Customers
     and
     Pharmacies     For  the  years  ended  June  30,   1997,   1998  and  1999,
                    approximately  63%,  60%  and  64%,  respectively,   of  the
                    revenues  were  from  three  plan   sponsors   administering
                    multiple  plans.  Amounts due from these three  customers at
                    June  30,  1998  and  1999   approximated   $2,751,000   and
                    $6,813,000,  respectively.  During  the year  ended June 30,
                    1999,  the  Company  recorded   approximately   $500,000  of
                    additional  revenue when the amount of the adjustment became
                    determinable,  upon the Company  receiving verbal acceptance
                    of  the  calculations  under  the  provisions  of one of its
                    arrangements  to  adjust  for the  increased  cost of  drugs
                    primarily   related  to  the  prior  year.   The   Company's
                    arrangements  with these  plan  sponsors  are  either  oral,
                    short-term,   terminable   by  the  sponsor  or  subject  to
                    continuing negotiation.

                    For  the  years  ended  June  30,   1997,   1998  and  1999,
                    approximately  30%,  25%, and 41% of the cost of claims were
                    from two  pharmacy  chains.  Amounts  payable  to these  two
                    pharmacy chains at June 30, 1998 and 1999 were approximately
                    $2,679,000 and $7,686,000, respectively.

                                      F-20
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements



                    The Company evaluated its accounts receivable as of June 30,
                    1999 taking into  consideration  the  expiration  of certain
                    contracts   during   the   period  and  the  status  of  the
                    negotiations to renew those contracts.  As consideration for
                    the renewal of these contracts,  the Company determined that
                    it would be necessary to negotiate  the  receivable  balance
                    due from these  contracts  and the Company most likely would
                    not be able to collect  the full  amount.  As a result,  the
                    Company  estimated  and  recorded a reserve in the amount of
                    $550,000 during the year ended June 30, 1999.


6.   Taxes on
     Income         Provisions  (benefit)  for  federal and state  income  taxes
                    consist of the following:


                                           Year ended June 30,
                       ---------------------------------------------------------

                              1997                  1998                 1999
  ---------------- --------------------- ------------------- ------------------
  Current:
     Federal           $     6,038             $  60,000             $596,000
     State                   3,978                21,000              179,000
  ---------------- --------------------- ------------------- ------------------
                            10,016                81,000              775,000
  ---------------- --------------------- ------------------- ------------------
  Deferred:
     Federal              (154,900)              363,000              135,000
     State                 (45,100)              125,000               66,000
  ---------------- --------------------- ------------------- ------------------
                          (200,000)              488,000              201,000
  ---------------- --------------------- ------------------- ------------------
  Total                  $(189,984)             $569,000             $976,000
  ---------------- --------------------- ------------------- ------------------


                    In 1997,  1998 and 1999,  $471,000,  $291,439  and  $22,000,
                    respectively,  of income tax  benefits  reduced  the capital
                    distribution in those years (Note 3(a)).

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

                                      F-21

<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                                               Year ended June 30,
                                   ------------------------------------------
                                          1997          1998        1999
  -------------------------------  -------------- ------------ --------------
  Statutory rate                          34.0%         34.0%       34.0%
  State taxes - net of federal
    taxes                                   -            7.1         5.4
  Decrease in deferred income
    tax valuation reserve (see
    Note 3(a))                           (48.6)           -           -
  Utilization of net operating
    loss carryforward                       -             -         (7.3)
  Permanent differences                     -             -          1.4
  -------------------------------  -------------- ------------ --------------
                                        (14.6%)         41.1%       33.5%
  -------------------------------  -------------- ------------ --------------


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

  June 30,                                        1998                1999
  ----------------------------------- ------------------- ------------------
  Accounts receivable allowances              $100,000            $333,000
  Vacation expense accrual                      41,000              41,000
  Officer/stockholder bonus accrual                  -             156,000
  Property and equipment                       734,000             166,000
  ----------------------------------- ------------------- ------------------
                                              $875,000            $696,000
  ----------------------------------- ------------------- ------------------

7.   Commitments
     and
     Contingencies  (a) On December 15, 1998, the Company leased an apartment in
                    Port  Washington,  New  York for use by two  members  of its
                    management  under  an  operating  lease,  which  expires  on
                    December 14, 1999. The annual rent is $20,400. Utilities and
                    maintenance  are payable by the Company as additional  rent.
                    Future  minimum  rent  payments  under  the   noncancellable
                    operating  leases with related (Note 3) and other parties at
                    June 30, 1999 are as follows:

                                      F-22
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


 Year ending June 30,
 --------------------------------------------------- ---------------------
 2000                                                         $   405,000
 2001                                                             415,000
 2002                                                             436,000
 2003                                                             458,000
 2004                                                             362,000
 Thereafter                                                        28,000
 --------------------------------------------------- ---------------------
                                                               $2,104,000
 --------------------------------------------------- ---------------------

                    (b) In February 1998, the Company  entered into an agreement
                    for computer  software  products and  professional  services
                    with  an  unrelated  company.  The  agreement  requires  the
                    Company to pay an initial license fee of $400,000,  of which
                    $100,000  was paid upon  signing  and  $25,000  was  payable
                    monthly  through  February 1999. The initial  license fee of
                    $400,000 has been  capitalized  and is being  amortized over
                    three years. In addition, if certain milestones were reached
                    based on the number of  processed  claims,  as defined,  the
                    license fee  increases  incrementally,  up to an  additional
                    $500,000 over the term of the  agreement.  In February 1999,
                    the  Company  met  certain   milestones,   resulting  in  an
                    additional  license fee of $150,000,  which was  capitalized
                    and is being amortized over three years.  The agreement also
                    provides  for the annual  payment of 18% of the license fee,
                    as defined,  as a service  maintenance fee which is expensed
                    as incurred.

                                      F-23
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    (c) On February 9, 1999, the Company was informed by counsel
                    that an action was  brought  against  it by the West  Contra
                    Costa Unified School District and an individual plaintiff in
                    the State of California.  The case was subsequently  removed
                    to Federal court. The complaint alleges, among other things,
                    that the parties  entered into a contract in November  1996,
                    for   services  to  be   provided   by  the   Company   and,
                    subsequently,   the  Company  unilaterally   terminated  the
                    contract on December 16, 1996. The complaint further alleges
                    that this  termination  was in violation of the terms of the
                    contract  and one or more  statutory  provisions;  that  the
                    termination   resulted  in  the  school  district  incurring
                    approximately $150,000 in additional costs due to its having
                    to enter into a fee for service arrangement with the Company
                    in order to continue providing  prescription benefits to its
                    plan members;  and that, due to the wrongful  termination of
                    the  contract,  the school  district  was forced to secure a
                    replacement  for the benefits and services that were to have
                    been  provided  under  the  contract  with the  Company.  In
                    connection  with  this  last  circumstance,   the  complaint
                    alleges  that the  school  district  incurred  approximately
                    $400,000 in additional  expenses.  The complaint  also seeks
                    treble  damages.  If treble  damages were  allowable in this
                    case and a judgment were to be entered  against the Company,
                    the  Company  would be  liable  for  damages  in  excess  of
                    $1,500,000.  The Company denies the  allegations and intends
                    to  vigorously   defend  this  action.  In  the  opinion  of
                    management,  the outcome of this  litigation will not have a
                    material adverse effect on the Company's  financial position
                    or its results of operations.

                                      F-24
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    (d)  Commencing  with the year  ending  June 30,  2000,  the
                    Company  has  an  employment  arrangement  with  its  senior
                    executives  which  entitles them to  participate  in a bonus
                    pool equal to 15% of any increase in pretax profits over the
                    prior year.  Pursuant  to her  employment  arrangement,  the
                    Company's Executive Vice President of Sales and Marketing is
                    entitled to commissions  of .5% of gross  revenues  received
                    from  direct  accounts  sold  and  .25%  of  gross  revenues
                    received  from  accounts  sold by  sales  people  under  her
                    management.

8.   Stock Options  (a) On July 1,  1997,  the  Company  sold  an  aggregate  of
                    1,713,118  shares of  common  stock at $.78 per share to the
                    principal  stockholder,  a director,  and an  individual  in
                    exchange   for   notes   receivable;   plus  the   principal
                    stockholder  and the  director  agreed to cancel  options to
                    purchase an aggregate of 1,406,292 shares of common stock at
                    $.08  per  share.

                    (b) On July  1,  1997,  the  principal  stockholder  granted
                    options to an employee  of the  Company to purchase  255,689
                    shares of the Company's common stock at $5.87 per share from
                    his  personal  holdings.  In  accordance  with  Statement of
                    Financial  Accounting  Standards  No. 123  ("SFAS No.  123")
                    Accounting for  Stock-Based  Compensation,  the options were
                    accounted  for as granted to the  employee  directly  by the
                    Company.  These  options  vest  and  become  exercisable  as
                    follows:

                         (i) 20% on July 1, 1999

                         (ii) 20% on July 1, 2000

                         (iii) 20% on July 1, 2001

                         (iv) 20% on July 1, 2002

                         (v) 20% on July 1, 2003

                    These options terminate on July 1, 2005.

                                      F-25
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

                    On  December  7, 1998,  the  principal  stockholder  granted
                    options to an employee  of the  Company to  purchase  63,922
                    shares of the Company's common stock at $5.87 per share from
                    his personal holdings.  In accordance with SFAS No. 123, the
                    options  were  accounted  for as  granted  to  the  employee
                    directly  by the  Company.  These  options  vest and  become
                    exercisable as follows:

                         (i) 1/3 on December 7, 1999

                         (ii) 1/3 on December 7, 2000

                         (iii) 1/3 on December 7, 2001

                    These options terminate on December 7, 2002.


                    On  December  7, 1998,  the  principal  stockholder  granted
                    options to an employee  of the  Company to  purchase  25,569
                    shares of the Company's common stock at $5.87 per share from
                    his  personal  holdings.  In  accordance  SFAS No. 123,  the
                    options  were  accounted  for as  granted  to  the  employee
                    directly  by the  Company.  These  options  vest and  become
                    exercisable as follows:

                         (i) 1/3 on December 7, 1999

                         (ii) 1/3 on December 7, 2000

                         (iii) 1/3 on December 7, 2001

                    These options terminate on December 7, 2003.

                    There was no charge to operations  for the issuance of these
                    options.

                    (c) SFAS No. 123  requires  the Company to provide pro forma
                    information  regarding  net income and earnings per share as
                    if  compensation  cost for the Company's stock option grants
                    had been determined in accordance with the fair value method
                    prescribed in SFAS No. 123.

                                      F-26

<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    The Company estimates the fair value of each stock option at
                    the  grant  date by using the  Black-Scholes  option-pricing
                    model with the following  weighted average  assumptions used
                    for grants in fiscal  years  ended  June 30,  1998 and 1999,
                    respectively: no dividends paid for all years; 0.1% expected
                    volatility for all years;  risk-free  interest rates of 6.3%
                    and 4.5%,  respectively;  and expected  lives of 7.0 and 4.3
                    years, respectively.

                    Based on the above  calculation,  the weighted fair value of
                    options granted in fiscal years ended June 30, 1998 and 1999
                    was $2.03 and $.87, respectively.

                    Under the  provisions  of SFAS No. 123,  the  Company's  net
                    income and earnings  per share would have been  decreased to
                    the pro forma amounts indicated below:


                                                Year ended June 30,
                                     ------------------------------------------

                                          1997           1998           1999
     ----------------------------- -------------- --------------- -------------

     Net income:

        As reported                $ 1,488,766    $    816,448    $ 1,939,011

        Proforma                     1,488,766         764,466      1,871,866
     ----------------------------- -------------- --------------- -------------

     Basic earnings per share:

        As reported                $       .46    $       .16     $      .37

        Proforma                           .46            .15            .36
     ----------------------------- -------------- --------------- -------------

     Diluted earnings per share:

        As reported                $       .37    $       .16     $      .37

        Proforma                           .37            .15            .36
     ----------------------------- -------------- --------------- -------------



                                      F-27

<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

                    (d) The following table summarizes  information  about stock
                    options as of June 30, 1999:


                                 Shares of Common       Weighted Average
                                      Stock              Exercise Price
    --------------------------- ------------------- --------------------------
    Shares under option at
       June 30,  1996                  1,406,292                    .08
       Granted, cancelled,
          exercised                            -                       -
    --------------------------- ------------------- --------------------------
    Shares under option at
       June 30, 1997                   1,406,292                    .08
       Granted                           255,689                   5.87
       Cancelled                      (1,406,292)                   .08
    --------------------------- ------------------- --------------------------
    Shares under option at
       June 30, 1998                     255,689                   5.87
       Granted                            89,491                   5.87
    --------------------------- ------------------- --------------------------
    Shares under option at
       June 30, 1999                     345,180                  $5.87
    --------------------------- ------------------- --------------------------


                    None of the above  outstanding  options were  exercisable at
                    June 30, 1999 (Note 11).

                    (e) On May  10,  1999,  the  Company's  Board  of  Directors
                    adopted the 1999 Stock  Option Plan which  provides  for the
                    grant of options  intended  to qualify as  "incentive  stock
                    options" under Section 422 of the Internal  Revenue Code and
                    options that are not  intended to so qualify  ("nonstatutory
                    stock options"),  as well as stock appreciation  rights. The
                    total number of shares of common stock reserved for issuance
                    under the plan is 1,650,000 plus an indeterminate  number of
                    shares of common stock issuable upon the exercise of "reload
                    options".  The  1999  Stock  Option  Plan  was  approved  by
                    stockholders on May 10, 1999.

                                      F-28
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


                    The plan is administered by the Company's Board of Directors
                    and  options  may  be  granted  to all  full-time  employees
                    (including  officers)  and  directors  of the Company or its
                    subsidiary. No options have been granted under this plan.


9.   Supplemental
     Cash Flow
     Information

                                                Year ended June 30,
                                 -----------------------------------------------

  Cash paid:                           1997             1998           1999
  ------------------------------- --------------- -------------- ---------------

     Interest                      $  2,254        $    4,136       $     250

     Income taxes                    48,916            20,901         131,827

  Non cash investing and
    Financing activities:

   Issuance of common stock
      for notes from
      stockholders                        -         1,340,000(i)            -
  ------------------------------- --------------- -------------- ---------------

                    These   non-recourse   (except   with  regard  to  interest)
                    promissory  notes dated July 1, 1997, are due and payable in
                    five  years  and bear  interest  at 8.5% per  annum  payable
                    quarterly.  The 1,713,118  shares issued in connection  with
                    these  notes  included  1,278,447  shares  to  the  majority
                    stockholder.  The notes are  collateralized by the shares of
                    stock purchased.



                                      F-29

<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements


10.  Employee
     Benefit Plan   Effective  June 1, 1998,  the Company  adopted a 401(k) plan
                    covering substantially all employees. Participants may elect
                    to  contribute  to the plan a minimum  of 1% to a maximum of
                    18% of their  annual  compensation,  not to  exceed a dollar
                    limit set by law.  Annually,  the Company  will  determine a
                    discretionary matching contribution equal to a percentage of
                    each participant's  contribution.  Contributions made by the
                    Company  for the  years  ended  June 30,  1998 and 1999 were
                    approximately $4,000 and $7,000, respectively.


11.  Earnings Per
     Share          A  reconciliation  of shares used in  calculating  basic and
                    diluted earnings per share follows:



                                              Year ended June 30,
                                   -------------------------------------------

                                          1997           1998            1999
   ------------------------------- --------------- --------------- -----------

   Basic                             3,258,459      4,966,885       5,205,084


   Effect of assumed conversion
     of employee stock options         750,022          2,281               -
   ------------------------------- --------------- --------------- -----------

   Diluted                           4,008,481      4,969,166       5,205,084
   ------------------------------- --------------- --------------- -----------


                    Outstanding  options to purchase shares of common stock were
                    not  included in the  computation  of diluted  earnings  per
                    share  because,  upon  exercise,  the common  stock would be
                    issued by the majority  stockholder  in accordance  with the
                    option  agreements.  (See  Note 8.)  These  options  were as
                    follows:



                                              Year ended June 30,
                                   ------------------------------------------

                                          1997           1998           1999
   ------------------------------- --------------- -------------- -----------

   Number of options                         -        255,689        345,180

   Weighted-average exercise
     price                                   -          $5.87          $5.87
   ------------------------------- --------------- -------------- -----------


                                      F-30
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

                    The  shares  held by the  majority  stockholder  subject  to
                    employee  options have been included in the  computation  of
                    basic and diluted earnings per share.


12.  Subsequent
     Events         (a)   Public Offering

                    The registration statement for the Company's Public Offering
                    became  effective on July 28, 1999. The Company  consummated
                    the Public  Offering on August 2, 1999 and issued  1,600,000
                    shares of  common  stock at an  offering  price of $7.50 per
                    share.  The Company  granted the  underwriters of the Public
                    Offering  200,000  warrants for nominal  consideration.  The
                    warrants entitle the underwriters to purchase 200,000 shares
                    of common  stock from the  Company  at $9.00 per share.  The
                    warrants are exercisable  for four years  commencing on July
                    29, 2000.  In  addition,  the  underwriters  were granted an
                    overallotment option by the Company to buy 300,000 shares of
                    common stock at $7.50 per share exercisable by September 11,
                    1999.  The   underwriters  did  not  exercise  this  option.
                    Concurrent with the Public Offering, the Selling Stockholder
                    sold  400,000  shares of common  stock from its  holdings at
                    $7.50  per  share.   The   Company   received   proceeds  of
                    $12,883,100   representing  payment  for  the  sale  of  the
                    1,600,000  shares plus 73% of the proceeds  from the sale of
                    the 400,000 shares by the Selling  Stockholder for repayment
                    of   $1,992,900   of   indebtedness   owed  by  the  Selling
                    Stockholder  in the amount of $1,042,500  and the balance to
                    amounts owed by affiliates of the Selling Stockholder to the
                    Company.  Such proceeds were net of  underwriting  discounts
                    and commissions,  a non-accountable  expense allowance and a
                    financial advisory fee paid to the underwriters plus certain
                    fees and expenses paid by the Company.

                    The  proforma  balance  sheet at June 30, 1999  reflects the
                    Public Offering transactions noted above.

                                      F-31
<PAGE>

                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

                    (b) The Company  entered into an employment  agreement  with
                    the majority stockholder effective July 1, 1999. Pursuant to
                    this agreement, the majority stockholder has agreed to serve
                    as Chairman of the Board of Directors at an annual salary of
                    $200,000,  subject to  adjustment by the Board of Directors.
                    The  agreement  commenced  on July 1, 1999 and has a term of
                    two years, unless terminated by the Company for cause, or in
                    the event the stockholder becomes permanently disabled.  The
                    agreement provides for certain fringe benefits payable to or
                    on behalf of the majority stockholder, such as the use of an
                    automobile.  In addition, the agreement provides for certain
                    termination  benefits  payable to the majority  stockholder,
                    which  depending  upon the  reason for  termination,  can be
                    equal to up to two years salary.

                    (c) Issuance of Stock Options.

                    On August 3, 1999, the Company granted  incentive options to
                    employees  under the 1999 Stock  Option Plan (see note 8(e))
                    to  purchase  108,700  shares of  common  stock at $7.50 per
                    share.  The options  vest and become  exercisable  one-third
                    upon completion of one year of employment and one-third each
                    year thereafter. These options terminate on August 3, 2004.

                    On August 3, 1999, the Company granted  nonstatutory options
                    to three outside  directors under the 1999 Stock Option Plan
                    (see note 8(e)) to purchase 30,000 shares of common stock at
                    $7.50 per share. The options vest and become  exercisable as
                    follows:  (i) one-third on August 3, 1999, (ii) one-third on
                    August 3, 2000, and (iii) one-third on August 3, 2001. These
                    options terminate on August 3, 2004.



                                      F-32

<PAGE>


Report of Independent Certified Public Accountants on Financial Statement
Schedule





The audits  referred  to in our  report to the Board of  Directors  of  National
Medical  Health Card Systems,  Inc. and  Subsidiary,  dated  September 22, 1999,
relating to the  consolidated  financial  statements of National  Medical Health
Card Systems,  Inc. and  Subsidiary,  included the audit of the schedule  listed
under Item 14 of Form 10-K for each of the three years in the period  ended June
30,  1999.  This  financial  statement  schedule  is the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion on this
financial statement schedule based upon our audits.

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



BDO Seidman, LLP

September 22, 1999



<PAGE>


                                                         National Medical Health
                                                              Card Systems, Inc.
                                                                  and Subsidiary

<TABLE>
<CAPTION>
                 Schedule II - Valuation and Qualifying Accounts





                                                        Additions
                                      Balance at        charged to
                                     beginning of       costs and                                          Balance at end
Description                             period         expense (a)        Write-offs      Other Changes      of period
----------------------------------- ---------------- ----------------- ----------------- ---------------- -----------------

Reserves and allowances
   deducted from asset
   accounts:

Allowance for possible
   losses

<S>                                    <C>              <C>              <C>                  <C>             <C>
Year ended June 30, 1997               $100,000         $115,000         $  15,000            $  -            $200,000

Year ended June 30, 1998               $200,000        $  70,000         $  70,000            $  -            $244,189

Year ended June 30, 1999               $244,189         $657,544         $  55,389            $  -            $846,344
</TABLE>

(a)   Charged to bad debts.







                                      S-1
<PAGE>

                                   SIGNATURES

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

                                 NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.


September 28, 1999               By: /s/ Bert E. Brodsky
                                 --------------------------------------
                                    Bert E. Brodsky, Chairman of the Board and
                                    Chief Executive Officer

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

      Signatures                  Capacity                       Date
      ----------                  --------                       ----

/s/ Bert E. Brodsky
________________________    Chairman of the Board and      September 28, 1999
Bert E. Brodsky             Chief Executive Officer

/s/ Gerald Shapiro
________________________    Vice Chairman of the Board     September 28, 1999
Gerald Shapiro              and Secretary

/s/ Richard J. Strauss
________________________    Director                       September 28, 1999
Richard J. Strauss,
M.D., F.A.C.S

/s/ Gerald Angowitz
________________________    Director                       September 28, 1999
Gerald Angowitz

/s/ Kenneth J. Daley
________________________    Director                       September 28, 1999
Kenneth J. Daley

/s/ Berry Denaro
________________________    Treasurer and Chief Financial  September 28, 1999
Barry Denaro                Officer