UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934.
                    For the fiscal year ended June 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACY OF 1934.

For the transition period from _______ to ___________

                        Commission file number 000-26749

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

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

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

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

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

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

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

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

     The  aggregate  market  value  of the  registrant's  voting  stock  held by
non-affiliates  of the  registrant,  computed by reference to the closing  sales
price as  quoted  on the  NASDAQ  National  Market  on  September  22,  2003 was
approximately $49,955,122.

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


<PAGE>

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

Yes  X   No
    ---    ---

     (APPLICABLE  ONLY TO CORPORATE  REGISTRANTS)  Indicate the number of shares
outstanding of the registrant's common stock, as of the latest practicable date:
7,834,581 shares outstanding as of September 22, 2003.

     DOCUMENTS  INCORPORATED  BY  REFERENCE:  Portions of the  definitive  Proxy
Statement to be delivered to  shareholders in connection with the annual meeting
of shareholders to be held in 2003 are  incorporated  into Part III of this Form
10-K.






<PAGE>
<TABLE>
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                            INDEX
                                                                                       Page No.

Forward Looking Statements                                                                4

                                     PART I

Item 1.           Description of Business                                                 4

Item 2.           Description of Property                                                27

Item 3.           Legal Proceedings                                                      28

Item 4.           Submission of Matters to a Vote of Security Holders                    28

                                     PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder Matters  29

Item 6.           Selected Financial Data                                                30

Item 7.           Management's Discussion and Analysis of Financial Condition and        32
                  Results of Operations

Item 7A.          Quantitative and Qualitative Disclosures about Market Risk             46

Item 8.           Financial Statements and Supplementary Data                            46

Item 9.           Changes in and Disagreements on Accounting And Financial Disclosure    46

Item 9A.          Controls and Procedures                                                46

                                    PART III

Item 10.          Directors and Executive Officers of Registrant                         47
                  Compliance with Section 16(a) of the Exchange Act

Item 11.          Executive Compensation                                                 47

Item 12.          Security Ownership of Certain Beneficial Owners and Management         47

Item 13.          Certain Relationships and Related Transactions                         47

Item 14.          Principal Accountant Fees and Services                                 47

                                     PART IV

Item 15           Exhibits, Financial Statement Schedules and Reports on Form 8-K        48

Signatures                                                                               53

</TABLE>

                             INTRODUCTORY STATEMENTS

Forward Looking Statements

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

                                     PART I

Item 1.           DESCRIPTION OF BUSINESS.

General

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

Recent Acquisitions and Developments

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

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

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

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

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

     Part of the cash portion of the purchase  price  ($722,000) was put into an
escrow account to provide security for PMP's indemnification obligations. Health
Card has asserted  two claims  against  this  escrow.  A settlement  was reached
whereby  Health Card received in July 2003,  $540,000 from the escrowed funds to
cover both claims and the remaining  amounts held in escrow were  released.  The
Company  was  also  required  to  pay  up  to  $1,000,000  of  additional   cash
consideration if certain  financial  targets relating to PMP's business were met
over the first  three  years  after  closing,  which  would be  accounted  as an
addition to  goodwill.  The targets  which were  related to  retaining  specific
contracts were not achieved in either of the first two years and consequently no
additional consideration was paid for those periods.

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

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

     The purchase price for the Centrus  Acquisition was $40 million in cash, of
which  $3  million  was  held  in  escrow  to  secure  certain   indemnification
obligations.  All  escrowed  funds have been  released as of January  2003.  The
Company  acquired  approximately  $1.4  million  of  HSL's  assets  and  assumed
approximately  $1.4  million  of  HSL's  liabilities  relating  to  the  Centrus
business. The excess of the acquisition cost over the fair value of identifiable
net assets acquired was approximately  $40.7 million.  In addition,  the Company
has  agreed to pay HSL as  additional  purchase  price up to $4  million  over a
period  of three  years  if the  Centrus  business  achieves  certain  financial
performance targets during the two-year period following the consummation of the
transaction.  The  financial  targets  were  achieved  during  the  first  year;
therefore, $2,000,000 was earned. Of this amount, $1,000,000 was paid out in May
2003 and $1,000,000 will be paid out in May 2004. HSL may also be entitled to an
additional  incentive payment based on the financial  performance of the Centrus
business  during the one-year  period  following  the purchase.  The  additional
incentive payment target was not achieved, and thus, there will be no pay out of
this item.

     In connection with the Acquisition,  several members of Centrus' management
team have joined the Company as  employees,  and have been granted stock options
to purchase an aggregate of 300,000 shares of Common Stock,  under the Company's
1999 Stock Option Plan, as amended.  The Company  intends to continue to use the
assets acquired in the Centrus  Acquisition for the delivery of  cost-effective,
integrated PBM services.

     In part to finance  the  Centrus  Acquisition,  on January  29,  2002,  the
Company  and certain of its  subsidiaries  entered  into a $40  million  secured
revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate
of Healthcare  Finance Group, Inc. In connection with the Facility,  the Company
and certain of its subsidiaries have agreed to sell, on an on-going basis, their
accounts  receivable  to NMHC  Funding,  LLC  ("Funding"),  a limited  liability
company of which the Company and such subsidiaries are members. Funding utilizes
these  receivables as collateral to secure  borrowings  under the Facility.  The
Facility has a three year term,  provides for borrowing up to $40 million at the
London InterBank  Offered Rate (LIBOR) plus 2.4% (3.5% at June 30, 2003), and is
secured  by  receivables  and other  assets of the  Company  and  certain of its
subsidiaries.  Borrowings  of $28.4  million  under  the  Facility  were used to
finance part of the purchase price of the Centrus Acquisition with an additional
$300,000  borrowed to pay for legal fees.  The Facility will also be used by the
Company for working capital purposes and future acquisitions.

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

     On November 1, 2002, the Company and its wholly-owned subsidiary, Integrail
Acquisition  Corp.,  entered  into an  Asset  Purchase  Agreement  with HSL (the
"Integrail Agreement"),  and certain of its security holders (together with HSL,
the  "Sellers").  Pursuant to the  Integrail  Agreement,  Health  Card  acquired
substantially  all of the assets of Integrail,  a division of HSL's  operations,
for a purchase  price of $1,400,000  (the  "Integrail  Acquisition").  Integrail
provides  software and analytical tools in the area of informatics  which allows
for the blending of medical and pharmacy data to predict future outcomes.

     Half of the  $1,400,000  purchase price for the Integrail  Acquisition  was
paid at the closing directly to the Sellers,  and half was deposited into escrow
as security for the  performance of certain  indemnification  obligations of the
Sellers. The Company acquired approximately $500,000 of HSL's assets and assumed
approximately $500,000 of Integrail's  liabilities relating to its business. The
excess of the acquisition  cost over the fair value of  identifiable  net assets
acquired was  $1,482,000.  In addition,  the Company  agreed to release  certain
amounts  from the  escrow to the  Sellers  if the  Integrail  business  achieved
certain  operational  milestones  during  the  12  month  period  following  the
purchase. Funds for the Integrail Acquisition were supplied by the Facility.

     In  connection  with the  Integrail  Acquisition,  a member of  Integrail's
management  team joined the Company as an employee,  and has been granted  stock
options to purchase an aggregate  of 33,000  shares of Common  Stock,  under the
Company's 1999 Stock Option Plan, as amended.

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

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

     In connection with the PPP Acquisition, several members of PPP's management
team have joined the Company as  employees,  and have been granted stock options
to purchase an aggregate of 150,000 shares of Common Stock,  under the Company's
1999  Stock  Option  Plan,  as  amended.  As of August 1,  2003,  the  Company's
wholly-owned subsidiary,  Ascend, assumed all of the shares of PPP. Each of PRXA
and PPRX continues to operate under their  respective  names, as subsidiaries of
Ascend, in the state of Maine. Ascend provides  specialty-pharmacy services in a
broad range of areas, including women's health, pediatric care, men's health and
transplant. The Company intends to position Ascend, as a preferred provider with
PPP's target markets while focusing on the extension of their specialty services
to the Company's pharmacy benefit management division.

                                    OVERVIEW

Industry Background

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

Company Overview

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

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

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

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

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

                                   THE COMPANY

Pharmacy Benefits Management

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

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

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

Claims Management

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

     In the ordinary case, plan participants  present their health card together
with a physician's  prescription  to a participating  pharmacy.  The pharmacist,
using standard industry software,  enters each claim on the pharmacy's  computer
and the claim is  electronically  communicated  to Health Card for on-line  real
time  processing.  If the  prescription  is for a drug  listed on the  sponsor's
approved drug list,  Health Card's on-line claims management system will confirm
that the submitted  claim is in conformity  with the plan terms and  conditions,
and the pharmacist is advised of the appropriate  co-payment and deductible,  if
any, to be collected from the plan  participant.  The on-line claims  management
system will also advise the  pharmacist of the payment the pharmacy will receive
from Health Card. In addition,  Health Card's on-line claims  management  system
sends  appropriate  messages  regarding  preferred drugs 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 and would then have to submit a paper claim to Health
Card for reimbursement. Occasionally a plan participant's claim is rejected or a
prior  authorization  is required  based on plan  parameters,  in which case the
participant  may be referred to the plan's sponsor or to Health Card's  customer
service department.

     Invoicing and Payments. Sponsors are charged an administration fee for each
prescription filled plus a dispensing fee for managing each claim.  Sponsors pay
Health  Card;  Health  Card  pays  an  individually  negotiated  amount  to  its
participating independent and chain pharmacies which amount may be at a discount
to the  amount  charged to the  sponsors.  Plan  participants  filing for direct
payment receive an allowable  payment which is usually specified by the sponsor.
See "The Company - Pharmacy Network",  and Note 1 to the Consolidated  Financial
Statements comprising Item 8 hereof.

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

     Pursuant to a verbal agreement  between Health Card and Specialty  Pharmacy
Care, Inc. ("Specialty"),  a wholly owned subsidiary of Health Card, Health Card
submits  claims for rebates to Specialty for certain of Health Card's  sponsors.
Specialty  performs the services of a rebate  administrator for which it is paid
an administrative  fee. Specialty has entered into approximately  fifty separate
agreements with drug  manufacturers.  While the terms of each agreement  between
Specialty and the drug  manufacturers are unique, the basic concept is the same.
Such  agreements  generally  provide  that Health  Card must list the  specified
products of each of the drug manufacturers on Health Card's approved formularies
with the specified  sponsors.  Health Card's P&T Committee approves the clinical
efficacy  and  appropriateness  of such  formulary  drugs  prior to listing  the
products on any approved formularies. For a discussion of the P&T Committee, see
"-  Formulary  Design and  Disease  Information  Services."  Health Card may not
prefer, either directly or indirectly, any competing products over the specified
drug manufacturer's products except for reasons of medical appropriateness.  The
drug  manufacturers  are obligated to pay rebates  within a specified  period of
time after  Health  Card  submits its  claims,  based on agreed  upon  specified
percentages  which  can  vary  based  on  certain  contractual   criteria.   The
manufacturers  establish a baseline rebate based on Health Card's initial claims
and are  obligated to pay  incremental  rebates  based on  increases  beyond the
baseline.  Similarly,  Centrus has entered into  separate  agreements  with drug
manufacturers  which  have been  assumed  by  Health  Card.  As of August  2003,
substantially  all of the rebate  contracts with Centrus have been  consolidated
with Health Card.

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

Pharmacy Network

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

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

Benefit Design Consultation

     Health   Card   assists   sponsors   in  defining   their   financial   and
employee-benefit  objectives  for their  prescription  drug benefit plans and in
developing  a program to meet such  objectives.  Health  Card staff  analyze and
provide  recommendations  to  sponsors  regarding  how  to  improve  their  plan
performance based upon their objectives. General areas of focus include:

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

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

Drug Review and Analysis

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

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

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

Formulary Design and Disease Information Services

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

     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 clinical  efficacy prior to cost  considerations  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 recommends  those  drugs  which  require  prior  authorization  from  the
sponsor, and

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

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

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

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

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

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

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

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

Data Access, Reporting and Information Analysis

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

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

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

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

Physician Profiling

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

Health Information Management

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

     Integrail's  work in the area of  predictive  modeling  has resulted in the
development  of product and service  offerings  that enable  clients to identify
future  healthcare risk and provide  solutions to better manage the clinical and
economic  implications of the risk. These predictive modeling products developed
by  Integrail  are sold  directly  by  Integrail  as well as Health  Card,  thus
expanding the potential  marketplace for these tools.  Health Card believes that
these  information  based  services are becoming a more  important  component of
managed  care  as well as  management  of the  overall  healthcare  dollar,  and
therefore these services may be in higher demand by clients in the future.

Specialty Pharmacy

     Health  Card's  specialty   pharmacy  program  is  delivered   through  its
wholly-owned  subsidiary,  Ascend,  and in the state of Maine,  through PRXA and
PPRX, both  wholly-owned  subsidiaries of Ascend.  For purposes  herein,  Health
Card's specialty pharmacy program is referred to collectively as, Ascend. Ascend
manages high cost self-injected medications for some of its sponsors.  Recently,
this class of medications  has become a significant  percentage of Health Card's
sponsors' pharmacy budget. This growth is a function of increased utilization as
well as an increase in the number of available treatment agents.

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

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

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

Mail Service Pharmacy

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

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

     Prior to  operating  its own mail  service  pharmacy in  Miramar,  Florida,
Health Card  outsourced all of its mail order business to third parties.  Health
Card continues to have a non-exclusive  relationship with Eckerd Health Services
d/b/a Express Pharmacy Services ("Express  Pharmacy")  pursuant to which Express
Pharmacy  acts  as  a  participating   pharmacy  and  dispenses  drugs  to  plan
participants by mail. The agreement between Health Card and Express Pharmacy was
renewed as of June 30, 2003 for an  additional  one year term.  Either party has
the right to terminate  the  agreement at the end of any renewal  term,  in each
case on 90 days' prior  written  notice.  The  agreement  provides  that Express
Pharmacy  will (i)  provide  the  covered  drugs by mail to  participants;  (ii)
collect the appropriate  co-payment;  and (iii) if required by the plan, collect
any  additional  payment if a brand  drug is  dispensed  when a generic  drug is
available.

     Sponsors' using the mail-order  services of Express  Pharmacy have begun to
be transitioned to the mail pharmacy  services of NMHCmail.  However,  since the
agreement with Express Pharmacy does not contain any volume requirements, Health
Card intends to continue to use Express Pharmacy to fulfill any excess capacity.
Claims  submitted  by mail order  pharmacies  are managed  using  Health  Card's
on-line  claims  management  system  and are  subject  to the  same  review  and
verification as those claims submitted by retail pharmacies.

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

Sponsors

Agreement with Sponsors

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

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

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

Significant Sponsors

     For the fiscal year ended June 30,  2003,  MVP  Healthcare  ("MVP") was the
only sponsor that  accounted for 10% or more of Health Card's  revenues.  Health
Card's wholly owned subsidiary, HSL Acquisition Corp., acquired the company that
has been providing services to MVP, a former Centrus Sponsor.

     MVP has been a client of Centrus since 1990.  The contract  between MVP and
Centrus  was  assigned  to Health  Card  effective  March 1, 2002.  Health  Card
recently renegotiated its contract with MVP to extend the expiration date of its
contract to December 31, 2005.  For the year ended June 30, 2003,  revenues from
MVP represented 28% of Health Card's gross revenues.

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

Company Operations

Sales and Marketing

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

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

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

Information Systems

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

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

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

Suppliers

     In July 2003,  NMHCmail  entered into a 42 month agreement with a wholesale
distributor,  AmerisourceBergen,  to be the primary supplier of pharmaceuticals.
Health Card is currently  negotiating  other supplier  contracts as well. Health
Card  believes  that its supplier  arrangements  will be adequate to fulfill its
needs.

Competition

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

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

     o a  successful  record of  delivering  lower costs for its  sponsors  than
national trends,

     o a broad base of experience  in the  information  technology  and pharmacy
benefit management industries,

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

     o a focus on customer service.

Employees

     As of  September  12,  2003,  Health  Card  and  its  subsidiaries  had 290
employees.  Of the 290 total employees,  275 are full-time and 15 are part-time.
Health Card is not a party to any collective  bargaining  agreement,  and Health
Card considers its relations with its employees to be satisfactory.

Government Regulation

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

     Regulatory  authorities have very broad discretion to interpret and enforce
these laws and to promulgate corresponding rules and regulations.  Violations of
these  laws and  regulations  may  result in  criminal  and/or  civil  fines and
penalties, injunctive relief to prevent future violations, other sanctions, loss
of professional  licensure and exclusion from participation in federal and state
health care programs, including Medicare and Medicaid. There can be no assurance
that Health Card has interpreted the applicable laws and regulations in the same
way as  regulatory  or judicial  authorities,  or that the laws and  regulations
and/or the  interpretation  thereof  will not  change.  To date,  Health  Card's
business  activities  and  relationships  with  sponsors,   pharmacies,   rebate
administrators,  plan  participants,  and  brokers  have not been the subject of
regulatory investigation or review on either the state or the federal level.

     Moreover,  regulation of the  healthcare  industry is in a state of flux as
numerous  legislation on the federal and state level have been  introduced  that
would, if enacted, impact on Health Card's business. A more detailed analysis of
certain laws and  regulations and proposed  legislation  affecting the business,
operations and relationships of Health Card is set forth below.

Anti-Kickback Statute

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

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

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

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

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

Regulations Regarding Privacy and Confidentiality

     The federal government and most states,  regulate the dissemination and use
of personally  identifiable  health information about a patient.  Many of Health
Card's activities involve the receipt,  use and disclosure by it of confidential
health information,  including disclosure of the confidential health information
to  a  patient's  health  benefit  plan.  In  addition,   Health  Card  may  use
de-identified data for research and analytical purposes.

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

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

     HHS has also issued final  regulations  governing the security of protected
health  information,  which  became  effective  on April  21,  2003 and  initial
compliance is required by April 20, 2005 (the  "Security  Rules").  The Security
Rules impose  detailed  requirements  on health care  providers,  health  plans,
healthcare  clearinghouses,  and  their  business  associates  relating  to  the
storage, utilization, and transmission of health information.

     Health Card has a HIPAA Compliance  Committee  comprised of representatives
from each of Health  Card's  departments  to oversee  and assess  Health  Card's
compliance with HIPAA. Health Card believes that it is in substantial compliance
with all of the rules and regulations  promulgated  under HIPAA. To date, Health
Card  has,  among  other  tasks,  educated  all of its  employees  on the  HIPAA
regulations  and  its  application  to  Health  Card's  business,  entered  into
necessary business associate  agreements with sponsors and vendors,  implemented
practices for the standardization of electronic  communication,  and installed a
security  system to protect the  integrity of electronic  transmissions.  Health
Card is  continually  assessing the steps it must take to be in full  compliance
with the Security  Standards and the related costs of  compliance,  but does not
believe the Security  Standards will require changes to its information  systems
and business  practices.  However,  there can be no assurance that these changes
and their  associated  costs will not have a material  adverse  effect on Health
Card.

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

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

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

ERISA

     Some of Health Card's  sponsors are self-funded  health plans.  These plans
are subject to the Employee  Retirement  Income  Security Act of 1974, or ERISA,
which imposes  certain  obligations  on those deemed  fiduciaries  of the health
plans. Health Card believes that its activities are sufficiently limited that it
does not assume any of the fiduciary  responsibilities  of the plan for which it
provides  PBM  services  and thus would not be  regulated  as a fiduciary  under
ERISA.  In addition,  Health Card's current form of agreement with plan sponsors
specifically  provides that Health Card is not a fiduciary of the plan. Although
courts have  declined to extend  ERISA  fiduciary  obligations  to managed  care
companies,  there can be no assurance  that the U.S.  Department of Labor (which
enforces  ERISA) or a court will not assert that Health Card (or some other PBM)
has a fiduciary  obligation in connection  with its  activities on behalf of its
self-funded  sponsors.  If Health  Card is deemed  to be a  fiduciary,  it could
potentially  be  subject  to claims  regarding  benefit  denials  and  breach of
fiduciary duties in connection with its provision of services.  Several lawsuits
have  currently  been filed  against  several  PBMs,  alleging that the PBM is a
fiduciary  under  ERISA  and  are in  breach  of  their  fiduciary  obligations.
Decisions on these lawsuits are still pending.

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

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

FDA Regulation

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

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

Medicare Prescription Drug Benefits Reforms

     Medicare  reimbursement  and  coverage of  prescription  drugs could change
significantly  in the near  future.  Medicare  presently  covers  only a limited
number of outpatient  prescription drugs, but legislative  initiatives are being
considered to expand Medicare  coverage of drugs, in some instances as part of a
broad reform of the Medicare  program.  Some proposals have included  provisions
for  incorporating the services of pharmacy benefit managers into the program to
control costs. The proposals also include implementing a Medicare sponsored drug
discount  card  program  administered  through  PBMs  and  other  vendors  as  a
transitional program to the expanded Medicare drug coverage.

     Recent   developments   appear  to  indicate  that  some  of  the  Medicare
prescription  drug benefit will likely be adopted.  However,  Health Card cannot
assess at this stage how such legislation  would address drug coverage or costs,
whether a drug  discount  card  program  would be involved or the impact of such
legislation  on  Health  Card's   business  and   profitability.   Enactment  of
legislation to expand  Medicare drug coverage  could create broader  markets for
pharmacy  benefit  managers.  Alternatively,  it could  regulate  or  limit  the
services of pharmacy  benefit  managers  and have an adverse  impact upon Health
Card's business and profitability.

Consumer Protection Laws

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

Regulations Applicable to Health Care Professionals

     All states regulate the practice of medicine,  nursing,  and other licensed
health  professions.  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 services,
and consulting  services.  Health Card does not believe that these or any of its
other  activities  as a  pharmacy  benefit  management  company  constitute  the
practice of medicine,  nursing, or any other licensed health profession.  Health
Card is  licensed  as a pharmacy  in several  states in which it  believes it is
required  to be so  licensed.  Health  Card  cannot  assure  that  a  regulatory
authority  in a state in which it  engages  in any of the  foregoing  activities
would not  assert a  contrary  position  and  subject  it to  sanctions  for the
unauthorized practice of medicine, nursing, or other licensed health profession.

Third Party Administrator, Utilization Review Laws
and Preferred Provider Organizations

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

Mail Service Pharmacy Regulation

     Health  Card's mail  service  pharmacy,  NMHCmail,  will  distribute  drugs
throughout  the  United  States  once it is in  full  operation.  Health  Card's
fulfillment  center is located in Florida and is licensed to do business  and to
deliver controlled  substances in the state of Florida.  Some of the states into
which  NMHCmail  plans  to  deliver   pharmaceuticals  have  laws  that  require
out-of-state  mail service  pharmacies to register  with, or be licensed by, the
board of pharmacy  or similar  regulatory  body in such state,  in order to mail
drugs  into  the  state.  NMHCmail  has  registered  or is  in  the  process  of
registering  in every state that, to its knowledge  requires such  registration.
Some of these states also require out-of-state mail service pharmacies to comply
with certain pharmacy laws and regulations of their states. In addition, certain
states require that NMHCmail employ a pharmacist  licensed in the state to which
the drugs are shipped.  NMHCmail  has  employed a  pharmacist  licensed in those
states.   Health  Card  believes  that  NMHCmail  is  currently  in  substantial
compliance  with  state  laws and  regulations  that  apply to the mail  service
pharmacy  operations.  In addition,  Health Card believes that all of NMHCmail's
applications for state  registration or licensure will be submitted prior to the
delivery of  pharmaceuticals  into a particular state, but cannot guarantee that
it will obtain all of the required state licenses prior to such date.

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

     In addition,  Health Card's specialty  pharmacy,  Ascend, has a fulfillment
center  located  in  Maine  and  has a  license  to  do  business  and  dispense
prescription  drugs in Maine. Some of the states into which Health Card delivers
pharmaceuticals  have laws that require  out-of-state mail service pharmacies to
register  with,  or be licensed by, the board of pharmacy or similar  regulatory
body in such  state,  in order to mail drugs into the  state.  Ascend  currently
delivers mail order prescription into five states, Virginia, South Carolina, New
Hampshire,  Maryland  and  Florida,  and has mail order  licenses in all of such
states.

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

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

Regulation of PBMs

     The federal government  currently does not directly regulate the activities
of PBMs.  Several states,  including New York,  have  introduced  legislation in
recent years which, if enacted,  would directly regulate the activities of PBMs.
Recently,  Maine passed  legislation  that directly  regulates the activities of
PBMs. In part, the Maine law requires PBMs that derive any payments from rebates
to pass such rebate payments in full to the sponsors.  The  Pharmaceutical  Care
Management  Association ("PCMA") has filed a lawsuit against the State of Maine,
seeking to prevent the new Maine PBM law from taking  effect.  Even if PCMA does
not prevail and the Maine law  becomes  effective,  Health Card does not believe
its business in Maine will be adversely affected. Health Card currently does not
have any PBM sponsors located in Maine. To the extent these bills are enacted in
states where Health Card's sponsors are located, they could materially adversely
affect Health Card's business.

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

Legislation and Regulation Affecting Drug Prices

     Some states have  adopted  legislation  and  regulations  requiring  that a
pharmacy  participating  in the state Medicaid  program provide program patients
the best price that the pharmacy makes  available to any third party plan ("most
favored nation pricing" legislation).  Such legislation and regulations may have
a material adverse effect on Health Card's ability to negotiate discounts in the
future from network  pharmacies and on the  reimbursement  Health Card receives.
Other states have enacted "unitary pricing" legislation, which mandates that all
wholesale  purchasers  of drugs  within  the  state be given  access to the same
discounts  and  incentives.  Such  legislation  has not yet been  enacted in the
states where Health Card's pharmacies are located.  However, if such legislation
is enacted in states where Health Card's pharmacies are located, it could have a
material  adverse effect on Health Card's ability to negotiate  discounts on the
purchase of prescription  drugs to be dispensed by its pharmacies.  In addition,
some manufacturers may view these laws and policies as a disincentive to provide
discounts to private  purchasers,  such as Health Card's customers,  which could
adversely affect Health Card's ability to control plan costs.

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

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

     Congress has introduced new legislation to permit reimportation of approved
drugs, originally manufactured in the United States, back into the United States
from  other  countries  where the  drugs  were  sold at a lower  price.  A House
Government Reform  Subcommittee held hearings on this issue during 2003. Whether
and how such a policy will be  implemented  is unclear.  The ultimate  impact of
such legislation on the business of Health Card is not known.

Legislation Affecting Plan Design

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

Network Access Limitations

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

Formulary Restrictions

     Many states have also begun to enact laws that regulate the development and
use of  formularies by insurers,  HMOs and other third party payors.  These laws
have  included   requirements  on  the  development,   review  and  updating  of
formularies,  the role and composition of pharmacy and therapeutics  committees,
the disclosure of formulary information to health plan members and a process for
allowing members to obtain  non-preferred drugs without additional  cost-sharing
where they are medically  necessary and the formulary drugs are determined to be
inappropriate.   Increasing   regulation   of   formularies   by  states   could
significantly affect Health Card's ability to develop and administer formularies
on behalf of Health Card's sponsors.

Company Information

Address and Availability of Information.

     Health  Card's  principal  executive  offices are located at 26 Harbor Park
Drive, Port Washington, NY 11050. Its telephone number is (516) 626-0007 and web
site is  www.nmhcrx.com.  Health  Card  files its  annual  report on form  10-K,
quarterly  reports on Form 10-Q,  current reports on Form 8-K, all amendments to
those  reports  (where  applicable)  and other filings with the  Securities  and
Exchange  Commission (the "SEC").  In addition,  the SEC maintains its web site,
www.sec.gov that contains  reports,  proxy and information  statements and other
information regarding issuers filing electronically,  including Health Card. You
may also read and copy any materials Health Card files with the SEC at the SEC's
Public  Reference Room at 450 Fifth Street,  NW,  Washington,  DC 20549. You may
obtain  information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.

     Code of Ethics. As of September 19, 2003, Health Card has adopted a code of
ethics for all of its senior officers.


Item 2.           DESCRIPTION OF PROPERTY.

     The Company currently occupies  approximately  26,500 square feet of office
space  located at 26 Harbor Park  Drive,  Port  Washington,  New York 11050 (the
"Leased  Premises").  The Company subleases the Leased Premises from BFS Realty,
LLC, an affiliate of the  Company's  Chairman (the  "Affiliate").  The Affiliate
leases the Leased Premises from the Nassau County Industrial  Development Agency
("NCIDA")  pursuant to a lease that was entered into by NCIDA and the  Affiliate
in July  1994,  which  expires in March  2005.  The  Affiliate  has the right to
purchase  the Leased  Premises  upon  expiration  of that lease.  The  Affiliate
subleases a portion of the Leased  Premises to the Company (the "Lease").  As of
November 1, 2001,  the Company and the  Affiliate  amended the Lease.  The Lease
provides that,  effective  August 1, 2001, the rent payable to the Company shall
be an  aggregate  annual rent of  $308,305.  While  formerly  the  Company  made
estimated monthly real estate tax, utilities and maintenance-expense payments to
the  Affiliate,  the Lease now  provides  that the Company will pay its pro-rata
share of such expenses  directly,  to the entities to whom payment must be made.
The Company  estimates  that such  expenses  will  approximate  an  aggregate of
$336,000 per year.  The annual rent will increase by 5% per year during the term
of the Lease.  The annual  expenses are also expected to increase,  although the
Company cannot estimate by how much. The Lease expires in July, 2010. Additional
space is  currently  being  built in the  Leased  Premises  which will allow the
Company to  reconfigure  its existing  space and to move all of its employees in
Port Washington into contiguous space. As part of this process, the Company will
reassess its space needs and occupy additional space as required. It is expected
that any additional space taken would not exceed an annual rent of $200,000. The
space  is  currently  planned  to  be  available  by  January  2004.   Leasehold
improvements  made to this space  during the years  ended June 30, 2002 and 2003
were approximately $60,000 and $1,000 respectively.

     Pursuant to a lease dated  August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington,  New York, which is used as a pharmacy.  The landlord for these
premises is 61 Manorhaven Boulevard, LLC, of which the Company's Chairman is the
sole member.  The current rent is $1,914 per month. The annual rent increases by
5% per year. Additional rent, in the form of certain expenses, is also payable.

     Additionally,  the Company leases office and/or warehouse space through its
subsidiaries  in  Little  Rock,  Arkansas;  Tulsa,  Oklahoma;  Portland,  Maine;
Miramar,  Florida and Latham, New York. The aggregate annual rental payments for
leased  space in Little Rock are  approximately  $194,000;  for leased  space in
Tulsa are approximately $24,000; for Miramar,  Florida,  approximately $142,000,
for  Portland,  Maine  approximately  $40,000;  and  for  Latham,  approximately
$383,000.  The Company  intends to move its current  office  space in  Portland,
Maine to a larger office and warehouse space in South Portland, Maine.

     In addition,  Health Card rents a two family house in Port Washington,  New
York (near the Company's offices) from P.W. Capital,  LLC, (a company affiliated
with  Health  Card's  Chairman  of the  Board)  which  is used  for  out-of-town
employees.  Health Card evaluated the cost of hotels for these  individuals  and
determined  it was more cost  efficient  to rent the house at a monthly  rate of
$5,500.  During the  fiscal  year ended  June 30,  2003,  Health  Card paid P.W.
Capital,  LLC, $66,000 in rent for this facility.  For the same reasons,  Health
Card rents two houses  from Living In Style,  LLC,  an entity  owned by three of
Health  Card's  executive  officers.  Pursuant  to leases  dated May 1, 2002 and
expiring  April 30, 2007,  Health Card paid an aggregate of $127,050 in rent for
these two facilities during the fiscal year ended June 30, 2003. The annual rent
for each of the facilities increases by 5% per year.


Item 3.           LEGAL PROCEEDINGS.

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

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plan Inc.  ("MHP") in the United  States  District  Court for the Eastern
District of Michigan.  The amended complaint alleges,  among other things,  that
the  parties  entered  into a contract  dated July 1999 (the  "Agreement"),  and
further alleges that the Company has overcharged MHP for the  administration  of
prescription benefit services in contravention to the terms of the Agreement and
breached  its  fiduciary  duties by making a profit.  MHP is  seeking $3 million
dollars in damages.  The Company  filed an answer and  counterclaim  on June 12,
2002. In the counterclaim, the Company claimed damages in excess of $2.8 million
based on Midwest's failure to pay under a contract.  In late June 2002,  Midwest
agreed to make two payments in the amount of $1.34  million and $1.36 million to
partially settle the Company's  claims against Midwest.  Midwest has now added a
fiduciary duty claim. The Company continues to have counterclaims  totaling over
$200,000 against Midwest for Midwest's  failure to pay the amounts it had agreed
to pay Health  Card for goods and  services.  The  Company's  motion for partial
summary judgment and motion to dismiss the fiduciary duty claim will be heard on
November  6,  2003.  The court has not set a trial  date.  Discovery  will close
September 30, 2003. The Company believes the claims alleged in the complaint are
without merit and intends to vigorously defend the action.


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

         N/A




                                     PART II

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

Market Information

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

<TABLE>
<S>                                                               <C>    <C>    <C>    <C>    <C>    <C>
                                                                Fiscal Years ended June 30,
                                                     2002                            2003
                                                     ----                            ----
                                                High      Low                   High       Low

First Quarter                                   $4.82    $1.45                  $10.80    $6.40
Second Quarter                                 $10.40    $2.65                  $ 9.75    $6.58
Third Quarter                                  $15.61    $9.10                  $ 9.65    $8.00
Fourth Quarter                                 $12.90    $7.90                  $11.84    $8.00
</TABLE>

Holders

     Health  Card has been  advised by its  transfer  agent  (Continental  Stock
Transfer & Trust Company) that the  approximate  number of record holders of its
common stock as of September 22, 2003 was 48.

Dividend Policy

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

Recent Sales of Unregistered Securities

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

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

     The  entire  $11.6  million  principal  amount of the Notes,  plus  accrued
interest, was retired on June 26, 2002. However, as of June 30, 2002, $8 million
of the $11.6 million had not yet cleared the bank for payment. As a result, this
amount was  re-classified  back to notes  payables as of June 30,  2002.  The $8
million  cleared the bank in early July 2002 which  eliminated the notes payable
at that time.

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,  2003 and  provide
certain  supplemental data. The selected  consolidated income statement data for
the years ended June 30,  2001,  2002,  and 2003 and the  selected  consolidated
balance  sheet  data as of June 30,  2002 and 2003  have been  derived  from the
audited  consolidated  financial  statements  of Health Card  included in Item 8
hereof. The selected consolidated income statement data for the years ended June
30, 1999 and 2000 and the selected  consolidated  balance  sheet data as of June
30, 1999,  2000 and 2001 have been derived from audited  consolidated  financial
statements  of  Health  Card  that  are not  included  in this  Form  10-K.  The
information  contained in this table should be read in  conjunction  with Health
Card's consolidated  financial  statements and notes thereto,  and "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included  in Item 7 hereof.  All  amounts  are in  thousands,  except  per share
amounts.

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

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

                                                 1999            2000            2001            2002            2003
                                              -----------     -----------     -----------     ------------     ----------
                                              -----------     -----------     -----------     ------------     ----------
Income Statement Data:/1
Revenues                                     $   128,262     $   167,676     $   272,119     $   459,832     $   573,266
Cost of claims                                   115,768         153,377         249,572         424,733         525,472
                                              -----------     -----------     -----------     ------------     ----------
                                              -----------     -----------     -----------     ------------     ----------
Gross profit                                      12,494          14,299          22,547          35,099          47,794
Selling, general and administrative
     expenses *                                   10,171          12,358          21,423          27,230          35,974
                                              -----------     -----------     -----------     ------------     ----------
                                              -----------     -----------     -----------     ------------     ----------
Operating income                                   2,323           1,941           1,124           7,869          11,820
Other income (expense)                               592             922             877            (502)           (804)
                                              -----------     -----------     -----------     ------------     ----------
                                              -----------     -----------     -----------     ------------     ----------
Income before provision for income
     taxes                                         2,915           2,863           2,001           7,367          11,016
Provision for income taxes                           976           1,247             843           2,900           4,602
                                              -----------     -----------     -----------     ------------     ----------
                                              -----------     -----------     -----------     ------------     ----------
Net income                                   $     1,939     $     1,616     $     1,158    $      4,467     $     6,414
                                              ===========     ===========     ===========     ============     ==========
                                              ===========     ===========     ===========     ============     ==========

Earnings per common share:
  Basic                                   $         0.37   $        0.24   $        0.16   $         0.62  $        0.85
  Diluted                                 $         0.37   $        0.24   $        0.16   $         0.56  $        0.80

Weighted average number of shares outstanding:
   Basic                                           5,205           6,720           7,101           7,213           7,590
   Diluted                                         5,205           6,720           7,200           7,909           8,036

 *  Includes amounts charged by
   affiliates aggregating                 $        2,817   $       2,986   $       4,081   $       1,889   $         862
Balance Sheet Data:
Cash and cash equivalents                 $        1,978   $      14,595   $      10,877   $       1,768   $       5,222
Working capital (deficit)                         (6,681)          6,030          (7,091)         (42,653)       (32,567)
Total assets                                      30,846          44,363          79,110         149,895         156,740
Long term debt including current
     portion                                           2           2,332           1,875          24,065          17,511
Total stockholders' equity                         1,998          13,425          15,472          21,277          28,426
Supplemental Data/2
Retail pharmacy claims processed                   3,066           4,059           7,403          14,371          17,330
Mail pharmacy claims processed                       171             255             487             767             902
Estimated plan participants
     (at year end)                                   521             505           1,500           2,500           2,500

</TABLE>


1      Reference is made to Item 1 hereof,  (Description of Business) and Item 7
hereof  (Management's  Discussion & Analysis)  for  descriptions  of the various
acquisitions  that have been  consummated in the last 3 years, and the financing
arrangements  that have  been set in place;  such  acquisitions  and  financings
affect the comparability of the information provided in the foregoing tables for
fiscal years 2001 through 2003.

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

     The audited  Consolidated  Financial  Statements  include  the  accounts of
Health  Card  and  its  wholly  owned  subsidiaries,  PAI,  PMP,  Centrus,  IPA,
Specialty,  NMHCRX Contracts,  Inc.  ("Contracts"),  PBM Technology,  Inc. ("PBM
Tech"),  NMHCmail  and  Integrail.  Also  included  are the accounts of Funding.
Unless the context  otherwise  requires,  references  herein to the "Company" or
"Health Card" refer to the Company and its subsidiaries on a consolidated basis.
The results of  operations  and balance  sheet of PAI have been  included in the
consolidation  as of July 20, 2000, the effective date that the Company acquired
PAI. The results of  operations  and balance  sheet of PMP have been included in
the  consolidation  as of March 5, 2001,  the  effective  date that the  Company
acquired PMP. The results of operations and balance sheet of Centrus and Funding
have been included in the  consolidation  as of January 29, 2002,  the effective
date that the Company  acquired  Centrus.  The results of operations and balance
sheet of Integrail  have been  included in the  consolidation  as of November 1,
2002,  the  effective  date that the Company  acquired  Integrail.  All material
intercompany   balances   and   transactions   have  been   eliminated   in  the
consolidation.

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

     Revenue  for  the  PBM  division  is  earned  and  recognized  as  follows:
administrative  fees are  agreed  upon  with the  sponsor  on either a per claim
charge or a per plan participant per month charge.  Per claim fees are billed to
sponsors for the claims  adjudicated during the period. Per plan participant per
month fees are generally billed to sponsors at the beginning of the month. Since
January 1, 2000,  all  services  have been  provided on a fee for service  basis
only.  The  amount of  revenue  related  to the drugs  dispensed  by  pharmacies
participating  in Health  Card's  pharmacy  network is recognized at the time of
dispensing the drug as the cost is incurred. The amount of revenue recognized is
reduced by the amount of rebates that Health Card shares with its sponsors.  The
specific  terms of the contracts  that Health Card enters into with its sponsors
will determine  whether Health Card  recognizes the gross revenue related to the
cost  of the  prescriptions  filled.  In  certain  cases,  the  Company  has not
recognized  the gross  revenue  or cost  related to  prescriptions  filled for a
specific sponsor. This has no impact on the Company's gross profit since neither
the revenue nor the related cost of the prescriptions is recorded.

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

                                                   Years Ended June 30,
                                             2001        2002            2003
Revenues relating to:
Pharmaceuticals                           $266,959     $447,862        $562,283
Administrative fees and other                5,160       11,970          10,983
                                          ---------    --------        --------

         Total Revenues                   $272,119     $459,832        $573,266
                                          --------     --------        --------

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

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

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

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

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

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

     Certain  of Health  Card's  sponsors  are  entitled  to all or a portion of
rebates received by Health Card, which portion varies  contractually by sponsor.
The  manufacturer  rebates  retained by Health Card,  after the sponsors receive
their contractual amounts,  have historically had a significant impact on Health
Card's financial performance. For the fiscal years ended June 30, 2001, 2002 and
2003  the  rebates  retained  by  Health  Card  has  equaled  19%,  19% and 11%,
respectively, of the Company's total gross profit. Due to the expected continued
growth and  diversification  of Health  Card's  business,  Health  Card  expects
rebates to continue to account for a significant,  but declining,  percentage of
its total gross profit.

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

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

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

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

Results of Operations

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

     Revenues  increased  $113.4  million,  or  approximately  25%,  from $459.8
million  for the fiscal  year ended June 30,  2002,  to $573.2  million  for the
fiscal year ended June 30, 2003. Of the increase,  $156.0 million was due to the
inclusion of revenues  from  Centrus,  since it was acquired on January 29, 2002
and included a full fiscal year in 2003 compared to a little over five months in
the fiscal year ended June 30, 2002.  Another  $84.2 million of the increase was
due to revenues  related to new sponsors or new services  offered  during fiscal
2003. These increases were partially offset by a revenue decrease related to two
factors:  1) two major sponsors terminated their contracts with Health Card, one
effective  June 30,  2002 and one  effective  December  31,  2002  leading  to a
reduction in revenue of  approximately  $88  million,  and 2) there were certain
contracts  during  the  twelve  months  ended  June 30,  2003  that the  Company
recognized  on a net revenue  basis  versus  fewer  contracts  during the twelve
months ended June 30, 2002 that the Company  recognized on a net revenue  basis.
The  specific  terms of the  contracts  that  Health  Card  enters into with its
sponsors will determine whether Health Card recognizes the gross revenue related
to the cost of the  prescriptions  filled.  For those contracts that Health Card
recognizes  net revenue,  there is no impact on gross  profit since  neither the
revenue nor the related costs of the  prescriptions is recorded.  Another factor
affecting  the  year-over-year  increase  was rebates  payable to the  Company's
sponsors  increased  by $23.2  for the  twelve  months  ended  June 30,  2003 as
compared to the twelve  months  ended June 30,  2002.  Since  these  rebates are
treated as a  reduction  in  revenues,  this led to a  reduction  in the overall
year-over-year revenue increase. The majority of the balance of the increase, or
approximately  $46 million,  was due primarily to increased  revenues from other
existing  sponsors  as a result of  several  factors  including  higher  charges
relating to  increased  cost of  pharmaceuticals,  new drugs,  plan  participant
growth and an increase in the average number of claims per plan participant.

     Cost of claims increased $100.7 million,  or approximately 24%, from $424.7
million  for the fiscal  year ended June 30,  2002,  to $525.4  million  for the
fiscal year ended June 30, 2003.  Centrus  accounted for $151.6 million,  of the
increase. This increase was partially offset by the two factors described in the
previous  paragraph,  namely, the loss of two major sponsors and the recognizing
of certain  contracts on a net revenue  basis.  An increase of $22.1  million in
gross rebates received,  which is treated as a reduction in cost of claims,  for
the fiscal  year ended June 30,  2003 as  compared to the fiscal year ended June
30, 2002 also led to a reduction in the year-over-year  increase. The balance of
the increase in cost of claims is related to the increased  revenue as described
above  related to both new and existing  sponsors.  As a percentage of revenues,
cost of claims decreased from 92.4% to 91.7% for the fiscal years ended June 30,
2002 and June 30, 2003, respectively.  These same two factors contributed to the
declining  costs as a percentage of revenue.  The two major sponsors are managed
care organizations.  Industry-wide,  managed care clients have a greater cost of
claims,  and consequently a lower gross margin,  than other types of business in
the PBM  industry.  While  not all of the  revenue  associated  with  these  two
sponsors was replaced by new business,  the new business,  for the most part was
not managed  care,  so  consequently  the cost of claims on the new business was
lower than on the business it replaced. In addition, the contracts recognized on
a net revenue  basis  decrease  the overall  Company  costs as a  percentage  of
revenue due to the cost not being  recognized on the  contracts  recorded on the
net revenue basis. The decline in cost of claims as a percentage of revenues was
moderated by the higher cost of claims on the Centrus  book of  business,  which
serves  managed care clients  primarily.  Centrus' cost of claims for the fiscal
year ended June 30, 2003 ran about 6 - 9 percentage points greater than the rest
of the Company's business,  and since Centrus accounted for 49% of the Company's
revenue in the fiscal year, this impacted the overall cost of claims percentage.

     Gross profit  increased  from $35.1  million for the fiscal year ended June
30,  2002 to $47.8  million  for the fiscal  year ended June 30,  2003;  a $12.7
million, or 36%, increase. In addition, to the revenue volume increase,  Centrus
accounted  for $4.3 million,  or 33%, of the  increase.  The increase in rebates
(and  administrative fees related to the collection of rebates) after accounting
for the amount of rebates that are shared with  sponsors,  accounted for another
$1.6 million,  or 13%. Gross profit, as a percentage of revenue,  increased from
7.6% to 8.3%  for the  twelve  months  ended  June 30,  2002 and June 30,  2003,
respectively.  The contracts the Company  recognizes on a net revenue basis have
the effect of  improving  the gross  margin as a percent  of revenue  due to the
lower revenue base.  Partially offsetting this impact, the Company has seen some
decline in profit margins due to competitive pressures.

     Selling,  general,  and  administrative  expenses,  which  include  amounts
charged by affiliates,  increased $8.7 million, or approximately 32%, from $27.2
million for the fiscal year ended June 30, 2002 to $35.9  million for the fiscal
year ended June 30, 2003. This increase is primarily  related to the acquisition
of Centrus. While the expenses specifically related to Centrus were $7.3 million
greater in the twelve  months ended June 30, 2003 as compared to the five months
since the  acquisition  in the  twelve  months  ended  June 30,  2002,  this was
partially offset by reductions in other areas of the Company related to the full
integration of Centrus. The Company analyzed every department in the Company and
made  decisions  concerning  the most  efficient  way to operate  regardless  of
location.  This  evaluation  has led to  synergies  across the  Company  and has
allowed  the  Company  to  maximize  the  utilization  of its  resources.  It is
anticipated that this kind of analysis and deployment of resources will continue
as the Company grows.

     Selling,  general, and administrative expenses also increased in the twelve
months  ended June 30,  2003 due to the  start-up of two new  activities  in the
quarter ended December 31, 2002. The Company  acquired  Integrail as of November
1, 2002 (See Note 2 to the Consolidated  Financial Statements  comprising Item 8
hereof). In the months since the Company acquired Integrail,  approximately $1.3
million of expenses were incurred  primarily  related to salary and benefits and
depreciation and amortization.  The other activity was the start-up of the build
out of a mail order  facility in Miramar,  Florida.  Prior to July 1, 2003,  the
Company  out-sourced  the total actual  fulfillment  of  prescriptions  that are
ordered by mail. By bringing these services  in-house the Company will be better
able to control service and cost for its customers.  For the twelve months ended
June  30,  2003,  approximately  $450,000  of  expenses  were  incurred  on this
endeavor. The division started dispensing pharmaceuticals as of July 1, 2003.

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

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

     Selling,  general,  and  administrative  expenses  as a percent  of revenue
increased  from 5.9% for the fiscal  year  ended  June 30,  2002 to 6.3% for the
fiscal year ended June 30, 2003.  The main reason for the increase is the impact
of recognizing  more contracts on a net revenue basis, as that has the effect of
dividing these same expenses over a smaller gross revenue base. In addition, the
acquisition of Integrail and the start-up of NMHCmail led to an increase in this
percentage.

     For the  fiscal  year ended  June 30,  2002,  the  Company  incurred  other
expense,  net,  of  approximately  $502,000.  For the fiscal year ended June 30,
2003, the Company incurred other expense,  net, of approximately  $804,000.  The
components  of  the  approximate  $302,000  increase  in  net  expense  were  an
approximate  $84,000  increase  in interest  expense,  an  approximate  $270,000
decrease in interest income, offset by an approximate $52,000 additional gain on
sold assets during the fiscal year ended June 30, 2002. The primary  reasons for
the net  increase  in  expense  were 1) the  interest  expense  incurred  on the
Company's  revolving  credit  facility  and on the Note  Offering to finance the
acquisition   of  Centrus   and   Integrail   (see  Item  1,   "Description   of
Business-Recent  Acquisitions",   and  Note  2  to  the  Consolidated  Financial
Statements  comprising  Item 8 hereof),  and 2) the reduction in interest income
since all cash  balances go towards  paying off the revolving  credit  facility.
Partially  offsetting the increase in other expense was an  approximate  $52,000
increase  in  deferred  gain on the sale of assets  related to a  sale/leaseback
transaction,  which gain of  approximately  $459,000  was  recorded  as deferred
revenue and is being recognized over the life of the lease,  which is thirty-six
(36) months.  (See Note 9 to the Consolidated  Financial  Statements  comprising
Item 8 hereof.)

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

     EBITDA  (earnings before interest,  taxes,  depreciation and  amortization)
increased  by  approximately  $5.1  million or 46%,  from $11.1  million for the
fiscal year ended June 30, 2002 to $16.3  million for the fiscal year ended June
30, 2003. The primary factor for the increase was the  approximate  $4.0 million
increase  in  operating  income  described  above.  In  addition,  there  was an
approximate   $736,000   increase  in  depreciation   and  amortization  and  an
approximate  $438,000 increase in other intangible  amortization  related to the
Company's  acquisitions.  (See "-- Fiscal Year Ended June 30,  2002  Compared to
Fiscal Year Ended June 30, 2001.")

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     The  Company  has  acquired  four  companies  in the last three  years.  In
addition,  the  Company  has  made,  in  prior  years,  significant  information
technology  infrastructure  investments  in  terms  of  purchased  hardware  and
internally  developed software.  Consequently,  there is a significant amount of
depreciation and amortization that flows through the Company's current financial
statements  related to these investments.  Therefore,  the Company believes that
EBITDA is an important measure of its current financial  performance.  EBITDA is
presented as net income plus the  provision for income  taxes,  other  expenses,
net,  and  depreciation  and  amortization.  While  EBITDA is not a  measure  of
financial  performance under generally  accepted  accounting  principles,  it is
provided as  information  for certain  investors  for analysis  purposes for two
reasons:  (1) it excludes the impact of depreciation and amortization related to
prior  investments  and (2) these  items  are not  controllable  in the  current
period. EBITDA is not meant to be considered a substitute or replacement for net
income as prepared in accordance with accounting  principles  generally accepted
in the United States. EBITDA is calculated as follows:

<TABLE>
<S>                                                                                <C>         <C>       <C>
                                                                      Year Ended June 30,
                                                    2001                       2002                  2003
                                          ---------------------- -------------------------- ------------------
                                          ---------------------- -------------------------- ------------------
Net income                                     $   1,158                   $   4,467             $   6,414
Provision for income taxes                           843                       2,900                 4,602
Other (income) expense, net                         (877)                        502                   804
Depreciation                                         700                       1,065                 1,389
Amortization                                       1,895                       2,199                 3,048
                                          ---------------------- -------------------------- ------------------
                                          ---------------------- -------------------------- ------------------
EBITDA                                         $   3,719                  $   11,133            $   16,257
                                          ====================== ========================== ==================
</TABLE>


Liquidity and Capital Resources

     The Company's  primary cash  requirements are for capital  expenditures and
operating  expenses,  including cost of  pharmaceuticals,  software and hardware
upgrades  and the  funding of  accounts  receivable.  Effective  July 2003,  the
Company  requires  cash to  carry  inventory  in its  mail  order  facility  and
specialty pharmacy. The Company also requires cash for potential acquisitions of
other pharmacy benefit  management  companies or of companies  providing related
services.  As of June 30,  2003,  the Company had a working  capital  deficit of
$32.6  million as compared to a working  capital  deficit of $42.7 million as of
June 30, 2002. The primary reason for the improvement in working capital was the
profitability  generated  by the  Company  during the fiscal year ended June 30,
2003. The Company has now acquired four  companies  since July 2000 (and a fifth
in July 2003)  utilizing  primarily  cash. This has had the effect of increasing
the  Company's  working  capital  deficits  until  sufficient  profitability  is
generated to pay back the cost of the acquisitions.  In addition,  the Company's
revolving credit facility is treated all as a short-term liability per generally
accepted accounting principles even though its terms do not expire until January
2005.

     Net cash  provided  by  operating  activities  was $12.4  million and $15.7
million for the fiscal  years ended June 30,  2002 and 2003,  respectively.  One
factor  leading to the $3.3 million  increase in cash provided by operations was
the $1.9  million of  incremental  net income  generated  during the fiscal year
ended June 30, 2003 as compared to the fiscal year ended June 30, 2002.  Another
factor in the  increase  in cash was the  changes in  accounts  receivables  and
payables during the two years. For the year ended June 30, 2002 accounts payable
and accrued expenses  increased by $41.7 million while receivables  increased by
$37.7 million, providing $4.0 million of cash. For the year ended June 30, 2003,
accounts payable increased by $6.8 million while  receivables  decreased by $1.3
million  generating  $8.1  million of cash.  Thus,  $4.1  million  more cash was
provided by  operations  from changes in  receivables  and  payables  during the
fiscal year ended June 30, 2003 as compared to June 30, 2002.

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

     Net cash used in investing  activities  was $6.0 million for the year ended
June 30,  2003,  as compared to $42.9  million for the year ended June 30, 2002.
The primary  differences in the two periods were the  acquisition of Centrus for
$40 million in the year ended June 30, 2002, and the acquisition of Integrail in
the year ended June 30, 2003. The net cash outlay for Integrail was  $1,472,425,
representing the initial payment of $1,400,000 plus $72,425 of related expenses.
No cash was assumed in the acquisition.

     During  the  year  ended  June  30,  2003  the  Company  borrowed  a net of
approximately $1.8 million under its revolving credit facility. These funds were
primarily  utilized to repay the  principal  balance of the  Convertible  Notes,
which had been put in place to  acquire  Centrus,  which  has had the  effect of
significantly reducing the interest expense that the Company incurs. The Company
also paid $0.8  million  towards its  outstanding  capital  lease and other debt
obligations during the fiscal year ended June 30, 2003.

     The  Company  has entered  into  various  capital  lease  transactions  for
hardware and  software.  The Company has also  assumed  various  capital  leases
through its acquisitions. The principal balance of all capital leases as of June
30, 2003 was approximately $808,000.

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

     On January 29,  2002,  the  Company  entered  into a $40 million  revolving
credit facility, details of which are set forth in Item 1 above and in Note 9 to
the Consolidated  Financial Statements  comprising Item 8 hereof.  Borrowings of
$28.7 million under the Facility were used to finance part of the purchase price
of the Company's acquisition of Centrus. The Facility contains various covenants
that,  among other  things,  require the Company to maintain  certain  financial
ratios, as defined in the agreements governing the Facility. As of September 15,
2003,  approximately  $19.1 million was outstanding under the Facility,  and the
Company was in compliance with its financial-ratios covenants.

         The total future payments under these contractual obligations as of
June 30, 2003 is as follows:
<PAGE>
<TABLE>
<S>                                                                      <C>    <C>    <C>    <C>    <C>    <C>

                                                              Payments Due by Period
Contractual Obligations                                         ($ in thousands)

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

Long Term Debt                       $ 15,683       $   15,683           $    __       $       __        $      __

Capital Lease Obligations                 808              481               327               __               __

Operating Leases                       11,206            2,414             4,370             1,934           2,488

Sale-leaseback                            592              444               148               __               __
                                     ________          _______          ________            ______         _______


Total Contractual Cash
Obligations                         $  28,289        $  19,022           $ 4,845            $1,934         $ 2,488
                                    =========        =========          ========           =======        ========
  </TABLE>

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

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

     The Sellers of Integrail  are eligible to receive from monies put in escrow
up to $700,000 if certain  operational  milestones  are achieved  over the first
twelve months.

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

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

Other Matters

Inflation

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

Subsequent Events

     On July 31, 2003, the Company entered into a Stock Purchase  Agreement with
Portland  Professional  Pharmacy  ("PPRX"),   Professional  Pharmacy  Associates
("PRXA",  and together with PPRX,  "PPP") and the individual  shareholders  (the
"PPP  Shareholders")  to purchase all of the shares of PPP for  $3,150,000  (the
"PPP  Acquisition").  In  addition,  the  Company  agreed  to  pay  to  the  PPP
Shareholders  up to  $7,000,000  over a  three-year  period if the PPP  business
achieved certain financial targets. PPP provides  specialty-pharmacy services in
a broad range of areas,  including women's health,  pediatric care, men's health
and  transplant.  Funds for the PPP  Acquisition  were supplied by the Company's
revolving credit facility.

     In connection with the PPP Acquisition, several members of PPP's management
team have joined the Company as  employees,  and have been granted stock options
to purchase an aggregate of 150,000 shares of Common Stock,  under the Company's
1999  Stock  Option  Plan,  as  amended.  As of August 1,  2003,  the  Company's
wholly-owned  subsidiary,  Ascend Specialty Pharmacy Services,  Inc.  ("Ascend")
assumed  all of the shares of PPP.  Each of PRXA and PPRX  continues  to operate
under their respective  names, as subsidiaries of Ascend, in the state of Maine.
The Company intends to position Ascend as a preferred provider with PPP's target
markets  while  focusing on the  extension  of their  specialty  services to the
Company's PBM division.

Critical Accounting Policies and Estimates

General

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

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

Revenue Recognition

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

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

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

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

Bad Debt

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

Deferred Taxes

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

Goodwill and Intangible Impairment

     In  assessing  the  recoverability  of the  Company's  goodwill  and  other
intangibles,  the Company must make assumptions  regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related  assumptions  change in the future, the Company
may be required to record  impairment  charges for these  assets not  previously
recorded.  On July 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible  Assets," and will be required
to analyze its goodwill for impairment  issues on a periodic  basis  thereafter.
During the year ended June 30, 2003,  the Company did not record any  impairment
losses related to goodwill and other intangible assets.

Capitalized Software

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

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

         Not applicable.


Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The audited  financial  statements of Health Card as of June 30, 2003, 2002
and 2001,  and the related  Schedules,  are included in this Form 10-K following
Item 14 hereof.


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

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


Item 9A.        CONTROLS AND PROCEDURES

     Health Card has  established  disclosure  controls and procedures to ensure
that material  information  relating to Health Card,  including its consolidated
subsidiaries, is made known to the officers who certify the financial reports of
Health  Card  and to  other  members  of  senior  management  and the  Board  of
Directors.

     Health Card's principal  executive officer and principal  financial officer
have concluded  that,  based on their  evaluation as of a date within 90 days of
the filing date of this Annual Report on Form 10-K, the disclosure  controls and
procedures  (as defined in Rules  13a-14(c) and 15d-14(c)  under the  Securities
Exchange Act of 1934, as amended (the  "Exchange  Act")) are effective to ensure
that the information  required to be disclosed by Health Card in reports that it
files or submits under the Exchange Act is recorded,  processed,  summarized and
reported within the time periods specified by the SEC rules and forms.

     There were no significant  changes in Health Card's internal controls or in
other factors that could  significantly  affect those controls subsequent to the
date of its most recent evaluation.



<PAGE>


                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  required is incorporated herein by reference to the fiscal
year 2003 definitive Proxy Statement under the caption  "Election of Directors",
which the Company anticipates will be filed by October 28, 2003.


Item 11. EXECUTIVE COMPENSATION

     The information  required by this item is incorporated  herein by reference
to the fiscal 2003  Definitive  Proxy  Statement  under the  caption  "Executive
Compensation", which the Company anticipates will be filed by October 28, 2003.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  required by this item is incorporated  herein by reference
to the fiscal 2003  Definitive  Proxy  Statement  under the  captions  "Security
Ownership of Certain  Beneficial  Owners" and Security Ownership of Management",
which the Company anticipates will be filed by October 28, 2003.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTONS

     The information  required by this item is incorporated  herein by reference
to the  fiscal  2003  Definitive  Proxy  Statement  under the  caption  "Certain
Relationships and Related  Transactions",  which the Company anticipates will by
filed by October 28, 2003.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Not applicable because this report is filed for a period ending prior
to December 15, 2003.



<PAGE>



                                     PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                  FORM 8-K

(a)  1.  Financial Statements
<TABLE>
<S>                                                             <C>    <C>    <C>    <C>    <C>    <C>

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

          Independent Auditors' Reports                                           F-2 - F-3

          Consolidated Balance Sheet as of June 30, 2002 and 2003                     F-4

          Consolidated Statement of Income for each of the years ended
          June 30, 2001, 2002 and 2003                                                F-5

          Consolidated Statement of Stockholders' Equity for each
          of the years ended June 30, 2001, 2002 and 2003                             F-6

          Consolidated Statement of Cash Flows for each of the years ended
          June 30, 2001, 2002 and 2003                                                F-7

                  Notes to Consolidated Financial Statements                      F-8 - F-31

         2.       Financial Statement Schedule

                  Schedule II:  Valuation and Qualifying Accounts                 S-1 - S-2

         3.       Exhibits

Exhibit
Number       Description of Exhibit

 2.1     Asset Purchase Agreement dated as of November 1, 2002, by and between Health Card,
         Integrail  Acquisition Corp., Health Solutions, Ltd., and certain security
         holders of Health Solutions, Ltd. (10)
 2.2     Assignment Agreement dated as of November 1, 2002, by and between
         Health Card, Integrail Acquisition Corp., and Health Solutions, Ltd. (10)
 2.3     Stock Purchase Agreement dated July 31, 2003, among Health Card and Portland
         Professional Pharmacy, Portland Professional Pharmacy Associates and the
         individuals listed on Schedule I thereto
 3.1     Certificate of Incorporation of Health Card (7)
 3.4     By-Laws of Health Card (7)
 4.1     Form of Specimen Common Stock Certificate (9)
 4.2     Form of Warrant Agreement, including form of Representatives' Warrants (1)
10.1     Mail Service Provider Agreement, dated July 1, 1996, between Health Card and
         Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.2     Amendment to Mail Service Provider Agreement, dated January 1, 1997, between
         Health Card and Thrift Drug, Inc. d/b/a Express Pharmacy Services (1)
10.3     Software License Agreement and Professional Service Agreement, dated February
         18, 1998, between Health Card and Prospective Health, Inc. (1)
10.4     1999 Stock Option Plan (1)
10.5     Employee Covenant Agreement, dated June 15, 1998, between Health Card
         and Mary Casale (1)
10.6     Employee Covenant Agreement, dated June 16, 1998, between Health Card
         and Ken Hammond (1)
10.7     Stock Option Agreement, dated August 3, 1999, between Health Card and Ken
         Hammond (4)
10.8     Employment Agreement, dated March 27, 2000, between Health Card and
         David Gershen (4)
10.9     Stock Option Agreement, dated May 1, 2000, between Health Card and David
         Gershen (4)
10.10    Employment Agreement, dated May 3, 2000, between Health Card and James
         Bigl (4)
10.11    Stock Option Agreement, dated June 12, 2000, between Health Card and James
         Bigl (4)
10.12    Stock Option Agreement, dated August 3, 1999, between Health Card and
         Kenneth J. Daley (4)
10.13    Stock Option Agreement, dated August 3, 1999, between Health Card and
         Gerald Angowitz (4)
10.14    Assignment, dated November 1, 1996, from Sandata, Inc., to BFS Realty,
         LLC (1)
10.15    Lease, dated August 10, 1998, between 61 Manorhaven Boulevard, LLC and
         Health Card (1)
10.16    Letter, dated June 3, 1999, from Bert Brodsky to Health Card (1)
10.17    Letter, dated June 3, 1999, from Gerald Shapiro to Health Card (1)
10.18    Agreement of Guaranty, dated June 1, 1998, by Bert E. Brodsky in favor of Health Card (1)
10.19    Promissory Note, dated July 31, 2000, made payable by P.W. Capital, LLC to the
         order of Health Card, in the amount of $3,890,940 (4)
10.20    Letter, dated  June 8, 1999, from P.W. Capital Corp. to Health Card (1)
10.21    Letter, dated June 9, 1999, from Bert E. Brodsky to Health Card (1)
10.22    Letter, dated June 8, 1999, from the Bert E. Brodsky Revocable Trust to Health Card (1)
10.23    Letter Agreement, dated June 30, 1999, between the Bert E. Brodsky Revocable
         Trust and Health Card (1)
10.24    Employment Agreement, dated July 1, 1999, between Health Card and Bert E. Brodsky (1)
10.25    Letter, dated June 8, 1999, from Bert E. Brodsky to Health Card (1)
10.26    Form of Lock-Up Agreement (1)
10.27    Acquisition and Merger Agreement, dated as of June 27, 2000, between
         Health Card and Pharmacy Associates, Inc. (3)
10.28    Lease Agreement, dated March 4, 1996, between Pharmacy Associates, Inc. and
         Executive Park Partnership (4)
10.29    Amendment to Lease, dated November 2, 1998, between Pharmacy Associates, Inc.
         and Executive Park Partnership (4)
10.30    Amendment to Lease, dated November 19, 1998, between Pharmacy Associates, Inc.
         and Executive Park Partnership (4)
10.31    Lease Agreement, dated July 8, 1999, between Pharmacy Associates, Inc. and
         Executive Park Partnership (4)
10.32    Asset Purchase Agreement dated as of March 5, 2001 among National Medical Health
         Card Systems, Inc., PMP Acquisition Corp., Provider Medical Pharmaceutical, LLC
         and members of PMP (5)
10.33    Employment Agreement, dated June 4, 2001, between National Medical Health Card
         Systems, Inc. and Tery Baskin (6)
10.34    Stock Option Agreement, dated June 4, 2001, between National Medical Health Card
         Systems, Inc. and Tery Baskin (6)
10.35    Stock Option Agreement, dated June 12, 2001, between National Medical Health Card
         Systems, Inc. and James Bigl (6)
10.36    Asset Purchase Agreement dated January 29, 2002 by and among the Company,
         Health Solutions Limited ("HSL"), HSL Acquisition Corp., a wholly-owned
         subsidiary of the Company, and the security holders of HSL (8)
10.37    Receivables  Purchase and Transfer  Agreement  dated January 29, 2002 by and
         among the Company and certain of its subsidiaries and NMHC Funding, LLC (8)
10.38    Loan and Security Agreement dated January 29, 2002, by and between NMHC Funding, LLC
         and HFC Healthco-4, LLC, an affiliate of Healthcare Finance Group, Inc. (8)
10.39    Lease Agreement dated as of August 1, 2001, between National Medical Health
         Card Systems, Inc. and BFS Realty, LLC (6)
10.40    Amended Lease Agreement dated as of August 1, 2001,  between National Medical
         Health Card Systems, Inc. and BFS Realty, LLC (6)
10.41    2003 Employee Stock Purchase Plan (11)
10.42    Amendment No. 2 dated April 15, 2002 to Employment Agreement between
         Health Card and James Bigl
10.43    Amendment No. 3 dated October 14, 2002 to Employment Agreement between
         Health Card and James Bigl
10.44    Amendment No. 4 dated November 6, 2002 to Employment Agreement between
         Health Card and James Bigl
10.45    Stock Option Agreement between Health Card and James Bigl dated February 20, 2001
10.46    Stock Option Agreement between Health Card and James Bigl dated April 30. 2002
10.47    Stock Option Agreement between Health Card and James Bigl dated June 26, 2002
10.48    Stock Option Agreement between Health Card and James Bigl dated July 22, 2003
10.49    Employment Agreement dated October 14, 2002 between Health Card and Bert Brodsky
10.50    Employment Agreement dated November 20, 2002 between Health Card and Agnes Hall
10.51    Stock Option Agreement between Health Card and Agnes Hall dated January 8, 2001
10.52    Amendment to Stock Option Agreement between Health Card and Agnes Hall dated
         January 8, 2001
10.53    Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001
10.54    Amendment to Stock Option Agreement between Health Card and Agnes Hall dated August 10, 2001
10.55    Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001
10.56    Amendment to Stock Option Agreement between Health Card and Agnes Hall dated December 4, 2001
10.57    Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002
10.58    Amendment to Stock Option Agreement between Health Card and Agnes Hall dated July 31, 2002
10.59    Stock Option Agreement between Health Card and Agnes Hall dated August 1, 2003
10.60    First Amendment dated November 6, 2002 to Employment Agreement between Health Card
         and David Gershen
10.61    Stock Option Agreement between Health Card and David Gershen dated February 20, 2001
10.62    Stock Option Agreement between Health Card and David Gershen dated September 24, 2001
10.63    Stock Option Agreement between Health Card and David Gershen dated August 1, 2002
10.64    Stock Option Agreement between Health Card and David Gershen dated August 1, 2003
10.65    First Amendment dated November 6, 2002 to Employment Agreement between Health Card
         and Tery Baskin
10.66    Stock Option Agreement between Health Card and Tery Baskin dated July 20, 2000
10.67    Stock Option Agreement between Health Card and Tery Baskin dated August 10, 2001
10.68    Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2002
10.69    Stock Option Agreement between Health Card and Tery Baskin dated September 19, 2002
10.70    Stock Option Agreement between Health Card and Tery Baskin dated August 1, 2003
10.71    Employment Agreement between Health Card and Patrick McLaughlin dated January 29, 2002
10.72    Stock Option Agreement between Health Card and Patrick McLaughlin dated January 29, 2002
10.73    Stock Option Agreement between Health Card and Patrick McLaughlin dated August 1, 2003
10.74    Amendment to Stock Option Agreement dated January 29, 2002 between Health Card and
         Patrick McLaughlin
10.75    Stock Option Agreement between Health Card and Gerald Angowitz dated November 20, 2000
10.76    Stock Option Agreement between Health Card and Gerald Angowitz dated February 20, 2001
10.77    Stock Option Agreement between Health Card and Gerald Angowitz dated April 9, 2003
10.78    Stock Option Agreement between Health Card and Kenneth J. Daley dated November 20, 2000
10.79    Stock Option Agreement between Health Card and Kenneth J. Daley dated February 20, 2001
10.80    Stock Option Agreement between Health Card and Kenneth J. Daley dated April 9, 2003
10.81    Stock Option Agreement between Health Card and Ronald L. Fish dated November 20, 2000
10.82    Stock Option Agreement between Health Card and Ronald L. Fish dated February 20, 2001
10.83    Stock Option Agreement between Health Card and Ronald L. Fish dated April 9, 2003
10.84    Stock Option Agreement between Health Card and Paul J. Konigsberg dated November 20, 2000
10.85    Stock Option Agreement between Health Card and Paul J. Konigsberg dated February 20, 2001
10.86    Stock Option Agreement between Health Card and Paul J. Konigsberg dated April 9, 2003
10.87    Stock Option Agreement between Health Card and Bert E. Brodsky dated February 20, 2001
10.88    Stock Option Agreement between Health Card and Gerald Shapiro dated February 20, 2001
10.89    Lease dated November 1, 2002 between B/A Airport Park Solutions, LLC and Health Card
10.90    Lease Addendum dated March 10, 2003 between B/A Airport Park Solutions, LLC and Health Card
10.91    Lease Agreement dated November 18, 2002 between Sunbeam Development Corporation and
         NMHCRx Mail Order, Inc.
10.92    Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development
         Corporation and NMHCRx Mail Order, Inc.
10.93    AmerisourceBergen Prime Vendor Agreement, dated July 21, 2003 between NMHCRx Mail Order, Inc.
         d/b/a NMHCmail and AmerisourceBergen Drug Corporation
14.      Code of Ethics
21.      List of Subsidiaries
23.1     Consent of Ernst & Young LLP to the incorporation by reference in the
         Registration Statement on Form S-8 (File No. 333-8224) of its report
         dated September 29, 2003
23.2     Consent of Goldstein Golub Kessler LLP to the  incorporation  by reference in the
         Registration  Statement on Form S-8 (File No. 333-8224) of its report
         dated September 29, 2003
31.1     Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of
         the Sarbanes-Oxley Act 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
         pursuant to Section 302 of the Sarbanes-Oxley Act
32.1     Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
32.2     Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
</TABLE>


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

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

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

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

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

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

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

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

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

     (10) Denotes  document  filed as an Exhibit to Health  Card's Form 10-Q for
the quarter ended September 30, 2002 and incorporated herein by reference.

     (11) Denotes document filed as an Exhibit to Health Card's Definitive Proxy
Statement  on  Schedule  14-A on October  25,  2002 and  incorporated  herein by
reference.

(b) Reports on Form 8-K

     A Form 8-K was filed with the Securities and Exchange Commission on May 16,
2003 and August 12, 2003.


<PAGE>


                                   SIGNATURES

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

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

By  /s/Bert E. Brodsky
    --------------------------------------------------------------------
       Bert E. Brodsky, Chairman
Date:  September 29, 2003

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

By    /s/  Bert E. Brodsky
   --------------------------------------------------------------------
           Bert E. Brodsky, Chairman of the Board
Date: September 29, 2003

By   /s/  Gerald Shapiro
  ---------------------------------------------------------------------
          Gerald Shapiro, Vice Chairman of the Board, Secretary
Date: September 29, 2003

By   /s/  James J. Bigl
   -------------------------------------------------------------------
          James J. Bigl, Chief Executive Officer, Principal Executive
            Officer and Director
Date: September 29, 2003

By   /s/  Gerald Angowitz
  -------------------------------------------------------------------
        Gerald Angowitz, Director
Date: September 29, 2003

By   /s/  Kenneth J. Daley
  -------------------------------------------------------------------
          Kenneth J. Daley, Director
Date: September 29, 2003

By   /s/  Paul J. Konigsberg
  -------------------------------------------------------------------
          Paul J. Konigsberg, Director
Date:September 29, 2003

By   /s/  Ronald L. Fish
  -------------------------------------------------------------------
          Ronald L. Fish, Director
Date: September 29, 2003

By   /s/ David J. Gershen
  -------------------------------------------------------------------
         David J. Gershen, Principal Financial and Accounting Officer
Date: September 29, 2003

<PAGE>


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









Independent Auditors' Reports                                    F-2 - F-3


Consolidated Financial Statements:
   Balance Sheet                                                    F-4
   Statement of Income                                              F-5
   Statement of Stockholders' Equity                                F-6
   Statement of Cash Flows                                          F-7
   Notes to Consolidated Financial Statements                   F-8 - F-31








<PAGE>




                         Report of Independent Auditors


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

     We have audited the  accompanying  consolidated  balance sheets of National
Medical Health Card Systems, Inc. and subsidiaries as of June 30, 2003 and 2002,
and the related  consolidated  statements of income,  stockholders'  equity, and
cash flows for the years then ended.  Our audits  also  included  the  financial
statement schedule listed in the index at Item 15(a). These financial statements
and  schedule  are  the   responsibility  of  the  Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of National
Medical Health Card Systems,  Inc. and  subsidiaries  at June 30, 2003 and 2002,
and the  consolidated  results of their  operations and their cash flows for the
years then ended in conformity with accounting  principles generally accepted in
the United  States.  Also,  in our  opinion,  the  related  financial  statement
schedule, when considered in relation to the basic financial statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.

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


                                                       /s/ Ernst & Young LLP
Melville, New York
September 5, 2003

                                                                             F-2

<PAGE>




                          INDEPENDENT AUDITOR'S REPORT




Board of Directors
National Medical Health Card Systems, Inc.


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

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the results of National Medical Health
Card Systems,  Inc. and  Subsidiaries'  operations  and their cash flows for the
year ended June 30, 2001 in  conformity  with  accounting  principles  generally
accepted in the United States of America.




GOLDSTEIN GOLUB KESSLER LLP
New York, New York

August 31, 2001

                                                                             F-3


<PAGE>


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


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

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

                                ($ in thousands)
-------------------------------------------------------------------------------------------------------------------
                                                                                    June 30,              June 30,
Assets                                                                                2002                 2003
                                                                                      ----                 ----
Current:

  Cash and cash equivalents (including cash equivalent investments of $1,187        $ 1,768               $ 5,222
    and $1,189, respectively)
  Restricted cash                                                                     2,653                 2,383
  Accounts receivable, less allowance for doubtful accounts of $2,248
             and $2,014, respectively                                                59,285                52,022
  Rebates receivable                                                                 15,775                24,584
  Due from affiliates                                                                   504                 4,165
  Deferred tax assets                                                                 1,542                 2,065
  Other current assets                                                                  610                 1,714
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                           82,137                92,155

  Property, equipment and software development costs, net                             9,031                 8,239
  Due from affiliates                                                                 3,620                     -
  Intangible assets, net of accumulated amortization of $406 and $1,210,
    respectively                                                                      2,523                 2,291
  Goodwill                                                                           52,035                53,669
  Other assets                                                                          549                   386
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
      Total Assets                                                               $  149,895            $  156,740
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current Liabilities:

  Accounts payable and accrued expenses                                          $  100,525            $  106,675
  Revolving credit facility and loans payable-current                                13,835                15,683
  Convertible notes payable                                                           8,000                     -
  Current portion of capital lease obligations                                          556                   481
  Due to officer/stockholder                                                            696                 1,117
  Income Taxes payable                                                                    -                   629
  Other current liabilities                                                           1,178                   137
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                      124,790               124,722
  Capital lease obligations, less current portion                                       809                   327
  Other long term liabilities                                                           865                 1,020
  Deferred tax liability                                                              2,154                 2,245
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                              128,618               128,314
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies
Stockholders' Equity:

  Preferred stock $.10 par value; 10,000,000 shares authorized, none outstanding         -                     -
  Common Stock, $.001 par value, 25,000,000 shares authorized,  7,550,239 and
    7,812,907 shares issued, 7,359,239 and 7,621,907 outstanding, respectively           8                     8

  Additional paid-in-capital                                                        14,292                15,027
  Retained earnings                                                                  7,721                14,135
  Treasury stock at cost, 191,000 shares                                              (744)                 (744)
---------------------------------------------------------------------------------------------------------------------------
     Total stockholders' equity                                                     21,277                28,426
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total Liabilities and Stockholders' Equity                                 $  149,895            $  156,740
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
                               See accompanying notes to consolidated financial statements

                                                                             F-4
</TABLE>

<PAGE>

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



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

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

              (All amounts in thousands, except per share amounts)
                                                                                    Years ended June 30,
                                                                       2001              2002                2003
                                                                       ----              ----                ----

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

Revenue                                                         $   272,119       $   459,832       $   573,266
Cost of claims                                                      249,572           424,733           525,472
-------------------------------------------------------------------------------------------------------------------

Gross profit                                                         22,547            35,099            47,794

Selling, general and administrative expenses*                        21,423            27,230            35,974

------------------------------------------------------------------------------------------------------------------
Operating income                                                      1,124             7,869            11,820
------------------------------------------------------------------------------------------------------------------

Other income (expense):
Interest expense                                                       (236)           (1,125)           (1,209)
Interest income                                                       1,113               522               252
Other income, net                                                         -               101               153
------------------------------------------------------------------------------------------------------------------
                                                                        877              (502)             (804)
------------------------------------------------------------------------------------------------------------------

Income before provision for income taxes                              2,001             7,367            11,016
Provision for income taxes                                              843             2,900             4,602

------------------------------------------------------------------------------------------------------------------
Net income                                                        $   1,158        $    4,467        $    6,414
==================================================================================================================

Earnings per common share:
  Basic                                                           $    0.16        $     0.62        $     0.85

==================================================================================================================
  Diluted                                                         $    0.16        $     0.56        $     0.80
==================================================================================================================


Weighted-average number of common shares outstanding:
  Basic                                                               7,101             7,213             7,590

==================================================================================================================
  Diluted                                                             7,200             7,909             8,036
==================================================================================================================

* Includes amounts charged by affiliates aggregating:           $     4,081        $    1,889          $    862


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

           See accompanying notes to consolidated financial statements
                                                                             F-5
</TABLE>



<PAGE>


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


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

                                            Notes
                                        Receivable   Preferred Stock   Common Stock     Additional    Retained   Treasury Stock
                                        ----------   ---------------   ------------    -----------   ---------   --------------
                                       Stockholders  Shares Amount    Shares Amount  Paid-in-Capital  Earnings    Shares Amount
                                       ------------  ------ ------    ------ ------  ---------------  --------    ------ ------
 Balance at June 30, 2000              $  (339)        -    $   -      6,912 $   7    $  12,405       $ 2,096      191  $ (744)
  Principal paid on notes receivable        65         -        -          -     -            -             -        -       -
  Interest paid on notes receivable        (26)        -        -          -     -            -             -        -       -
  Stock issued - PAI acquisition             -         -        -        400     -          850             -        -       -
  Net income                                 -         -        -         -      -            -         1,158        -       -

 --------------------------------------------------------------------------------------------------------------------------------
 --------------------------------------------------------------------------------------------------------------------------------
 Balance at June 30, 2001                 (300)        -        -      7,312     7       13,255         3,254      191    (744)
  Principal paid on notes receivable       300         -        -          -     -            -             -        -       -
 Exercise of stock options                  -          -        -        175     1          787             -        -       -
  Stock issued - PAI acquisition            -          -        -         63     -          250             -        -       -
  Net income                                -          -        -          -     -            -         4,467        -       -

 --------------------------------------------------------------------------------------------------------------------------------
 --------------------------------------------------------------------------------------------------------------------------------
  Balance at June 30, 2002                   -         -        -      7,550     8       14,292         7,721      191    (744)
  Exercise of stock options                  -         -        -        221     -          485             -        -       -
  Stock issued - PAI acquisition             -         -        -         42     -          250             -        -       -
  Net income                                 -         -        -          -     -            -         6,414        -       -

 --------------------------------------------------------------------------------------------------------------------------------
 --------------------------------------------------------------------------------------------------------------------------------
 Balance at June 30, 2003               $    -         -    $   -      7,813   $ 8     $ 15,027       $14,135      191  $ (744)
 --------------------------------------------------------------------------------------------------------------------------------
           See accompanying notes to consolidated financial statements

                                                                             F-6
</TABLE>

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

           NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                ($ in thousands)
                                                                                            Years Ended June 30,
                                                                                   ---------------------------------------
                                                                                   ---------------------------------------
                                                                                       2001         2002          2003
                                                                                       ----         ----          ----
Cash flows from operating activities:
             Net income                                                            $  1,158    $   4,467     $   6,414
               Adjustments to reconcile net income to net cash
               provided by operating activities:
                 Depreciation and amortization                                        2,585        3,264         4,437
                 Amortization of deferred gain                                            -         (102)         (153)
                 Net gain on disposal of capital assets                                   -         (331)          (13)
                 Provision for doubtful accounts                                        857          546           164
                 Compensation expense accrued to officer/stockholder                    482          154           821
                 Deferred income taxes                                                  391           13          (433)
                 Interest accrued on stockholders'/affiliate's loans                    (26)           -          (165)
                 Changes in assets and liabilities, net of effect from acquisitions:
                 Restricted cash                                                       (468)      (1,055)          270
                 Accounts receivable                                                (10,155)     (29,750)        7,486
                 Rebates receivable                                                  (1,304)      (7,986)       (8,809)
                 Other current assets                                                  (594)         387        (1,028)
                 Due to/from affiliates                                                (346)         351          (276)
                 Other assets                                                            42          (54)          (19)
                 Accounts payable and accrued expenses                               19,527       41,713          6,844
                 Income taxes payable and other current liabilities                     (56)          83          (163)
                 Other long term liabilities                                             (2)         715           308
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                             12,091      12,415        15,685
--------------------------------------------------------------------------------------------------------------------------
------------ -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
             Capital expenditures                                                    (3,842)      (3,196)       (2,468)
             Acquisition of Integrail, net of cash acquired                               -            -        (1,482)
             Acquisition of Centrus, net of cash acquired                                 -      (40,287)       (1,070)
             Acquisition of PAI, net of cash acquired                                (4,614)      (1,000)       (1,000)
             Acquisition of PMP, net of cash acquired                                (6,706)           -             -
             Proceeds from disposal of capital assets                                    30        1,321            22
             Repayment of note by stockholder                                             -          300             -
             Principal received on notes from stockholders                               65            -             -
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                               (15,067)     (42,862)       (5,998)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:

             Proceeds from exercise of stock options                                      -         788            485
             Proceeds from convertible note offering                                      -      11,600              -
             Repayment of convertible note offering                                       -      (3,600)        (8,000)
             Proceeds from revolving credit facility                                  4,000      28,700        688,750
             Repayment of revolving credit facility                                  (4,000)    (14,887)      (686,901)
             Deferred financing costs                                                     -        (486)           183
             Repayment of debt and capital lease obligations                           (742)       (777)          (750)
------------ -------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities                                    (742)     21,338         (6,233)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents                                 (3,718)     (9,109)         3,454
Cash and cash equivalents at beginning of year                                       14,595      10,877          1,768
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                          $  10,877  $    1,768     $    5,222
--------------------------------------------------------------------------------------------------------------------------
          See accompanying notes to consolidated financial statements
                                                                             F-7
</TABLE>

<PAGE>


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

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

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

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

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

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

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

     NMHCRX Mail Order,  Inc.  was  incorporated  in August 2002 to provide mail
order  pharmacy  services to the  Company's  existing  sponsors as well as other
small regional PBMs. Prior to opening its own facility in Miramar,  Florida, the
Company  outsourced  all its mail order  business.  The  subsidiary  has its own
employees and rents the facility, including a warehouse, from an unrelated third
party. All revenue  generated by Mail Order for fulfillment of prescriptions for
the Company's members,  with the exception of co-pays collected from members, is
eliminated in consolidation.  The revenue is eliminated on Mail Order's books as
the revenue is recorded in the Company's  PBM's books,  as it is the entity that
has contracted with the sponsor.

     The  Company  considers  all  highly  liquid  debt  instruments  and  other
short-term  investments  with an initial  maturity  date of three months or less
from purchase date to be cash equivalents. These also include short-term, highly
liquid  municipal  bonds with  interest  rates that are reset  monthly which are
readily  convertible into cash at par value (cost).  Restricted cash balances at
June 30, 2002 and 2003 includes  approximately $2,653 and $2,383,  respectively,
which are  restricted as to their use as related to the  maintenance  of minimum
cash balances in accordance with Ohio statute.

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

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

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

     The Company  follows the  provisions of EITF 00-14,  Accounting for Certain
Sales  Incentives  - Coupons,  Rebates  and  Discounts  in  connection  with the
Company's rebates to sponsors.  These rebates are recognized when the Company is
entitled to them in accordance with the terms of the Company's arrangements with
drug  manufacturers,  third  party  rebate  administrators,  and  the  Company's
sponsors,  and when the  amount of the  rebates  is  determinable.  The  Company
records the gross rebate receivable and the appropriate  payable to the sponsors
based on  estimates,  which are subject to final  settlement.  The estimates are
based upon the claims  submitted and the Company's  rebate  experience,  and are
adjusted as additional information becomes available. Currently some rebates are
processed by a third party rebate  administrator  and the remaining  rebates are
submitted by Specialty directly to the drug manufacturers for reimbursement. For
the years ended June 30, 2001, 2002 and 2003 the rebates retained by the Company
were approximately $4,255, $6,513 and $5,398, respectively.

     Mail Order  began  filling  prescriptions  out of the  Miramar  facility on
August 1, 2003. Mail Order maintains an inventory of  pharmaceuticals,  which it
purchases  from a drug  wholesaler or direct from the  manufacturer.  Mail Order
recognizes  revenue at the point of adjudication  for both the co-pay  collected
from the individual member, as well as for the "sale" of the prescription to the
PBM at specified prices.  Revenue from this sale is eliminated in consolidation.
Inventory is stated at the lower of cost (first in, first out method) or market.

     Integrail  invoices its  customers  quarterly  primarily  for license fees,
connectivity charges,  analytical support and implementation charges. Based upon
the contract  with the  customer,  they are  invoiced  either  retroactively  or
prospectively.  Revenue is recognized  equally over the quarter that is invoiced
for. License fees are based on an annual formula, which includes a flat base fee
and then a per member amount charge when the number of members  exceeds  various
thresholds.

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

     The costs of  software  developed  for  internal  use  incurred  during the
preliminary project stage are expensed as incurred. Direct costs incurred during
the application  development  stage are  capitalized.  Costs incurred during the
post-implementation/operation   stage  are  expensed  as  incurred.  Capitalized
software  development  costs are amortized on a  straight-line  basis over their
estimated  useful  lives.  During  the  years  ended  June 30,  2002  and  2003,
approximately  $824 and  $1,012,  respectively,  in software  development  costs
related to internal programming time were capitalized.

     Amortization of capitalized  amounts  commences on the date the software is
placed  into  use and is  computed  using  the  straight-line  method  over  the
estimated economic life of the software, which prior to June 2001 was five years
and  subsequently  has been  primarily  three  years.  Amortization  expense was
approximately $1,327, $1,834, and $2,245 for the years ended June 30, 2001, 2002
and 2003, respectively.

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

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

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

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

     Pro forma information  regarding net loss applicable to common stockholders
is required by SFAS 123,  "Accounting for Stock-Based  Compensation," which also
requires that the  information be determined as if the Company has accounted for
its stock options under the fair value method of that statement. For purposes of
pro forma  disclosures,  the estimated fair value of the options is amortized to
expense over the options'  vesting period.  The fair value for these options was
estimated  using  the  Black-Scholes  option-pricing  model  with the  following
weighted-average  assumptions  used for all  grants in the years  ended June 30,
2001, 2002, and 2003: no dividend yield,  weighted-average  expected life of the
option of five  years,  risk-free  interest  rate  ranges of .84% to 5.82% and a
volatility  of 90.8%,  86.2%,  and  83.2%,  respectively,  for all  grants.  The
weighted-average  value of  options  granted is $.96,  $6.77,  and $4.99 for the
three years ended June 30, 2001, 2002, and 2003.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation  - Transition  and  Disclosure."  SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based  Compensation,"  to provide  alternative  methods of
transition  to SFAS No. 123's fair value method of  accounting  for  stock-based
employee  compensation.  SFAS No. 148 also amends the  disclosure  provisions of
SFAS No. 123 to require  disclosure  in the  summary of  significant  accounting
policies  of the  effects  of an  entity's  accounting  policy  with  respect to
stock-based  employee  compensation  on reported net income.  While SFAS No. 148
does not amend SFAS No. 123 to require  companies to account for employee  stock
options using the fair value method,  the disclosure  provisions of SFAS No. 148
are  applicable  to  all  companies  with  stock-based  employee   compensation,
regardless  of whether they account for that  compensation  using the fair value
method of SFAS No. 123 or the intrinsic  value method of APB No. 25. The Company
adopted SFAS No. 148 effective December 31, 2002.

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

    Year ended June  30,               2001           2002         2003
   ----------------------------------------------------------------------------
   Reported net income               $1,158         $4,467       $6,414
   Stock compensation expense
    included in net  income               -              -            -
   Pro forma compensation expenses     (320)          (666)      (1,574)
   ----------------------------------------------------------------------------
   Pro forma net income              $  838         $3,801       $4,840
   ============================================================================
   Pro forma earnings per share:
    Basic                            $  .12          $ .53       $  .64
    Diluted                          $  .12          $ .48       $  .60
   ============================================================================

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

     Financial   instruments   which   potentially   subject   the   Company  to
concentrations  of  credit  risk  are  cash  balances   deposited  in  financial
institutions which exceed FDIC or SIPC insurance limits. Amounts on deposit with
financial institutions, which exceeded the FDIC or SIPC insurance limits at June
30, 2002 and 2003, were approximately $7,710 and $5,694, respectively.

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

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

     For  comparability,  certain 2001 and 2002 amounts have been  reclassified,
where appropriate,  to conform to the financial  statement  presentation used in
2003.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142,  Business  Combinations  and  Goodwill and Other  Intangibles,
respectively.  FASB 141 requires all business combinations  initiated after June
30, 2001 to be accounted for using the purchase method. Under FASB 142, goodwill
is no longer subject to  amortization  over its estimated  useful life.  Rather,
goodwill is subject to at least an annual  assessment for impairment by applying
a fair-value based test.  Additionally,  an acquired  intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual  or other  legal  rights,  or if the  intangible  asset can be sold,
transferred,  licensed, rented or exchanged, regardless of the acquirer's intent
to do so. The Company has adopted  SFAS Nos.  141 and 142 as of July 1, 2001 and
has performed the requisite  impairment testing. As of June 30, 2003 there is no
impairment to the goodwill recorded on the accompanying balance sheet.

     SFAS 142  requires  the  disclosure  of net income and  earnings  per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter  until  all  periods  presented  reflect  goodwill  accounted  for in
accordance with SFAS 142. The goodwill amortized in the year ended June 30, 2001
was $396.  Therefore,  had SFAS 142 been  effective  prior to July 1, 2001,  the
Company's net income would have been $1,554 or $0.22 per basic and diluted share
for the year ended June 30, 2001.

     The Company  follows the  provisions  of SFAS No. 144,  Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets,  that is applicable to financial
statements  issued for fiscal years  beginning  after  December  15, 2001,  with
transition provisions for certain matters.  FASB's new rules on asset impairment
supersede SFAS No. 121,  Accounting for the Impairment of Long-Lived  Assets and
for Long-Lived  Assets to be Disposed of, and provide a single  accounting model
for  long-lived  assets  to be  disposed  of.  Although  retaining  many  of the
fundamental  recognition  and  measurement  provisions  of SFAS No. 121, the new
rules significantly change the criteria that would have to be met to classify an
asset as  held-for-sale.  The new rules  supersede the  provisions of Accounting
Principals  Board  Opinion No. 30 ("APB No. 30") with  regard to  reporting  the
effects of a disposal  of a segment of a business  and require  expected  future
operating  losses from  discontinued  operations to be displayed in discontinued
operations in the period in which the losses are incurred  rather than as of the
measurement  date  as  presently  required  by APB No.  30.  In  addition,  more
dispositions  will qualify for discontinued  operations  treatment in the income
statement.  The  implementation  of SFAS No. 144 had no impact on the  Company's
financial statements as of and for the year ending June 30, 2003.

     Prior to July 1, 2002, long-lived assets were evaluated for impairment when
events or changes in  circumstances  indicated  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  existed,  the
related  assets would have been written down to fair value.  No such  impairment
existed through June 30, 2002.

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

     Half of the $1,400  purchase price was paid at the closing  directly to the
Sellers,  and half was deposited into escrow as security for the  performance of
certain  indemnification  obligations  of  the  Sellers.  The  Company  acquired
approximately  $500  of  HSL's  assets,  which  included  $158 of  property  and
equipment,  $225 of  software,  $76 of  prepaid  expenses,  and $41 of  accounts
receivable.  The Company also agreed to assume approximately $500 of liabilities
related to Integrail,  which included $166 of debt under capital leases,  $75 of
miscellaneous  payables,  and $259 due to HSL for prior  equipment  and services
provided to  Integrail  by HSL.  The  acquisition  was  accounted  for under the
purchase  method of accounting  and the results of Integrail's  operations  were
included in the consolidated financial statement commencing with the acquisition
date. The excess of the  acquisition  costs over the fair value of  identifiable
net assets acquired was $1,482, which consists of the following components;  (i)
software and company know how valued at $575, which will be amortized over three
(3) years;  and (ii)  goodwill  of $907,  which will not be  amortized  for book
purposes  per SFAS 142 (see Note 1). The  allocation  of the  purchase  price is
preliminary subject to final valuation. For tax purposes, the goodwill and other
intangibles  will be amortized  over fifteen years.  Funds for this  transaction
were supplied by the Company's revolving credit facility. The agreement provides
that if certain  operational  milestones  are achieved  over the next 12 months,
certain amounts will be released from the escrow to the Sellers.

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

     The aggregate  purchase  price of the  Acquisition  was $40,000 in cash, of
which $3,000 was held in escrow to secure certain  indemnification  obligations.
(All escrow funds have been released as of January 2003).  The Company  acquired
approximately  $1,400  of HSL's  assets  which  included  $900 of  property  and
equipment and $500 of software.  The Company also agreed to assume approximately
$1,400 of HSL's  liabilities  relating to the Centrus  business  which  included
$1,100  of  rebates  due to  sponsors,  $100  of  capital  leases,  and  $200 of
miscellaneous  payables.  The  acquisition  was accounted for under the purchase
method of accounting and the results of Centrus' operations were included in the
consolidated  financial  statements  commencing with the  acquisition  date. The
excess of the acquisition  costs over the fair value of identifiable  net assets
acquired was $40,672,  which consists of the following components:  (i) customer
relationships  valued at $2,415,  which will be  amortized  over five (5) years;
(ii) an employment agreement valued at $83, which will be amortized over two (2)
years:  (iii) non-compete  contracts valued at $76, which will be amortized over
four (4) years,  and (iv)  goodwill of $38,098,  which will not be amortized for
book  purposes  per SFAS 142 (see Note 1). For tax  purposes,  the  goodwill and
other intangibles will be amortized over fifteen years. In addition, the Company
has agreed to pay HSL, as additional  purchase price, up to $4,000 over a period
of three (3) years if the acquired Centrus business  achieves certain  financial
performance  targets during the two-year period  following the Closing.  HSL may
also be entitled  to an  additional  incentive  payment  based on the  financial
performance of the Centrus  business  during the one-year  period  following the
Closing.

     The financial  performance  targets were achieved during the first year and
$2,000 has been earned. Of this amount,  $1,000 was paid in May 2003 and another
$1,000 will be paid in May 2004. The additional incentive payment target was not
achieved and thus, there will be no payout of this item.

     Simultaneously  with  the  consummation  of the  Acquisition,  the  Company
entered  into an  Employment  Agreement  and a Stock Option  Agreement  with the
former president of Centrus, pursuant to which he will serve as President of PBM
Services for the Company.  Additionally,  several members of Centrus' management
team have joined the Company as employees and have been granted stock options to
purchase an aggregate of 300,000  shares of Common  Stock,  under the  Company's
1999 Stock Option Plan, as amended.

     On January 29, 2002,  the Company and certain of its  subsidiaries  entered
into a $40,000  secured  revolving  credit  facility (the  "Facility")  with HFG
Healthco-4 LLC, a specialty  finance  company.  In connection with the Facility,
the Company  and certain of its  subsidiaries  have  agreed to  transfer,  on an
on-going basis,  their accounts  receivable to Funding.  Funding  utilizes those
receivables as collateral to secure  borrowing under the Facility.  The Facility
has a three  year  term,  provides  for  borrowing  up to  $40,000 at the London
InterBank Offered Rate (LIBOR) plus 2.40% (3.5% at June 30, 2003) and is secured
by receivables and other assets of the Company and certain of its  subsidiaries,
as defined.  Borrowings  of $28,700 under the Facility were used to finance part
of the purchase  price of the  Acquisition  and will also be used by the Company
and  certain  of its  subsidiaries  for  working  capital  purposes  and  future
acquisitions in support of its business plan. The outstanding balance as of June
30, 2003 was  approximately  $15,662,  which is  classified  as short term.  The
excess  available  balance  on June 30,  2003  was  approximately  $24,338.  The
Facility requires the Company to maintain certain financial and other covenants.
The Company was in compliance  with all  covenants at June 30, 2003.  Details of
this financing are disclosed in Note 9 "Commitments and Contingencies".

     On January 22, 2002 the Company  completed a convertible note offering (the
"Note Offering") in the aggregate  principal amount of $11.6 million,  which was
subordinated  to the  Facility.  Pursuant  to  the  Note  Offering,  subscribers
received a  promissory  note (each a "Note")  paying  interest  quarterly on the
unpaid  principal  balance  at the  rate  of 12%  per  annum.  The  subscribers,
including two who are directors of the Company,  were all accredited  investors.
The Notes had a term of one year,  unless  otherwise  extended  pursuant  to the
terms of the Note. The Notes were convertible at any time at the election of the
holders into shares of the common stock,  par value $.001 per share (the "Common
Stock") of the Company ("Conversion Shares") at a conversion price of $12.00 per
share,  the fair value of the Common Stock on January 22, 2002. The Note holders
were granted certain registration  rights.  Proceeds from the Note Offering were
used to finance part of the purchase  price of the  Acquisition.  The Notes were
repaid in full on June 26, 2002.  However,  as of June 30,  2002,  $8,000 of the
$11,600 had not yet cleared the bank for payment.  As a result,  this amount was
re-classified back to notes payables as of June 30, 2002. The $8,000 cleared the
bank in early July 2002 which eliminated the notes payable at that time.

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

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

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

     Pursuant  to the  terms of the  Agreement  and Plan of Merger  between  the
Company and Pharmacy  Associates,  Inc.  ("PAI"),  dated July 20, 2000 (the "PAI
Agreement"),  the Company acquired PAI, a regional  pharmacy benefit  management
company operating in Arkansas, Louisiana and Mississippi. Under the terms of the
merger  agreement,  stockholders  of PAI received an aggregate of $6,000 in cash
and 400,000 shares of the Company's  common stock,  which was valued at $850, on
the acquisition  date. Of the 400,000 shares,  200,000 were placed in escrow for
two years to secure  certain  indemnification  obligations.  All of those shares
were released  from escrow in July of 2002.  The  acquisition  was accounted for
under the purchase method of accounting and the results of PAI's operations were
included  in  the  consolidated   financial   statements   commencing  with  the
acquisition  date.  The excess of the  acquisition  costs over the fair value of
identifiable  net assets  acquired was $6,345,  which  consists of the following
components:  (i)  customer  relationships  valued at $131,  which was  amortized
entirely over the first year,  (ii)  noncompete  contracts  valued at $44, which
will  be  amortized   over  five  years  using  the   straight-line   method  of
amortization,  and (iii)  goodwill of $6,170,  which has not been  amortized for
book  purposes,  since July 1, 2001 in  accordance  with SFAS 142.  The goodwill
associated  with  this  acquisition  is not  deductible  for tax  purposes.  PAI
stockholders were entitled to receive  additional  consideration of up to $2,000
payable in a combination of cash and  unregistered  common stock over a two-year
period if certain  financial targets of PAI are met, which will be accounted for
as an addition to goodwill.  The financial targets were achieved for both years;
therefore,  $750 in cash and $250 in Common Stock (62,500 shares valued at $4.00
per share) was paid and  issued in  August,  2001,  and $750 in cash and $250 in
Common Stock  (41,668  shares valued at $6.00 per share) were paid and issued in
August, 2002.

     The following  summarized  unaudited  pro forma  results of operations  set
forth  below for the years  ended June 30,  2002 and 2003 assume the Centrus and
Integrail acquisitions had occurred as of the beginning of these periods:

 June 30,                                          2002                 2003
-------------------------------------------------------------------------------
Revenue                                         $619,562             $573,485
Net income                                        $1,145               $4,827
Net income per common share:
 Basic                                             $0.16                $0.64
 Diluted                                           $0.14                $0.60
Pro forma weighted-average number of
 common shares outstanding:
  Basic                                        7,212,536            7,590,425
  Diluted                                      7,909,054            8,036,398
-------------------------------------------------------------------------------

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

     The change in the  carrying  amount of goodwill for the year ended June 30,
2003 is as follows:

        Balance as of July 1, 2002                                     $52,035
        Centrus additional consideration earned                          1,073
        Integrail acquisition                                              907
        Settlement of PMP preacquisition claim                            (346)
                                                                       -------
        Balance as of June 30, 2003                                    $53,669

     Approximately $45,796 of the Company's June 30, 2003 goodwill is deductible
for income tax purposes on a straight-line basis over 15 years.

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

                                    2002                             2003
                        ==========================    ==========================
                        ==========================    ==========================
                          Gross                        Gross
     Asset Class        Carrying   Accumulated       Carrying      Accumulated
                         Amount    Amortization       Amount       Amortization
                       ---------   ------------      --------      ------------

         Customer       $ 2,720       $  362         $ 2,720           $ 967
      relationships
       Non-compete          120           25             120              53
        agreements
      Employment             89           19              86              62
       agreements
    Company know how          -            -             575             128
                        --------     --------       ---------        --------
                        --------     --------       ---------        --------
                       $   2,929      $  406         $ 3,501         $ 1,210
                       =========     ========       =========        ========

     The  weighted  average  remaining  amortization  period for all  intangible
assets is  approximately  3.2  years at June 30,  2003.  Amortization  period by
intangible asset class is as follows:

      Asset Class                                      Amortization Period
  Customer relationships                                 2.5 - 5 years
  Non-compete agreements                                  4 - 5 years
  Employment agreements                                     2 years
  Company know how                                          3 years

     The  aggregate  amortization  expense was  approximately  $804 for the year
ended June 30, 2003, and the estimated  amortization for future years ended June
30 is as follows:



     Year ending June 30,
            2004                                                    $749
            2005                                                     703
            2006                                                     561
            2007                                                     278
-----------------------------------------------------------------------------
                                                                  $2,291
=============================================================================
<TABLE>
<S>                                                                       <C>    <C>    <C>    <C>    <C>    <C>

 3.   PROPERTY,               Property, equipment and software development costs consist of the following:
      EQUIPMENT
      AND SOFTWARE                                                                                     Estimated
      DEVELOPMENT             June 30,                                 2002              2003         Useful Life
      COSTS:
                              -----------------------------------------------------------------------------------
                              Equipment                           $   3,748         $   4,602        3 to 5 years
                              Software                                9,673            11,241        3 to 5 years
                              Leasehold improvements                    528               935       Term of lease
                              Automobile                                 44                44             5 years
                              Equipment acquired under
                               capital leases                         2,575             2,575        5 to 8 years
-----------------------------------------------------------------------------------------------------------------
                                                                     16,568            19,397
                              Accumulated depreciation
                               and amortization                       7,537            11,158

-----------------------------------------------------------------------------------------------------------------
                                                                     $9,031          $  8,239
=================================================================================================================
</TABLE>


     Accumulated   depreciation  on  equipment   acquired  under  capital  lease
obligations was $867 and $1,240 as of June 30, 2002 and 2003, respectively.

     Depreciation and amortization  expense on property,  equipment and software
development  costs  for the years  ended  June 30,  2001,  2002,  and 2003,  was
approximately $2,028, $2,898, and $3,150, respectively.

     4. RELATED PARTY TRANSACTIONS:  Due to affiliates historically  represented
trade payables for developed software, other software services, operating leases
and maintenance costs.

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

     As of  June  30,  2001,  Sandata  owed  Health  Card  $504,  pursuant  to a
promissory note,  dated May 31, 2000, in the original  principal amount of $500,
plus interest at the rate of 9 1/2%; interest on such note was payable quarterly
and such note was paid in full on May 31, 2001.  On June 9, 2001,  Sandata again
gave a  promissory  note to Health Card in the  principal  amount of $500,  with
interest at the rate of 7%, which was to have been due on June 8, 2002. The note
was paid in full on August 15, 2001.  As of June 30,  2003,  Sandata owed Health
Card $11 for pharmacy benefit services.

     Due from  affiliates  includes a note from another  company  affiliated  by
common  ownership.  As of June 30,  2003,  the balance  due from this  affiliate
including  accrued  interest was $3,782.  Such amount bore  interest at 8.5% per
annum,  payable  quarterly.  The note was  collateralized by 1,022,758 shares of
$.001  par  value  common  stock of the  Company  registered  in the name of the
Company's Chairman of the Board and was subject to his personal  guarantee.  The
note was payable in annual  installments  of $400,  consisting  of principal and
interest  at the  rate of 8 1/2%  per  annum  on each of the  first  and  second
anniversary  dates,  with the total remaining  balance of principal and interest
due and payable on July 31, 2003. The first two $400 payments due under the note
as of July 31, 2001 and 2002 were  satisfied by  offsetting an equal amount owed
by the Company to the Chairman of the Board. The balance of the note,  including
accrued  interest,  was paid in full on July 31,  2003.  The note was  satisfied
through a combination of monies owed by the Company to the Chairman of the Board
and a cash payment made by the  affiliate  to the  Company.  Effective  July 31,
2001, the interest rate on the note was changed to the prime rate in effect from
time to time (4.25% at June 30, 2003).  For the years ended June 30, 2001, 2002,
and 2003,  the  amount  of  interest  income  accrued  related  to this note was
approximately $340, $206, and $163, respectively.

     On Feb 8, 2001, the President  gave to the Company his  Promissory  Note in
the amount of $34 as evidence of the loan by the  Company to the  President.  On
April 12,  2002,  the  Promissory  Note was amended  and the  Company  agreed to
increase  the loan to $100.  The loan bears  interest at 8%, and is due on April
25, 2003.  The interest rate was lowered  effective  July 1, 2002 to the rate at
which  the  Company  borrows  money  (3.5% at June 30,  2003).  The  President's
repayment obligation under the Promissory Note has been absolved by the Company.
The Company  set-off from the bonus paid the  President in July 2003, as part of
his annual compensation,  the amount that was otherwise payable by the President
under the Promissory Note including accrued interest.

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

     The  Company  has  accrued  approximately  $176  of  interest  income  from
affiliates  arising from the three loans  described  above during the year ended
June 30, 2003.

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

     The Company  purchased  computer  equipment and furniture and fixtures from
affiliates during the years ended June 30, 2002 and 2003 for approximately  $122
and $4, respectively.

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

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

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

 Year ended June 30,                    2001           2002              2003
-------------------------------------------------------------------------------
Software maintenance and
 related services and supplies (a)   $  1,244        $   496               $0
Management and consulting fees (b)      1,294            303               84
Administrative, accounting
 services and supplies (c)                894            548              236
Rent and utilities (d)                    649            542              542
-------------------------------------------------------------------------------
                                       $4,081         $1,889             $862
===============================================================================
     (a) A  company  affiliated  by common  ownership  historically  provided  a
significant  portion of the Company's  software  maintenance  (Note 1),  certain
other software services, computer hardware under operating leases and maintained
certain computer hardware.

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

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

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

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

     For the years  ended June 30, 2002 and 2003,  the  Company  paid the annual
premium of  approximately  $60 on behalf of the Company's  Chairman of the Board
for a life  insurance  policy.  The  aggregate  amount of premiums paid for such
policy will be repaid to the Company upon the payment of the  policy's  benefits
to the beneficiary.

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

 5. ACCOUNTS PAYABLE             Accounts payable and accrued expenses consist of the following:
    AND ACCRUED EXPENSES:
                              June 30,                                                  2002               2003
                              -----------------------------------------------------------------------------------

                              Claims payable                                          $78,436            $76,195
                              Rebates payable to sponsors                              17,921             24,082
                              Trade payables, accrued expenses and other payables       4,168              6,398

-----------------------------------------------------------------------------------------------------------------
                                                                                     $100,525           $106,675
=================================================================================================================
</TABLE>
 6. CAPITAL LEASE
     OBLIGATIONS:
                      The following is a schedule, by year, of future
                      minimum lease payments under capitalized leases,
                      together with the present value of the net minimum
                      lease payments at June 30, 2003:

                      Payments for the year ending June 30,
                              2004                                      $533
                              2005                                       336
  -----------------------------------------------------------------------------
                     Total minimum lease payments                        869

                     Less amount representing interest                    61
-----------------------------------------------------------------------------
                     Present value of net minimum lease payments         808
                     Less current portion                                481

-----------------------------------------------------------------------------
                     Long-term lease obligations                        $327
=============================================================================

     7. MAJOR  CUSTOMERS  AND  PHARMACIES:  For the year  ended  June 30,  2001,
approximately  16% of  revenue  was from one plan  sponsor,  which  was the only
sponsor that represented more then 10% of the Company's  revenues.  For the year
ended June 30,  2002,  approximately  15% and 10% of  revenue  was from two plan
sponsors.  For the year ended June 30,  2003,  approximately  28% of revenue was
from one plan sponsor. Amounts due from the respective sponsors at June 30, 2002
and 2003 approximated $13,386 and $7,049, respectively. As of June 30, 2003, the
Company's  arrangement  with its current major sponsor is for three years ending
December 31, 2005. One of the Company's  major sponsors  terminated its contract
as of June 30, 2002 and another one  terminated  its contract as of December 31,
2002.

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

     For the year ended June 30, 2001,  approximately 44% and 26%, respectively,
of the cost of claims were from two pharmacy chains. For the year ended June 30,
2002,  approximately  22% of the cost of claims was from one pharmacy chain. For
the year ended June 30, 2003,  approximately 21% and 11%,  respectively,  of the
cost of  claims  were  from two  pharmacy  chains.  Amounts  payable  to the two
pharmacy chains at June 30, 2003 was approximately $23,189.

 8. TAXES ON INCOME:

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

--------------------------------------------------------------------------------
  Year ended June 30,                 2001              2002           2003
      Current:
      Federal                         $364          $   2,149       $  3,953
      State                             89                738          1,085
-------------------------------------------------------------------------------
                                       453              2,887          5,038
-------------------------------------------------------------------------------

  Deferred:
    Federal                            324                 23           (356)
    State                               66                (10)           (80)

-------------------------------------------------------------------------------
                                       390                 13           (436)
-------------------------------------------------------------------------------
  Total provision                     $843             $2,900         $4,602

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

  Year ended June 30,                    2001           2002             2003
-------------------------------------------------------------------------------

 Statutory rate                          34.0%          34.0%          35.0%
 State taxes - net of federal taxes       5.1            5.1            6.7
  Permanent differences                   4.2            0.3            0.1
  Other                                  (1.2)            --             --
-------------------------------------------------------------------------------
                                         42.1 %        39.4%          41.8%
===============================================================================
 Deferred income tax assets (current and noncurrent)resulting from temporary
 differences are as follows:

    June 30,                               2002                 2003
-------------------------------------------------------------------------------
 Accounts receivable allowances           $1,004                 $836
 Vacation expense accrual                    100                  138
 Officer/stockholder bonus accrual           326                  973
 Deferred revenue                            102                  118
 Other                                        10                    -
-------------------------------------------------------------------------------
                                          $1,542               $2,065
===============================================================================

     Deferred  income tax  liabilities of $2,154 and $2,245 at June 30, 2002 and
2003, respectively, resulted from temporary differences between depreciation and
amortization of property and equipment.

     9.  COMMITMENTS  AND   CONTINGENCIES:   The  Company   currently   occupies
approximately  26,500 square feet of office space at 26 Harbor Park Drive,  Port
Washington,  New York 11050 (the "Leased  Premises").  The Company subleases the
Leased Premises from BFS Realty,  LLC, an affiliate of the Chairman of the Board
(the  "Affiliate").  The  Affiliate  leases the Leased  Premises from the Nassau
County Industrial Development Agency, pursuant to a lease which was entered into
by the agency and the  Affiliate in July 1994,  and which expires in March 2005.
The Affiliate has the right to purchase the Leased  Premises upon  expiration of
this lease.  The  Affiliate  subleases  a portion of the Leased  Premises to the
Company (the  "Lease").  As of November 1, 2001,  the Company and the  Affiliate
amended the Lease.  The Lease provides that,  effective August 1, 2001, the rent
payable by the Company shall be an aggregate annual rent of $308. While formerly
the Company made estimated  monthly real estate tax,  utilities and  maintenance
expense payments to the Affiliate,  the Lease now provides that the Company will
pay its  pro-rata  share of such  expenses  directly,  to the  entities  to whom
payment must be made.  The Company  estimates  that such monthly  expenses  will
approximate  an aggregate of $336, per year. The annual rent will increase by 5%
per year during the term of the Lease.  The annual expenses are also expected to
increase, although the Company cannot estimate by how much. The Lease expires in
July,  2010.  Additional  space is currently  being built in the Leased Premises
which will allow the Company to  reconfigure  its existing space and to move all
its employees in Port Washington into contiguous space. As part of this process,
the  Company  will  reassess  its space  needs and  occupy  additional  space as
required.  It is expected  that any  additional  space taken would not exceed an
annual rent of  $200,000.  The space is  currently  planned to be  available  by
January,  2004. Leasehold improvements made to this space during the years ended
June 30, 2002 and 2003 were approximately $60 and $1, respectively.

     Pursuant to a lease dated  August 10, 1998 and expiring on August 31, 2005,
Health Card occupies approximately 1,500 square feet at 63 Manorhaven Boulevard,
Port Washington,  New York, which is used as a pharmacy.  The landlord for these
premises is 61 Manorhaven Boulevard, LLC, of which the Company's Chairman is the
sole member.  The current rent is $1,914 per month. The annual rent increases by
5% per year. Additional rent, in the form of certain expenses, is also payable.

     In August 2001, the Company entered into a lease with P.W. Capital, LLC, an
affiliated  Company,  to rent a two  family  home  for  the  use of  out-of-town
employees while in Port Washington. The Company evaluated the cost of hotels for
these individuals and determined it was more cost efficient to rent the house at
a monthly  rate of  $5,500.  During the fiscal  year  ended June 30,  2003,  the
Company paid P.W. Capital, LLC, $66,000 in rent for this facility.  For the same
reasons, the Company rents two houses from Living in Style, LLC, an entity owned
by three of the Company's  executive  officers.  Pursuant to leases dated May 1,
2002 and expiring  April 30, 2007,  the Company paid an aggregate of $127,050 in
rent for these two  facilities  during the fiscal year ended June 30, 2003.  The
annual rent for each of the facilities increases by 5% per year.

     Additionally,  the Company leases office space through its  subsidiaries in
Little Rock,  Arkansas,  Tulsa,  Oklahoma and Latham, New York. The Company also
leases space for its mail order  pharmacy,  plus  warehouse  space,  in Miramar,
Florida.  The aggregate  annual rental payments for leased space in Little Rock,
Arkansas,  Tulsa,  Oklahoma and Latham,  New York. The Company also leases space
for its mail order  pharmacy,  plus  warehouse  space in Miramar,  Florida.  The
aggregate   annual  rental   payments  for  leased  space  in  Little  Rock  are
approximately $194; for leased space in Tulsa are approximately $24; for Latham,
approximately  $383; and for Miramar  approximately $142. The Company intends to
move its current office space in Portland, Maine, which was acquired on July 31,
2003 (see Note 16), to a larger  office and warehouse  space in South  Portland,
Maine.

     Real estate rental expense,  including utilities,  for the years ended June
30,  2001,  2002,  and  2003,  was   approximately   $792,  1,169,  and  $1,792,
respectively.   Of  these   amounts,   approximately   $564,   $542,  and  $542,
respectively, were charged by affiliates under operating leases.

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

     Future minimum payments under the  noncancelable  operating leases for real
estate and office  equipment with related and other parties at June 30, 2003 are
as follows:

 Year ending June 30,
          2004                                                  $  2,414
          2005                                                     2,405
          2006                                                     1,965
          2007                                                     1,059
          2008                                                       875
       Thereafter                                                  2,488
-------------------------------------------------------------------------------
                                                                 $11,206
===============================================================================

     In addition to the  operating  leases  above,  the Company  entered  into a
sale-leaseback  operating  lease of certain fixed assets  (principally  computer
hardware and externally  developed  software) with an affiliate of the Company's
Vice Chairman.  The minimum future operating lease payments at June 30, 2003 are
as follows:

     Year ending June 30,

          2004                                                     $ 444
          2005                                                       148
-------------------------------------------------------------------------------
                                                                   $ 592
===============================================================================

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

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

     An action was  commenced  against  the Company on April 30, 2002 by Midwest
Health Plan Inc.  ("MHP") in the United  States  District  Court for the Eastern
District of Michigan.  The amended complaint alleges,  among other things,  that
the  parties  entered  into a contract  dated July 1999 (the  "Agreement"),  and
further alleges that the Company has overcharged MHP for the  administration  of
prescription benefit services in contravention to the terms of the Agreement and
breached  its  fiduciary  duties by making a profit.  MHP is  seeking  $3,000 in
damages.  The Company filed an answer and  counterclaim on June 12, 2002. In the
counterclaim, the Company claimed damages in excess of $2,800 based on Midwest's
failure to pay under a contract.  In late June 2002,  Midwest agreed to make two
payments in the amount of $1,340 and $1,360 to  partially  settle the  Company's
claims  against  Midwest.  Midwest  has now added a fiduciary  duty  claim.  The
Company continues to have  counterclaims  totaling over $200 against Midwest for
Midwest's  failure to pay the amounts it agreed to pay Health Card for goods and
services.  The  Company's  motion for  partial  summary  judgment  and motion to
dismiss the  fiduciary  duty claim will be heard on November 6, 2003.  Discovery
will close  September 30, 2003.  The court has not set a trial date. The Company
believes the claims  alleged in the  complaint  are without merit and intends to
vigorously defend the action.

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

     On January 29, 2002,  the Company and certain of its  subsidiaries  entered
into the  Facility,  a $40 million  secured  revolving  credit  facility  with a
specialty  finance  company.  In connection  with the Facility,  the Company and
certain of its  subsidiaries  have agreed to sell, on an on-going  basis,  their
accounts receivable to Funding. Funding utilizes those receivables as collateral
to secure  borrowings  under the Facility.  The Facility has a three-year  term,
provides for  borrowing up to $40 million at the London  InterBank  Offered Rate
(LIBOR)  plus 2.4% (3.5% at June 30,  2003) and is secured  by  receivables  and
other  assets of the Company and certain of its  subsidiaries.  The  outstanding
balance as of June 30, 2003 was $15,662, which was all classified as short term.
The  Facility  requires  the Company to  maintain  certain  financial  and other
covenants. The Company was in compliance with all covenants at June 30, 2003.

     10. STOCK OPTIONS AND WARRANTS: During the years ended June 30, 2001, 2002,
and 2003,  the Company  granted  stock  options under the 1999 Stock Option Plan
(the "Plan"). During 2002, the Company amended the Plan and increased the number
of shares  issuable in connection with options granted under the Plan. The total
number of shares of common stock  reserved by the Company for issuance under the
Plan is  2,850,000  plus an  indeterminable  number of  shares  of common  stock
issuable upon the exercise of "reload options." There are no options outstanding
that contain the "reload" provision.  Stock options outstanding have a life of 4
to 10 years, as defined in Section 422 of the Internal  Revenue Code.  Incentive
options may not be granted  for a price less than 100% of the fair market  value
of the  common  stock  as of the  date of the  grant  or 110% in the  case of an
individual who owns more than 10% of the combined voting power of all classes of
stock of the  Company.  All  options  to date  have been  issued  with an option
exercise price at or above the fair market value of those options on the date of
grant.

     The following tables summarize  information about stock option activity for
the years ended June 30, 2001, 2002, and 2003:

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


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

        Outstanding options at June 30, 2000                         656,469       $     5.98
         Canceled                                                   (251,127)            6.23
         Granted                                                     837,942             2.92
       ---------------------------------------------------------------------------------------
        Outstanding options at June 30, 2001                       1,243,284             3.87
         Canceled                                                   (222,775)            8.46
         Granted                                                   1,015,760            10.36
         Exercised                                                  (175,243)            4.49
      ----------------------------------------------------------------------------------------
       Outstanding options at June 30, 2002                        1,861,026             6.77
         Canceled                                                    (73,634)            6.99
         Granted                                                     402,498             8.46
         Exercised                                                  (221,000)            2.20
      ----------------------------------------------------------------------------------------
       Outstanding options at June 30, 2003                        1,968,890       $     7.61
      ========================================================================================

     The following table summarizes  information about stock options outstanding
        at June 30, 2003:


                                                             Outstanding                            Exercisable
                                              --------------------------------------------    --------------------------
                                              -------------- --------------- -------------    ------------ -------------
                                                               Weighted-      Weighted-                     Weighted-
                                                                Average        Average                       Average
                       Option                  Number of       Remaining      Exercise        Number of     Exercise
                    Price Range                  Shares          Life           Price           Shares        Price
                    -----------------------   -------------- ------------    -------------    ------------  ------------
                    -----------------------   -------------- ------------    -------------    ------------  ------------
                    $  1.67  to $  2.51            365,995   2.65 years            $1.81         165,995         $1.77
                    $  2.52  to $  3.78             26,000   3.09 years            $3.12          15,435         $3.07
                    $  3.79  to $  5.69            192,900   2.57 years            $4.60         132,955         $4.73
                    $  5.70  to $  8.55            300,801   2.39 years            $7.67         105,782         $7.48
                    $  8.56  to $ 12.84          1,081,355   4.44 years           $10.19         147,277        $10.41
                    $ 12.85  to $ 15.10              1,839   3.63 years           $14.68             617        $14.68

                    -----------------------   -------------- ------------    -------------    ------------  ------------
                    -----------------------   -------------- ------------    -------------    ------------  ------------
                    $ 1.67 to   $15.10           1,968,890   3.13 years            $7.61         568,061         $5.81
                    =======================   ============== ============    =============    ============  ============
</TABLE>

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

     11. 2000  RESTRICTED  STOCK GRANT PLAN:  On October 16, 2000,  the board of
directors  approved the adoption of the Company's  2000  Restricted  Stock Grant
Plan (the "Stock Grant Plan"). The Stock Grant Plan was subsequently  adopted by
the shareholders at the Company's annual meeting on November 20, 2000. The Stock
Grant Plan provides for the issuance of shares that are subject to both standard
restrictions  on the  sale  or  transfer  of such  shares  (e.g.,  the  standard
seven-year   vesting  schedule  set  forth  in  the  Stock  Grant  Plan)  and/or
restrictions that the board may impose, such as restrictions  relating to length
of service, corporate performance or other restrictions. As of June 30, 2003, no
grants had been made under the Stock  Grant Plan and,  therefore,  no shares had
vested under it. There are 700,000  shares of common stock reserved for issuance
in connection with grants made under the Stock Grant Plan.


     Supplemental cash flow information is as follows:

    Year ended June 30,                        2001           2002         2003
    ---------------------------------------------------------------------------

   Cash paid:
    Interest                          $      236     $     1,110     $   1,194
    Income taxes                           1,287           2,277         4,039

   Noncash investing and
    financing activities:
  Issuance of common stock
   in connection with the
   acquisition of PAI                       850             250            250
-------------------------------------------------------------------------------

     13. EMPLOYEE  BENEFIT PLAN: The Company  maintains a 401-K plan that covers
substantially all Company employees. Participants may elect to contribute to the
plan a minimum of 1% to a maximum of 18% of their  annual  compensation,  not to
exceed  a dollar  limit  set by law.  Monthly,  the  Company  will  determine  a
discretionary  matching contribution equal to a percentage of each participant's
contribution.  Contributions  made by the  Company  for the years ended June 30,
2001, 2002, and 2003 were approximately $109, $79, and $228, respectively.

     14.  EARNINGS PER SHARE:  A  reconciliation  of shares used in  calculating
basic and diluted earnings per share follows:

  Year ended June 30,                      2001            2002          2003
-------------------------------------------------------------------------------

  Basic                                  7,100,674      7,212,536     7,590,425
  Effect of assumed conversion
   of employee stock options                65,406        661,999       445,973

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

--------------------------------------------------------------------------------
  Diluted                                7,199,526      7,909,054     8,036,398
================================================================================

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


   Year ended June 30,                2001             2002             2003
-------------------------------------------------------------------------------

 Number of options and warrants    866,284           435,700           922,787

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

===============================================================================
 Weighted-average exercise price   $   5.22      $     12.23         $    10.47



15.      QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<S>                                                                <C>           <C>      <C>            <C>     <C>            <C>


   (In thousands, except per share amounts)                 FY 2003                                             FY 2002
-----------------------------------------------------------------------------------------------------------------------------------
Quarters ended                                 6/30       3/31       12/31       9/30       6/30       3/31      12/31       9/30
-----------------------------------------------------------------------------------------------------------------------------------
Revenue                                     $148,397   $126,538    $150,964   $147,367   $145,995   $145,683    $87,509     $80,645

Income before provision for income taxes       2,986      2,941       2,777      2,313      2,323      1,839      1,799       1,406

Net income                                     1,676      1,735       1,638      1,365      1,327      1,103      1,048         989

Earnings per common share:
  Basic                                          .22        .23         .22        .18        .18        .15        .15         .14
  Diluted                                        .21        .22         .20        .17        .16        .14        .13         .13

Common share prices:
  High                                         11.84       9.65        9.75      10.80      12.90      15.61      10.40        4.82
  Low                                           8.00       8.00        6.58       6.40       7.90       9.10       2.65        1.45

</TABLE>

<PAGE>


     16.  SUBSEQUENT  EVENTS: On July 31, 2003, the Company entered into a Stock
Purchase Agreement with Portland  Professional  Pharmacy ("PPRX"),  Professional
Pharmacy Associates  ("PRXA",  and together with PPRX, "PPP") and the individual
shareholders  (the "PPP  Shareholders") to purchase all of the shares of PPP for
$3,150 (the "PPP  Acquisition").  In addition,  the Company agreed to pay to the
PPP  Shareholders  up to $7,000  over a  three-year  period if the PPP  business
achieved certain financial targets. PPP provides  specialty-pharmacy services in
a broad range of areas,  including women's health,  pediatric care, men's health
and  transplant.  Funds for the PPP  Acquisition  were supplied by the Company's
revolving credit facility.

     In connection with the PPP Acquisition, several members of PPP's management
team have joined the Company as  employees,  and have been granted stock options
to purchase an aggregate of 150,000 shares of Common Stock,  under the Company's
1999  Stock  Option  Plan,  as  amended.  As of August 1,  2003,  the  Company's
wholly-owned  subsidiary,  Ascend Specialty Pharmacy Services,  Inc.  ("Ascend")
assumed  all of the shares of PPP.  Each of PRXA and PPRX  continues  to operate
under their respective  names, as subsidiaries of Ascend, in the State of Maine.
The Company  intends to position PPP as a preferred  provider  with PPP's target
markets  while  focusing on the  extension  of their  specialty  services to the
Company's PBM division.

<PAGE>


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
 FINANCIAL STATEMENT SCHEDULE




Board of Directors
National Medical Health Card Systems, Inc.


     The audit  referred to in our report to the board of  directors of National
Medical  Health Card  Systems,  Inc.  and  Subsidiaries,  dated August 31, 2001,
relating to the  consolidated  financial  statements of National  Medical Health
Card Systems,  Inc. and Subsidiaries,  included the audit of the schedule listed
under  Item 15 of Form 10-K for the year  ended June 30,  2001.  This  financial
statement  schedule  is the  responsibility  of the  Company's  management.  Our
responsibility  is to express an opinion on this  financial  statement  schedule
based upon our audit.

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




GOLDSTEIN GOLUB KESSLER LLP
New York, New York

August 18, 2001


                                                                             S-1

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

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

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

Reserves and allowances deducted from asset accounts:

  Allowance for doubtful accounts

  Year ended June 30, 2001               $   727         $   942         $   (96)       $  274 (b)       $   1,847
  Year ended June 30, 2002                 1,847             546            (145)            -               2,248
  Year ended June 30, 2003                 2,248             164            (279)         (119)(c)           2,014

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

                                                                             S-2
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