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Nutrition Management Services Copa (NMSCA) SEC Filing 10-K Annual report for the fiscal year ending Thursday, June 30, 2005

Nutrition Management Services Copa

CIK: 879303 Ticker: NMSCA

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

 (MARK ONE)

     [ X ] ANNUAL  REPORT  PURSUANT TO SECTION 13
           OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
           1934 (Fee  required) For Fiscal year ended
           June 30, 2005
                                                      OR

     [   ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D)
           OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required)
           (NO FEE REQUIRED)

           For the transition period from _____ to _____

                         Commission file Number 0-19824

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

                      NUTRITION MANAGEMENT SERVICES COMPANY
                      -------------------------------------
             (Exact name of registrant as specified in its charter)

          Pennsylvania                                  23-2095332
          ------------                                 -----------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

                725 Kimberton Road, Kimberton, Pennsylvania 19442
                -------------------------------------------------
               (Address of principal executive office) (Zip Code)


        Registrant's telephone number, including area code: 610-935-2050
                                                            ------------

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

          Name of Each Exchange
          on Which Registered                     Title of Each Class
          -------------------                     -------------------

                None

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

                              Title of Each Class
                              -------------------
                 Shares of Class A Common Stock (no par value)

                            (COVER PAGE 1 OF 2 PAGES)




     Indicate  by  checkmark  whether the  registrant  (1) has filed all reports
     required to be filed by Section 13 or 15(d) of the Securities Exchanges 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 the Registrant's  knowledge, in definitive proxy or information
     statements  incorporated  by reference in Part III of this Form 10-K or any
     amendment to this Form 10-K. [x]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
     defined in Exchange Act Rule 12b-2). YES:                 NO:      X
                                               -----------         ------------

     The aggregate  market value of voting stock (Class A Common  Stock,  no par
     value) held by  non-affiliates  of the  Registrant  as of June 30, 2005 was
     approximately $342,826.

     Indicate the number of shares  outstanding of each of the issuer's  classes
     of common stock, as of the latest  practicable  date: At September 9, 2005,
     there was outstanding  2,747,000 shares of the Registrant's  Class A Common
     Stock, no par value, and 100,000 shares of the Registrant's  Class B Common
     Stock, no par value.

     DOCUMENTS INCORPORATED BY REFERENCE
     -----------------------------------

     The information  required by Part III for Form 10-K will be incorporated by
     reference to certain  portions of a  definitive  proxy  statement  which is
     expected to be filed by the  Registrant  pursuant to Regulation  14A within
     120 days after the close of its fiscal year.

     This report  consists of  consecutively  numbered  pages  (inclusive of all
     exhibits and including this cover page).  The Exhibit Index appears on page
     20.


                            (COVER PAGE 2 OF 2 PAGES)



PART I

ITEM 1 - BUSINESS

GENERAL

Nutrition  Management  Services  Company  (the  "Company"  or the  "Registrant")
provides food,  facilities  operations and housekeeping  management  services to
continuing care facilities, hospitals and retirement communities.

The Company was incorporated  under the laws of the Commonwealth of Pennsylvania
on March 28, 1979, and focuses on the continuing care and  health-care  segments
of the food service market.  Its customers  include  continuing care facilities,
hospitals and retirement communities.

On November 25, 1991, the Company organized Apple Management Services Company to
provide management service expertise.

On May 31, 1994, the Company purchased  twenty-two (22) acres of land containing
a  40,000  square  foot  building  formerly  used as a  restaurant  and  banquet
facility.  The  Company  renovated  the  property  to serve  as a  comprehensive
training facility for Company employees.  In addition,  the facility serves as a
showroom for  prospective  customers who can observe the Company's  programs for
nursing  and  retirement  home  dining and  hospital  cafeteria  operations.  In
September  1997,  the  Company  opened  the  retail  restaurant  portion  of the
Collegeville  Inn Conference & Training  Center.  In connection  therewith,  the
Company  expended  approximately  $6,000,000  in  renovation  work  through  the
issuance of two twenty-year  bonds dated December 1996 and its internal  working
capital.  The Company opened the banquet and training division during its second
quarter of fiscal year 1998. The remaining division of the project was available
for  operations in the third  quarter of fiscal 2000.  The agreement of sale for
the land  dated  September  8,  2004  has been  terminated  and the  Company  is
currently  exploring  several  alternatives  for the  land,  including,  but not
limited to, the sale of the land.  Effective  June 27, 2005,  the Company closed
the buffet  restaurant at the Collegeville Inn Conference and Training Center to
make the facility available for catered events.

On November 14, 1997, the Company organized Apple Fresh Foods, Ltd. to develop a
cook-chill  food  preparation  technology  for use in the Company's food service
business.  Apple Fresh Foods,  Ltd.  operations are located in the  Collegeville
Inn.

The Company is exploring all  reasonable  alternatives  to improve its operating
results,  including but not limited to,  increasing  food service  revenues with
targeted marketing efforts,  increasing  revenues from the sale of the Company's
Cook Chill products,  the sale or lease of all or part of the  Collegeville  Inn
Conference  and Training  Center,  sale of excess land at the  Collegeville  Inn
Conference and Training Center and reduction of operating expenses. There can be
no assurance as to the success of any or all of these alternatives.


                                       2


FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

See Note O on page F-20 of the Consolidated Financial Statements.

DESCRIPTION OF SERVICES

The Company  provides  contract food,  facilities  operations  and  housekeeping
services to continuing care facilities,  hospitals,  and retirement communities.
The  Company  provides  complete  management  and  supervision  of the  dietary,
facilities and housekeeping  operations in its customers' facilities through the
use of on-site management staff, quality and cost-control programs, and training
and  education  of  dietary  staff.  The  Company's  operational  districts  are
supported by Regional  Managers,  District Managers,  Registered  Dietitians and
Quality Assurance staff.

The  Company  seeks to provide its  services  at a lower cost than  self-managed
facilities,  while maintaining or improving  existing service,  nutritional care
standards and regulatory compliance.

MARKETING AND SALES

The  Company's  customers  include  continuing  care  facilities,  hospitals and
retirement communities,  which range in size from small individual facilities to
large multi-facility operations. Although many facilities perform their own food
service  functions  without  relying upon outside  management  firms such as the
Company,  the Company  expects the market for its services to grow as facilities
increasingly  seek to contain  costs and are  required to comply with  increased
governmental regulations.

The  Company's  services  are  marketed  at the  corporate  level  by its  Chief
Executive  Officer,  its  President,  and  its  Marketing  Representatives.  The
Company's  services are marketed  primarily  through  in-person  solicitation of
facilities.  The Company also utilizes direct mail and  participates in industry
trade shows.

MARKET FOR SERVICES

The market for the Company's  services  consists of a large number of facilities
involved  in various  aspects of the  continuing  care and health  care  fields,
including nursing homes,  retirement  communities,  hospitals and rehabilitation
centers.  Such  facilities  may be specialized  or general,  privately  owned or
publicly  traded,  for  profit or  not-for-profit  and may serve  residents  and
patients on a continuing or short-term basis.

SERVICE AGREEMENTS

The Company provides its services under several different financial arrangements
including  a fee basis and  profit  and loss  basis.  As of June 30,  2005,  the
Company provided  services under various service  agreements at forty-eight (48)
facilities. At certain of these facilities, the Company has contracts to provide
vending  services  and  housekeeping  services in  addition  to the  contract to
provide  food  services.  Most of these  contracts  have one year  terms and are
automatically  renewable  at the  end  of  each  service  year.  The  agreements
generally  provide that either party may cancel the  agreement  upon ninety (90)
days written notice.


                                       3


In consideration  for providing its services,  the Company expects to be paid by
its clients in accordance  with the credit terms agreed upon which range from 30
days to 90 days.

MAJOR CUSTOMER

The  Company's  Food  Service  Management  Segment had sales to three  customers
representing approximately 29%, 21% and 11%, respectively, of total revenues for
the year ended June 30, 2005.  For the years ended 2004 and 2003,  the Company's
Food  Service  Management  Segment  had  sales  to  one  customer   representing
approximately  28% and 26% of total revenues,  respectively.  The loss of any of
these  customers  could have a material  adverse effect on the Company's  future
results of operations.

COMPETITION

The Company  competes mainly with regional and national food service  management
companies  operating in the continuing care and health care industries,  as well
as with the self managed departments of its potential clients.

Although the  competition  to service these  facilities is intense,  the Company
believes that it competes effectively for new agreements as well as for renewals
of existing agreements based upon the quality and dependability of its services.
The  Company's  ability  to compete  successfully  depends  upon its  ability to
maintain and improve  quality,  service and  reliability,  to attract and retain
qualified  employees  and to  continue  to  expand  its  marketing  and  service
activities.

EMPLOYEES

At June 30, 2005, the Company employed a total of  approximately  354 employees.
Approximately  175 of those  employees serve in various  executive,  management,
administrative,  quality  assurance  and sales  capacities.  The  remaining  179
employees are primarily dietary and housekeeping workers. Approximately 89 (50%)
of the Company's  dietary and  housekeeping  workers are covered by a collective
bargaining agreement. The Company's collective bargaining agreement commenced in
2003 and ends in 2006. The Company makes  contributions  to the union's benefits
funds as required by the collective bargaining agreement.  The Company considers
its relationships with its employees and unions to be satisfactory.

PURCHASING

For the years  ended June 30,  2005,  2004 and 2003,  respectively,  the Company
purchased the following  percentages of its food and non-food  products from two
vendors:

                                       Years ended June 30,
                                   2005       2004        2003
                                   ----       ----        ----
          Vendor A:                 45%        40%         37%
          Vendor B:                 19%        18%         18%


                                       4


While the Company maintains a good relationship with these vendors, in the event
of a  disruption  in  the  Company's  relationship  with  these  vendors  or any
disruption in the vendors' business, the Company has alternate sources of supply
for its food and non-food products.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

Not applicable.

ITEM 2 - PROPERTIES

The  Company  leases  its  corporate  offices,  located at 725  Kimberton  Road,
Kimberton,  Pennsylvania, which consists of approximately 8,500 square feet from
Ocean 7, Inc., a corporation  controlled by the Chief  Executive  Officer of the
Company. The initial term of the lease expired on June 30, 2003 and continues on
a month-to-month  lease based on terms generally  similar to those prevailing to
unrelated  parties.  During the three years ending June 30, 2005, 2004 and 2003,
the Company paid the related  entity rent in the amounts of  $259,758,  $261,766
and  $232,259,  respectively.  The  Company  leases an  apartment  from the same
company to accommodate visiting clients and employees.

In  addition,  the Company is provided  with office  space at each of its client
facilities.

The  Company  owns  approximately  twenty-two  acres  of land  in  Collegeville,
Pennsylvania.  In 1997,  the Company  completed its  renovations  of an existing
40,000  square foot  building  to serve as a training  facility  and  conference
center.

The Company presently owns food service equipment,  computers, office furniture,
and equipment,  automobiles and trucks.  Management believes that all properties
and  equipment  are  sufficient  for  the  conduct  of  the  Company's   current
operations.

ITEM 3 - LEGAL PROCEEDINGS

On February  7, 2001,  the Company  filed a suit  against a major  client in the
Court of Common Pleas of Chester County,  Pennsylvania,  which was  subsequently
removed  to the  United  States  District  Court  for the  Eastern  District  of
Pennsylvania.  On February 25,  2005,  judgment was entered on a jury verdict in
favor of the Company,  in the amount of  $2,500,000  for damages  related to its
claims, including breach of contract and contractual interference.  The client's
counterclaim  was  dismissed  by the judge.  The Company  filed an appeal of the
jury's failure to award interest. Fees due to the Company's legal counsel in the
amount of $340,000 have been placed in escrow pending the outcome of the appeal.
The  former  client did not appeal the jury  verdict  and the  Company  received
$2,500,000 on June 1, 2005.  For the year ended June 30, 2005, the jury award is
reported as Other Income,  net of legal fees and related  expenses in the amount
of $378,762.

The Company is involved in litigation with a construction  contractor related to
the renovations of Collegeville Inn Conference and Training Center.  The Company
denies  its  liability  for the  contractor's  claims and has  asserted  offsets
against the amounts claimed. The case is currently in discovery.


                                       5


Although  it is not  possible  to  predict  with  certainty  the  outcome of the
unresolved legal action, or the range of possible loss or recovery,  the Company
believes these  unresolved  legal actions will not have a material effect on its
financial position or results of operations.

In  addition  to the  litigation  described  above,  the  Company  is exposed to
asserted and unasserted claims in the normal course of business.  In the opinion
of management,  the resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Class A Common Stock No Par Value, (the "Class A Common Stock") is
currently  trading on the OTC Pink Sheets  (Ticker  Symbol - NMSCA.PK)  and is a
penny stock. The Company's Class A Common Stock traded on the OTC Bulletin Board
until January 7, 2005,  at which time trading  commenced on the OTC Pink Sheets.
Securities and Exchange Commission regulations generally define a penny stock to
be an equity  security  that is not  listed on NASDAQ or a  national  securities
exchange  and that has a market  price of less than $5.00 per share,  subject to
certain  exceptions.  The regulations of the Securities and Exchange  Commission
require broker-dealers to deliver to a purchaser of the Company's Class A Common
Stock a  disclosure  schedule  explaining  the penny stock  market and the risks
associated  with it.  Various sales  practice  requirements  are also imposed on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions).  In addition,  broker-dealers
must provide the customer  with current bid and offer  quotations  for the penny
stock,  the  compensation  of  the  broker-dealer  and  its  salesperson  in the
transaction  and monthly  account  statements  showing the market  value of each
penny stock held in the customer's account.

The following  table shows the range of high and low bid  quotations as reported
on the OTC  Electronic  Bulletin  Board or the OTC Pink Sheets for the  quarters
ending during the last two fiscal years for the Class A Common Stock:

     Fiscal 2005                   High           Low
     ------------                  ----           ---
     Fourth Quarter                $0.40          $0.33
     Third Quarter                  0.35           0.31
     Second Quarter                 0.58           0.27
     First Quarter                  0.75           0.58

     Fiscal 2004                   High           Low
     -----------                   ----           ---
     Fourth Quarter                $1.15          $0.22
     Third Quarter                  0.22           0.20
     Second Quarter                 0.21           0.20
     First Quarter                  0.21           0.20


                                       6


The  prices   presented  are  bid  prices,   which   represent   prices  between
broker-dealers  and  do  not  include  retail  mark-ups  and  mark-downs  or any
commission  to the  broker-dealer.  The above  prices do not  reflect  prices in
actual transactions.

HOLDERS

As of September 8, 2005, there were  approximately  forty (40) holders of record
of the Class A Common Stock.

DIVIDENDS

The Company has not paid any  dividends on its Class A or Class B Common  Stock.
It is not expected  that the Company will pay any  dividends in the  foreseeable
future.  The  Company's  credit  facilities  prohibit  it from  paying  any cash
dividends.

ITEM 6 - SELECTED FINANCIAL DATA

The  selected  historical  financial  data  presented  below  should  be read in
conjunction  with,  and is  qualified  in its  entirety  by  reference  to,  the
Consolidated Financial Statements and the notes thereto.

                                                                          Years ended June 30
                                                  2005               2004             2003              2002              2001
                                                  ----               ----             ----              ----              ----
Revenue                                        $26,602,161       $27,999,905       $27,306,030       $29,906,631       $40,870,720
Gross profit                                     4,914,568         5,257,520         4,621,590         6,223,884         7,621,056
Income/(loss) from Operations                     (770.801)         (856,851)       (1,099,435)          (86,087)          138,720
Other income/(expense)                           1,854,038          (195,283)         (217,393)         (290,616)         (462,885)
Net income/(loss)                                  775,657          (850,434)         (819,441)         (286,724)         (315,952)

Per share of common stock (basic and diluted):
     Net (loss) income                             $ 0.27            ($ 0.30)          ($ 0.29)           ($0.10)           ($0.11)
                                                  ========           ========          ========           =======           =======

Weighted average common shares
outstanding                                     2,847,000          2,847,000         2,847,000         2,847,000         2,847,000
                                                =========          =========         ==========        =========         =========

                                                            As of June 30
                                                  2005               2004             2003              2002              2001
                                                  ----               ----             ----              ----              ----
Working capital                               $ 1,581,159         $  226,441       $ 1,726,474       $ 2,923,148       $ 2,875,949
Total assets                                   16,190,634         14,279,295        15,142,714        17,352,016        18,504,547
Long-term debt                                  5,604,521          5,376,922         5,339,343         6,273,998         6,453,248
Stockholders' equity                            5,413,580          4,629,683         5,480,117         6,299,558         6,586,282


                                                                 7


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward looking statements within the meaning of
Section 27A of the  Securities  Act of 1993, as amended,  and Section 21E of the
Securities Exchange Act of 1934 as amended,  which are intended to be covered by
the safe  harbors  created  thereby.  Although  the  Company  believes  that the
assumptions  underlying  the  forward-looking  statements  contained  herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the  forward-looking  statements included in this Form 10-K
will prove to be accurate.

In  light  of the  significant  uncertainties  inherent  in the  forward-looking
statements  included  herein,  the inclusion of such  information  should not be
regarded  as a  representation  by the  Company  or any  other  person  that the
objectives and plans of the Company will be achieved.

RESULT OF  OPERATIONS  YEAR ENDED JUNE 30, 2005  COMPARED TO YEAR ENDED JUNE 30,
2004

Revenues for the year ended June 30, 2005 ("Fiscal  2005") were  $26,602,161,  a
decrease of $1,397,744 or 4.9% compared to revenues of $27,999,905  for the year
ended June 30, 2004 ("Fiscal  2004").  This decrease is primarily due to the net
impact of revenues from new contracts versus revenues from lost contracts.

Cost of operations  for Fiscal 2005 was  $21,687,593  compared to $22,742,385 in
Fiscal  2004,  a decrease  of  $1,054,792  or 4.6%.  This  decrease  in costs of
operations is related to the decrease in revenues during the period.

Gross  profit for Fiscal 2005 was  $4,914,568  or 18.4% of revenue,  compared to
$5,257,520  or 18.8% of revenue in Fiscal  2004, a decrease of $342,952 or 6.5%.
The  decrease  in gross  profit is due to net impact of new  contracts  and lost
contracts,  which was partially offset by the renegotiation of contract rates in
the normal course of business.

General and administrative  expenses for Fiscal 2005 were $4,943,467 or 18.5% of
revenue, compared to $4,909,172 or 17.5% of revenue for Fiscal 2004, an increase
of  $34,295  or  0.7%.  The  increase  is  due to  higher  expenses  related  to
professional  fees and  insurance,  offset by lower payroll and payroll  related
costs.

Depreciation and amortization for Fiscal 2005 was $576,902, compared to $620,199
for Fiscal 2004.

Provision  for  doubtful  accounts  for Fiscal  2005 was  $165,000  compared  to
$585,000 for Fiscal 2004.  The decrease is due the Company's  decision in Fiscal
2004 to increase the  provision  for doubtful  accounts  with respect to certain
delinquent customers.

Loss from operations for Fiscal 2005 was $770,801 or 2.9% of revenue compared to
$856,851  or 3.1% of revenue  for Fiscal  2004,  a decrease of $86,050 or 10.0%.
This improvement over Fiscal 2004 is due to lower  depreciation  expense and bad
debt expense, as well as certain operating efficiencies.


                                       8


Interest  expense for Fiscal 2005 was  $279,245 or 1.1% of revenue,  compared to
$186,699 or 0.7% of revenue for Fiscal 2004.  This  increase is primarily due to
an increase in interest rates in Fiscal 2005.

Other  income for Fiscal 2005 was  $2,121,238  or 8.0 % of revenues  compared to
other expense of $18,148 or 0.0% of revenue for Fiscal 2004. The increase is due
to the Company's  receipt of the proceeds  from the  successful  resolution  the
litigation as detailed in Item 3-Legal Proceedings. The jury award of $2,500,000
is reflected net of legal and related expenses in the amount of $378,762.

For the reasons  stated  above,  income  before income taxes for Fiscal 2005 was
$1,083,237  or 4.1%  of  revenue  compared  to a loss  before  income  taxes  of
$1,052,134 or 3.8% of revenue for Fiscal 2004.

The net income for Fiscal 2005 was  $775,657 or $0.27 per share  compared to net
loss of $850,434 or $0.30 per share for Fiscal 2004.

RESULT OF  OPERATIONS  YEAR ENDED JUNE 30, 2004  COMPARED TO YEAR ENDED JUNE 30,
2003

Revenues for the year ended June 30, 2004 ("Fiscal 2004")  increased by $693,875
or 2.4% to $27,999,905  compared to revenues of  $27,306,030  for the year ended
June 30, 2003 ("Fiscal 2003").  This increase is primarily due to the net impact
of revenues from new contracts versus revenues from lost contracts

Cost of operations  for Fiscal 2004 was  $22,742,385  compared to $22,684,440 in
Fiscal  2003,  an  increase  of  $57,945  or  0.3%.  This  increase  in costs of
operations is due to increased revenues during the period

Gross  profit for Fiscal 2004 was  $5,257,520  or 18.8% of revenue,  compared to
$4,621,590 or 16.9% of revenue in Fiscal 2003, an increase of $635,930 or 13.8%.
The  increase  in  gross  profit  is  due  to the  addition  of  new  customers,
renegotiation  of  contract  rates  in  the  normal  course  of  business,   the
elimination  of under  performing  customers  and other  operating  efficiencies
implemented in the current year

General and administrative  expenses for Fiscal 2004 were $4,909,172 or 17.5% of
revenue, compared to $4,556,706 or 16.7% of revenue for Fiscal 2003, an increase
of  $352,466  or 7.7%.  The  increase is due to higher  fixed  costs,  including
expenses  related to  advertising,  recruitment  and the  addition of  corporate
overhead personnel to support its new business

Depreciation and amortization for Fiscal 2004 was $620,199, compared to $775,057
for Fiscal  2003.  This  decrease was due  primarily to the end of  amortization
expense for investment in contracts in Fiscal 2003.

Provision  for  doubtful  accounts  for Fiscal  2004 was  $585,000  compared  to
$389,262  for Fiscal  2003.  Due to the  passage  of time,  the  Company  made a
decision to increase the provision for doubtful accounts with respect to certain


                                       9


delinquent  customers.  The  Company  believes  it  will  be  successful  in its
collection efforts related to these outstanding balances

Loss from operations for Fiscal 2004 was $856,851 or 3.1% of revenue compared to
$1,099,435  or 4.0% of revenue for Fiscal 2003, a decrease of $242,584 or 22.1%.
This  improvement  over Fiscal 2003 is due to an  increase  in  revenues,  gross
profit and operating efficiencies.

Interest  expense for Fiscal 2004 was  $186,699 or 0.7% of revenue,  compared to
$211,953 or 0.8% of revenue for Fiscal 2003. This decrease is primarily due to a
reduction of long-term debt.

For the  reasons  stated  above,  loss before  income  taxes for Fiscal 2004 was
$1,052,134 or 3.8% of revenue compared to loss before income taxes of $1,316,828
or 4.8% of revenue for Fiscal 2003.

Net loss for Fiscal 2004 was $850,434 or $0.30 per share compared to net loss of
$819,441 or $0.29 per share for Fiscal 2003.

LIQUIDITY AND CAPITAL RESOURCES

Our  requirement  for capital is to fund (i) sales growth and (ii) financing for
acquisitions. Our primary source of financing during 2005 and 2004 was cash flow
from operations.

At June 30, 2005,  the Company had working  capital of $1,581,159 as compared to
$226,441  at June 30,  2004.  This  increase  in working  capital  is  primarily
attributable  to the Company's  receipt of the jury award related the successful
resolution  of  the  litigation  discussed  in  Item  3-Legal  Proceedings.  The
Company's  cash and cash  equivalents  increased  by  $1,943,093  to  $2,889,616
primarily  due to the  receipt  of the  jury  award  related  to the  litigation
discussed in Item 3-Legal  Proceedings.  Cash provided by operations  for Fiscal
2005 was  $1,868,859,  compared to $552,136  provided by  operations  for Fiscal
2004.

Investing  activities  consumed  $4,313 in cash during  Fiscal 2005  compared to
$280,656 in cash provided  during Fiscal 2004.  Investing  activities for Fiscal
2005  include  capital  expenditures  in the  amount  of  $2,961  as well as the
purchase  of  marketable  securities  of  $38,660  and the  sale  of  marketable
securities  of  $36,308.  During  Fiscal  2005,  financing  activities  provided
$78,547,  in cash,  primarily due to proceeds from the Company's line of credit,
compared to $685,469  consumed in cash during  Fiscal 2004,  which was primarily
due to a restriction of cash.

The Company has certain  credit  facilities  with its bank including a revolving
credit of $3,500,000. At June 30, 2005, the Company had $275,079 available under
its revolving credit. The Company has pledged a $250,000  Certificate of Deposit
as  additional  collateral  against the  revolving  line of credit.  The Company
issued two series of Industrial Bonds totaling  $3,560,548 in December 1996. The
outstanding  balance on the bonds was  $2,530,000  as of June 30, 2005.  In May,
2005, the Company entered into an agreement whereby the credit loan facility was
extended to July 1, 2006.

The Loan Facility contains certain covenants that include maintenance of certain
financial  ratios,  maintenance of minimum levels of working  capital as well as
affirmative  and  negative  covenants.  At June 30,  2005,  the  Company  was in
compliance with the covenants required under the credit facility agreement.


                                       10


============================================================================================================================
                                                                    PAYMENT DUE BY PERIOD
============================================================================================================================
                                                            LESS
     CONTRACTUAL                         TOTAL             THAN 1         2 - 3 YEARS           4 - 5           AFTER 5
     OBLIGATIONS                                            YEAR                                YEARS            YEARS
============================================================================================================================
Long-Term Debt *                      $5,754,921        $  150,000        $3,559,921        $  370,000        $1,675,000
============================================================================================================================
Operating Leases                          66,610            44,545            22,065              --                --
============================================================================================================================
Total Contractual Cash
Obligations                           $5,821,531        $  194,545        $3,581,986        $  370,000        $1,675,000
============================================================================================================================

* Long-Term  Debt includes the $3,224,921  outstanding  balance on the revolving
credit facility.

                                                                      AMOUNT OF COMMITMENT EXPIRATION
                                                                                 PER PERIOD
============================================================================================================================
              OTHER          TOTAL AMOUNTS
           COMMERCIAL          COMMITTED          LESS THAN                               4 - 5                OVER 5
          COMMITMENTS                             1 YEAR             1 - 3 YEARS          YEARS                YEARS
============================================================================================================================
Lines of Credit               $3,500,000         $      --           $3,500,000         $    --           $       --
============================================================================================================================
Standby Letter of
Credit                         3,065,000                --            3,065,000              --                   --
============================================================================================================================
Total Commercial
Commitments                    6,565,000                --            6,565,000              --                   --
============================================================================================================================

Based upon its present  plans,  management  believes that  operating  cash flow,
available  cash  and  available  credit  resources  will  be  adequate  to  make
repayments of indebtedness  described  herein,  to meet the working capital cash
needs of the Company and to meet anticipated  capital  expenditure  needs during
the twelve months ending June 2006.

The Company is exploring all  reasonable  alternatives  to improve its operating
results,  including but not limited to,  increasing  food service  revenues with
targeted marketing efforts,  increasing  revenues from the sale of the Company's
Cook Chill products,  the sale or lease of all or part of the  Collegeville  Inn
Conference  and Training  Center,  sale of excess land at the  Collegeville  Inn
Conference and Training  Center and reduction of operating  expenses.  Effective
June 27, 2005, the Company closed the buffet  restaurant at the Collegeville Inn
Conference  and  Training  Center to make the  facility  available  for  catered
events.  There  can be no  assurance  as to the  success  of any or all of these
alternatives.

In an effort to extend its current bank debt, the Company may seek to access the
public equity market whenever conditions are favorable, even if it does not have
an immediate  need for additional  capital at that time. Any additional  funding
may result in significant  dilution and could involve the issuance of securities
with rights, which are senior to those of existing stockholders. The Company may
also  need   additional   funding  earlier  than   anticipated,   and  our  cash
requirements, in general, may vary materially from those now planned, for


                                       11


reasons  including,  but not limited to,  competitive  advances  and higher than
anticipated expenses and lower than anticipated revenues from operations.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 151, "INVENTORY COSTS - AN AMENDMENT TO ARB NO. 43." This statement provides
guidance  to clarify  the  accounting  for  abnormal  amounts  of idle  facility
expense,  freight  handling costs, and wasted material  (spoilage),  among other
production costs. Provisions of ARB No. 43 stated that under some circumstances,
items such as idle facility expense,  excessive  spoilage and other costs may be
so abnormal as to require  treatment as current period  charges.  This statement
requires that those items be recognized as current period charges  regardless of
whether they meet the criterion of "so abnormal." In addition, SFAS 151 requires
that  allocation  of fixed  production  overheads to the costs of  conversion be
based on the normal capacity of the production facilities.  The adoption of this
statement is required for fiscal years beginning  after June 15, 2005.  Adoption
of the  Statement  is not  expected to have a material  impact on the  financial
statements of the Company.

In  November  2004,  the FASB issued  SFAS No. 152  "ACCOUNTING  FOR REAL ESTATE
TIME-SHARING  TRANSACTIONS - AN AMENDMENT OF SFAS NO. 66 AND 67". This Statement
amends SFAS No. 66.  "ACCOUNTING  FOR SALES OF REAL  ESTATE",  to reference  the
financial  accounting  and  reporting  guidance  for  real  estate  time-sharing
transactions  that is  provided  in AICPA  Statement  of  Position  (SOP)  04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
SFAS No. 67,  "ACCOUNTING FOR COSTS AND INITIAL RENTAL OPERATIONS OF REAL ESTATE
PROJECTS," to state the guidance for (a) incidental costs and (b) costs incurred
to sell  real  estate  projects  does  not  apply  to real  estate  time-sharing
transactions.  The  accounting  for those  operations  and costs is  subject  to
guidance in SOP 04-2,  effective  for  financial  statements  with fiscal  years
beginning  after June 15,  2005.  Adoption of this  Statement is not expected to
have a material impact on the financial statements of the Company.

In November 2004, the FASB issued SFAS No. 153, "EXCHANGES OF NONMONETARY ASSETS
- AN AMENDMENT TO APB NO. 29." This Statement amends Opinion No. 29 to eliminate
the  exception  for  nonmonetary  exchanges  of  similar  productive  assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial  substance.  A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the  exchange.  The adoption of this  statement is required for fiscal
years beginning after June 15, 2005.  Adoption of this statement is not expected
to have a material impact on the financial statements of the Company.

In  December  2004,  the FASB issued SFAS No. 123  (Revised  2004)  "SHARE-BASED
PAYMENT."  The  statement  requires  that  the  compensation  cost  relating  to
share-based  payment  transactions be recognized in financial  statements.  That
cost  will be  measured  based on the  fair  value of the  equity  or  liability
instrument issued. The statement covers a wide range of share-based compensation
arrangements including share options, restricted share plans,  performance-based
awards,  share  appreciation  rights,  and employee  share purchase  plans.  The
Company will be required to adopt SFAS 123 (R) as of July 1, 2006.  The adoption
of this statement is not expected to have a material impact on the  consolidated
financial statements of the Company.


                                       12


In May  2005,  the FASB  issued  SFAS No.  154  "ACCOUNTING  CHANGES  AND  ERROR
CORRECTIONS".  This Statement  replaces APB Opinion No. 20, Accounting  Changes,
and FASB Statement No. 3,  "REPORTING  ACCOUNTING  CHANGES IN INTERIM  FINANCIAL
STATEMENTS",  and changes the  requirements for the accounting for and reporting
of a change in accounting  principle.  This  Statement  applies to all voluntary
changes in  accounting  principle.  It also  applies to changes  required  by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition  provisions.  When a pronouncement includes specific
transition  provisions,  those provisions  should be followed.  Adoption of this
statement is required for fiscal years  starting  after  December 15, 2005.  The
adoption of this  statement  is not  expected  to have a material  impact on the
consolidated financial statements of the Company.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements,  which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments  that affect the reported  amount of
assets and  liabilities,  revenues  and  expenses,  and  related  disclosure  of
contingent  assets  and  liabilities  at the  date  of the  Company's  financial
statements.  Actual  results may differ  from these  estimates  under  different
assumptions or conditions.

Critical  accounting  policies  are  defined  as those  that are  reflective  of
significant  judgments and  uncertainties,  and potentially result in materially
different  results  under  different  assumptions  and  conditions.  The Company
believes that its critical accounting policies include those described below.

REVENUE RECOGNITION

Revenue  is  generated  primarily  from  fees for food  service  management  and
facilities  management at  continuing  care and health care  facilities  and the
Collegeville  Inn Conference  and Training  Center.  Revenue is recognized  when
services  are  performed.  Ongoing  assessments  of  the  credit  worthiness  of
customers  provide the  Company  reasonable  assurance  of  collectibility  upon
performance of services.

ACCOUNTS RECEIVABLE

The Company  performs  ongoing  credit  evaluations of its customers and adjusts
credit  limits  based on  payment  history  and the  customer's  current  credit
worthiness,  as determined by a review of their current credit information.  The
Company  continuously  monitors  collections and payments from its customers and
maintains a provision for estimated credit losses based on historical experience
and any specific  customer  collection  issues that have been identified.  While
such credit losses have historically been within the Company's  expectations and
the provisions  established,  the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.


                                       13


IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS

The carrying  value of property,  plant,  and equipment is evaluated  based upon
current and  anticipated  undiscounted  operating cash flows before debt service
charges.  An impairment is  recognized  when it is probable that such  estimated
future  cash  flows  will  be  less  than  the  carrying  value  of the  assets.
Measurement  of the amount of  impairment,  if any, is based upon the difference
between the net carrying value and the fair value, which is estimated based upon
anticipated undiscounted operating cash flows before debt service charges. Based
upon a review  of its  long-lived  assets,  the  Company  did not  recognize  an
impairment loss for the fiscal year ended June 30, 2005;  however,  there can be
no assurance  that the Company  will not  recognize  an  impairment  loss on its
long-lived assets in future periods.

INCOME TAX ACCOUNTING

The  Company  determines  its  provision  for income  taxes  using the asset and
liability  method.  Under this method,  deferred tax assets and  liabilities are
recognized  for the future tax  effects of  temporary  differences  of  existing
assets and  liabilities and their  respective tax bases.  Future tax benefits of
tax loss and credit  carryforwards  also are  recognized as deferred tax assets.
When necessary,  deferred tax assets are reduced by a valuation allowance to the
extent  the  Company  concludes  there  is  uncertainty  as  to  their  ultimate
realization.  Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those  temporary  differences are expected
to be  recovered  or settled.  The effect on  deferred  taxes of a change in tax
rates is recognized in income in the period that the change is enacted.

As of June 30, 2005 and 2004,  the Company  maintained  a deferred  tax asset of
$1,456,114  and  $1,623,841,  respectively.  The  Company  has  not  provided  a
valuation  allowance  against its deferred tax assets after  consideration  of a
future  gain on the  disposal  of  certain  land  adjacent  to its  Collegeville
facility and anticipated  future  profitable  operating  results.  However,  the
amount  realizable  may be  reduced  if future  taxable  income is reduced or is
insufficient to utilize the entire deferred tax asset.

EMPLOYMENT CONTRACTS

For the fiscal years ended June 30, 2005,  2004 and 2003 the Company paid a base
salary of $335,768,  $326,542 and $312,212 to Joseph Roberts, Chairman and Chief
Executive  Officer  and  $236,324,  $228,864  and  $228,899  to  Kathleen  Hill,
President and Chief Operating Officer,  respectively.  The Company currently has
no  employment  contracts  with  either  of such  individuals,  as all  previous
employment contracts with such individuals  expired. The Compensation  Committee
of the Board of Directors is currently  engaged in discussions  with Mr. Roberts
and Ms. Hill with respect to their  compensation for the fiscal year ending June
30, 2006.

CAPITAL EXPENDITURES

The Company has no other  material  commitments  for  capital  expenditures  and
believes that its existing cash and cash  equivalents,  cash from operations and
available  revolving  credit  will be  sufficient  to  satisfy  the needs of its
operations and its capital  commitments for the next twelve months.  However, if
the need arose,  the Company  would seek to obtain  capital from such sources as
continuing debt financing or equity financing.


                                       14


EFFECTS OF INFLATION

Substantially  all of the  Company's  agreements  with its  customers  allow the
Company to pass  through to its  customers  its  increases in the cost of labor,
food  and  supplies.  The  Company  believes  that it  will  be able to  recover
increased  costs  attributable  to inflation by  continuing to pass through cost
increases to its customers.

MEDICARE AND MEDICAID REIMBURSEMENTS

A substantial  portion of the Company's revenue is dependent upon the payment of
its fees by customer health care facilities,  which, in turn, are dependent upon
third-party payers such as state governments,  Medicare and Medicaid.  Delays in
payment by third party payers,  particularly  state and local  governments,  may
lead to delays in collection of accounts receivable.

ITEM 8 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial  Statements and Supplementary Data to be provided pursuant to this
Item 8 are included under Part IV, Item 15, of this Form 10-K.

ITEM 9 -  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

On September 2, 2003 the Company  engaged BDO  Seidman,  LLP ("BDO  Seidman") to
serve  as the  Company's  principal  independent  certified  public  accountant,
effective immediately.  On January 10, 2005, the Company retained Moore Stephens
as its independent  certified  accountants in place of BDO Seidman, who resigned
as the Company's  independent auditors effective December 23, 2004. The decision
to retain Moore Stephens was recommended by the Audit Committee of the Company's
Board of Directors and approved by the Company's Board of Directors.

In connection with the audits for the two most recent fiscal year ended June 30,
2004 and the subsequent  interim period through December 23, 2004, there were no
disagreements  between the  Company and BDO Seidman on any matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure which, if not resolved to the satisfaction of BDO Seidman,  would have
caused BDO Seidman to make reference to the subject matter of such disagreements
in  connection  with  its  reports  on  the  Company's   consolidated  financial
statements for such years.


                                       15


In  connection  with the  completion  of its audit of,  and the  issuance  of an
unqualified report on, the Company's  consolidated  financial statements for the
fiscal  year  ended June 30,  2004,  the  Company's  independent  auditors,  BDO
Seidman,  communicated  to the Company that the following  matter  involving the
Company's  internal  controls and operation were  considered to be a "reportable
condition",  as defined under standards established by the American Institute of
Certified Public Accountants, or AICPA.

The Company did not have  sufficient  competent  accounting  personnel  and as a
result  processes  relating to preparation of the Company's  income tax accrual,
including lack of timely management review, contributed to a material adjustment
of the income tax  accounts in the fourth  quarter of the fiscal year ended June
30, 2004.

Reportable  conditions  are matters  coming to the attention of the  independent
auditors  that, in their  judgment,  relate to significant  deficiencies  in the
design or  operation  of  internal  controls  and  could  adversely  affect  the
Company's  ability to record,  process,  summarize  and  report  financial  data
consistent  with the  assertions of management in the financial  statements.  In
addition,  BDO Seidman has advised the Company that they  consider  this matter,
which is  listed  above,  to be a  "material  weakness"  that,  by  itself or in
combination  could  result  in a more than  remote  likelihood  that a  material
misstatement  in the financial  statements  will not be prevented or detected by
our employees in the normal course of performing their assigned functions.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation,  under
the   supervision  and  with  the   participation   of  its  management  of  the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures as of June 30, 2004. Based on the foregoing,  the Company's Chief
Executive   Officer  ("CEO")  and  Principal   Financial  Manager  ("PFM")  have
determined  that the  Company's  disclosure  controls  and  procedures  were not
effective at a reasonable  assurance level based upon the deficiency  identified
by BDO  Seidman.  However,  the CEO and PFM noted that the Company has  remedied
this  deficiency and did not note any other  material  weaknesses or significant
deficiencies in the Company's  disclosure  controls and procedures  during their
evaluation.  In  November  2004,  the Company  hired a Director of Finance  with
relevant  education  and work  experience  who  assumed  responsibility  for the
preparation of all of the income tax analyses.

The  report of BDO  Seidman  on the  consolidated  financial  statements  of the
Company as of and for the two most recent  fiscal  years ended June 30, 2004 did
not  contain  any  adverse  opinion  or  disclaimer  of  opinion,  nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.

The foregoing  disclosures  were previously  reported in Item 4 of the Company's
current  report on Form 8-K filed with the SEC on January 10, 2005.  The Company
provided BDO Seidman with a copy of the foregoing disclosures and requested that
BDO Seidman furnish the Company with a letter  addressed to the SEC stating that
it agreed with such statements. A copy of such letter, dated January 7, 2005 was
filed as Exhibit 16.1 to Form 8-K, dated January 10, 2005.


                                       16


During the two most recent fiscal years ended June 30, 2004 and through December
23, 2004, neither the Company nor someone on its behalf consulted Moore Stephens
regarding  (i)  the   application  of  accounting   principles  to  a  specified
transaction,  either  completed or proposed;  or (ii) the type of audit  opinion
that matters or reportable events as set forth in Items 304 (a) (1) (iv) and (a)
(1) (v) of Regulation S-K.

ITEM 9A - CONTROLS AND PROCEDURES

Based on their  evaluation,  as of the end of the period covered by this report,
the  Company's  Chief  Executive  Officer and Principal  Financial  Manager have
concluded the Company's  disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14  under the  Securities  Exchange  Act of 1934) are  effective.
There have been no significant  changes in internal controls or in other factors
that could  significantly  affect these controls subsequent to the date of their
evaluation,   including  any  corrective  actions  with  regard  to  significant
deficiencies and material weaknesses.

ITEM 9B - OTHER INFORMATION

As disclosed in Item 3-Legal Proceedings, the Company received $2,500,000 in the
quarter  ended June 30, 2005,  as a result of the  successful  resolution of its
litigation  against a former client.  For the year ended June 30, 2005, the jury
award is reported as Other Income, net of legal fees and related expenses in the
amount of $378,762.

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information will be contained in the Proxy Statement of the Company for the
2005 Annual Meeting of Shareholders  under the caption  "Directors and Executive
Officers of the Registrant", and is incorporated herein by reference.

ITEM 11 - EXECUTIVE COMPENSATION

This information will be contained in the Proxy Statement of the Company for the
2005 Annual Meeting of Shareholders  under the caption  "Executive  Compensation
and Compensation of Directors" and is incorporated herein by reference.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information will be contained in the Proxy Statement of the Company for the
2005 Annual Meeting of Shareholders  under the caption "Security  Ownership" and
"Election of Directors" and is incorporated herein by reference.


                                       17




ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This  information  will be contained in the Proxy  Statements of the Company for
the 2005 Annual Meeting of Shareholders under the caption "Certain Relationships
and Related Transactions" and is incorporated herein by reference.


ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The accounting firms of Moore Stephens, P.C. ("Moore Stephens") and BDO Seidman,
LLP  ("BDO  Seidman")  served as the  Company's  independent  registered  public
accounting firm for the fiscal years ended June 30, 2005 and 2004, respectively.
Such firms have no other relationship to the Company or its affiliates.

AUDIT FEES
Moore  Stephens  billed the  Company  $40,000  for audit fees for the  Company's
annual consolidated financial statements for the fiscal year ended June 30, 2005
and BDO  Seidman  billed the Company  $53,000  for audit fees for the  Company's
annual  consolidated  financial  statements  for the fiscal  year ended June 30,
2004.

AUDIT RELATED FEES
Moore  Stephens  billed the Company  $12,000 for audit related  services for the
fiscal  year ended June 30,  2005.  BDO Seidman did not bill the Company for any
audit related services for fiscal year ended June 30, 2004.

TAX FEES
Moore  Stephens  billed the Company  $11,900 for tax services  during the fiscal
year ended June 30, 2005.  BDO Seidman did not bill the Company for tax services
for fiscal year ended June 30, 2004.

ALL OTHER FEES
Moore  Stephens  and BDO  Seidman  did  not  bill  the  Company  for  any  other
professional  services  for the  fiscal  years  ended  June 30,  2005 and  2004,
respectively.

PRE-APPROVAL POLICIES AND PROCEDURES

All audit and non-audit  services to be performed by the  Company's  independent
accountant must be approved in advance by the Audit  Committee.  Consistent with
applicable law, limited amounts of services,  other than audit, review or attest
services, may be approved by one or more members of the Audit Committee pursuant
to  authority  delegated by the Audit  Committee,  provided  each such  approved
service is reported to the full Audit Committee at its next meeting.

All of the  engagements  and fees for the  Company's  fiscal year ended June 30,
2005 were approved by the Audit Committee.


                                       18


The Audit Committee of the Board of Directors  considered  whether the provision
of  non-audit  services by Moore  Stephens  was  compatible  with its ability to
maintain  independence  from  an  audit  standpoint  and  concluded  that  Moore
Stephens' independence was not compromised.


                                       19


PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A)1.   Consolidated Financial Statements

        Reports of Independent Registered Public Accounting Firms        F-2 to F-3

        Consolidated Balance Sheets as of June 30, 2005 and 2004         F-4

        Consolidated Statements of Operations for the
        Years Ended June 30, 2005, 2004 and 2003                         F-5

        Consolidated Statements of Stockholders' Equity for the
        Years Ended June 30, 2005, 2004 and 2003                         F-6

        Consolidated Statements of Cash Flows for the
        Years Ended June 30, 2005, 2004 and 2003                         F-7

        Notes to Consolidated Financial Statements                       F-8 to F-22

        Schedule of Valuation Accounts                                   F-23

(B) Exhibits

            The following  Exhibits are filed as part of this report (references
            are to Reg. S-K Exhibit Numbers):

       3.1     Amended and  Restated  Certificate  of  Incorporation  of Company
               (Incorporated  by  reference  to  Exhibit  3.1 of  the  Company's
               Statement on Form S-1 (File No. 33-4281).

       3.2     By-laws of the Company  (Incorporated by reference to Exhibit 3.2
               of the S-1).

       4.1     Specimen  Stock  Certificate  of  the  Company  (Incorporated  by
               reference to Exhibit 4.1 of the S-1).

       4.5     Registration  Rights  Agreement  between the Company and Kathleen
               Hill (Incorporated by reference to Exhibit 4.5 of the S-1).

      10.4     Company's  1991 Stock Option Plan  (Incorporated  by reference to
               Exhibit 10.4 of the S-1).

      10.8     Guaranty   Agreement  between  the  Company  and  Joseph  Roberts
               (Incorporated  by reference to Exhibit 10.9 Annual Report on Form
               10-K filed September 27, 1992).


                                       20


      10.9     Lease   Agreement   Between   the   Company  and  Ocean  7,  Inc.
               (Incorporated  by  reference to Exhibit  10.11  Annual  Report of
               Form10-K filed September 27, 1992).

      10.14    Loan   Agreement   between  the  Montgomery   County   Industrial
               Development  Authority and Collegeville Inn Conference & Training
               Center,   Inc.  (a  wholly-owned   subsidiary  of  the  Company).
               (Incorporated  by reference to exhibit  10.14,  annual  report on
               Form 10-K Filed on September 27, 1997).

      10.15    Trust Indenture between Montgomery County Industrial  Development
               Authority and Dauphin Deposit Bank and Trust Company, as Trustee.
               (Incorporated  by reference to exhibit  10.15,  annual  report on
               Form 10-K filed September 27, 1997).

      10.16    Loan Agreement between  Montgomery County Industrial  Development
               Authority   and  Apple  Fresh  Foods   Limited  (a   wholly-owned
               subsidiary of the Company). (Incorporated by reference to exhibit
               10.16, annual report on Form 10-K Filed on September 27, 1997).

      10.17    Trust  Indenture  between  the  Montgomery   County   Development
               Authority and Dauphin Deposit Bank and Trust Company, as Trustee.
               (Incorporated  by reference to exhibit  10.17,  annual  report on
               Form 10-K Filed on September 27, 1997).

      10.19    Fourth Amendment to Revolving Credit Note between the Company and
               Wilmington Trust of Pennsylvania

      10.20    Ninth  Amendment  to  Loan  Agreement  between  the  Company  and
               Wilmington Trust of Pennsylvania

      10.21    Guaranty and Suretyship of Joseph V. Roberts

      31.1     Section 302 Certification of Principal Executive Officer

      31.2     Section 302 Certification of Principal Financial Manager

      32.1     Section 906 Certification of Chief Executive Officer

      32.2     Section 906  Certification  of Principal  Financial  Manager (the
               Company does not have a Chief Financial Officer).


                                       21


                                   SIGNATURES

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

Nutrition Management Services Company
(Registrant)

/s/ Joseph V. Roberts
----------------------------------
Joseph V. Roberts,
Chief Executive Officer and Director


Date:  September 28, 2005

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934,  as
amended,  this annual report has been signed by the following  persons on behalf
of the registrant and in the capacities indicated as of September 28, 2005.

/s/ Joseph V. Roberts                         /s/ Kathleen A. Hill
------------------------------                -------------------------------
Joseph V. Roberts, Chief                      Kathleen A. Hill, President and
Executive Officer and Director                Director
(Principal Financial Officer)

/s/ Richard Kresky
------------------------------                -------------------------------
Richard Kresky, Director                      Samuel R. Shipley, Director

/s/ Michael M. Gosman                         /s/ Michelle L. Roberts-O'Donnell,
------------------------------                -------------------------------
Michael M. Gosman, Director                   Michelle L. Roberts-O'Donnell,
                                              Director
/s/ Jane Scaccetti
------------------------------
Jane Scaccetti, Director


                                       22



FINANCIAL STATEMENTS AND REPORTS OF REGISTERED PUBLIC ACCOUNTING FIRMS
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
JUNE 30, 2005, 2004 AND 2003



                                TABLE OF CONTENTS

                                                                     Page
                                                                     ----

REPORTS OF INDEPENDENT REGISTERED PUBLIC
     ACCOUNTING FIRMS                                                F-2 to F-3

     CONSOLIDATED BALANCE SHEETS                                     F-4

     CONSOLIDATED STATEMENTS OF OPERATIONS                           F-5

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY                  F-6

     CONSOLIDATED STATEMENTS OF CASH FLOWS                           F-7

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      F-8 to F-22

SUPPLEMENTAL INFORMATION

     SCHEDULE OF VALUATION ACCOUNTS                                  F-23





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   To the Board of Directors and Stockholders of
   Nutrition Management Services Company and Subsidiaries
   Kimberton, Pennsylvania



We have  audited  the  accompanying  consolidated  balance  sheet  of  Nutrition
Management  Services  Company  and  Subsidiaries  as of June 30,  2005,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year then ended.  We have also audited the schedule  listed in the
accompanying   index.   These   consolidated   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 the standards of the Public  Company
Accounting Oversight Board [United States]. Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  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  consolidated  financial  position  of
Nutrition  Management Services Company and Subsidiaries as of June 30, 2005, and
the  consolidated  results of their operations and their cash flows for the year
ended, in conformity with U.S. generally accepted accounting principles.

Also, in our opinion,  the schedule presents fairly,  in all material  respects,
the information set forth therein.


                                          /S/ MOORE STEPHENS, P. C.
                                          -------------------------
                                          MOORE STEPHENS, P. C.
                                          Certified Public Accountants.

Cranford, New Jersey
September 15, 2005





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
Nutrition Management Services Company
Kimberton, Pennsylvania

We have  audited  the  accompanying  consolidated  balance  sheets of  Nutrition
Management  Services  Company  as of June 30,  2004  and  2003  and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the two years in the period  ended June 30,  2004.  We have also audited
the schedule listed in the accompanying  index.  These financial  statements and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Nutrition Management
Services  Company at June 30, 2004 and 2003, and the results of their operations
and their  cash  flows for each of the two years in the  period  ended  June 30,
2004, in conformity with accounting  principles generally accepted in the United
States of America.

Also, in our opinion,  the schedule presents fairly,  in all material  respects,
the information set forth therein.


/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Philadelphia, Pennsylvania

September 17, 2004 except
for Note E which is as of
December 15, 2004





                                       Nutrition Management Services Company and Subsidiaries
                                                     CONSOLIDATED BALANCE SHEETS
                                                              June 30,
                                                                                                      2005                 2004
                                                                                                  ------------         -------------
Current assets
     Cash and cash equivalents                                                                    $  2,889,616         $    946,523
     Marketable securities                                                                             213,561              202,969
     Accounts receivable (net of allowance for doubtful accounts of $958,702
         and $2,877,336 in 2005 and 2004, respectively)                                              3,063,514            2,259,582
     Deferred income taxes                                                                                --                405,320
     Inventory                                                                                         128,949              159,181
     Prepaid and other                                                                                 413,922              462,208
     Income tax refund                                                                                  43,730               63,348
                                                                                                  ------------         ------------
       Total current assets                                                                          6,753,292            4,499,131
                                                                                                  ------------         ------------

Property and equipment - net                                                                         6,989,627            7,563,568
                                                                                                  ------------         ------------


Other assets
     Restricted cash                                                                                   250,000              250,000
     Note receivable                                                                                   129,702              120,608
     Advances to officers                                                                              434,283              435,283
     Deferred income taxes                                                                           1,456,114            1,218,521
     Bond issue costs (net of accumulated amortization of $125,029
         and $110,461 in 2005 and 2004, respectively)                                                  166,295              180,863
     Other assets                                                                                       11,321               11,321
                                                                                                  ------------         ------------
         Total other assets                                                                          2,447,715            2,216,596
                                                                                                  ------------         ------------
         Total assets                                                                             $ 16,190,634          $ 14,279,295
                                                                                                  ============         ============
              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
     Current portion of long-term debt                                                            $    150,000         $    145,000
     Current portion of note payable                                                                        --              154,453
     Accounts payable                                                                                3,991,267            3,303,947
     Accrued expenses                                                                                  673,642              286,527
     Accrued payroll                                                                                   257,319              222,176
     Other                                                                                              75,190              160,588
                                                                                                  ------------         ------------
         Total current liabilities                                                                   5,313,707            4,272,691
                                                                                                  ------------         ------------

Long-term liabilities
     Long-term debt - net of current portion                                                         5,604,921            5,376,921
                                                                                                  ------------         ------------
         Total long-term liabilities                                                                 5,604,921            5,376,921
                                                                                                  ------------         ------------

Commitments and contingencies

Stockholders' equity
     Undesignated  preferred stock - no par, 2,000,000 shares  authorized, none issued and outstanding
     Common stock
         Class A - no par, 10,000,000 shares authorized; 3,000,000
              issued, 2,747,000 outstanding                                                          3,801,926            3,801,926
         Class B - no par, 100,000 shares authorized; 100,000 shares issued and outstanding                 48                   48
         Accumulated other comprehensive income (net of tax)                                             8,240                   --
     Retained earnings                                                                               2,102,929            1,327,272
                                                                                                  ------------         ------------
                                                                                                     5,044,548            5,129,246
Less treasury stock - (common - Class A: 253,000 shares - at cost )                                   (499,563)            (499,563)
                                                                                                  ------------         ------------
         Total stockholders' equity                                                                  5,413,580            4,629,683
                                                                                                  ------------         ------------
         Total liabilities and stockholders' equity                                               $ 16,190,634         $ 14,279,295
                                                                                                  ============         ============


                                   The accompanying notes are an integral part of these statements
                                                                 F-4


                                       Nutrition Management Services Company and Subsidiaries
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                         Year ended June 30,




                                                                           2005            2004            2003
                                                                       ------------    ------------    ------------

Food service revenue                                                   $ 26,602,161    $ 27,999,905    $ 27,306,030

Cost of operations
     Payroll and related expenses                                        10,789,982      11,178,474      10,938,468
     Other costs of operations                                           10,897,611      11,563,911      11,745,972
                                                                       ------------    ------------    ------------

     Cost of operations                                                  21,687,593      22,742,385      22,684,440
                                                                       ------------    ------------    ------------

Gross profit                                                              4,914,568       5,257,520       4,621,590
                                                                       ------------    ------------    ------------

Expenses
     General and administrative expenses                                  4,943,466       4,909,172       4,556,706
     Depreciation and amortization                                          576,902         620,199         775,057
     Provision for doubtful accounts                                        165,000         585,000         389,262
                                                                       ------------    ------------    ------------

     Total Expenses                                                       5,685,368       6,114,371       5,721,025
                                                                       ------------    ------------    ------------

     Loss from operations                                                  (770,800)       (856,851)     (1,099,435)
                                                                       ------------    ------------    ------------

Other income/(expense)
     Interest expense                                                      (279,245)       (186,699)       (211,953)
     Interest income                                                         12,045           9,564           9,763
     Other                                                                2,121,238         (18,148)        (15,203)
                                                                       ------------    ------------    ------------

     Other income/(expense)- net                                          1,854,038        (195,283)       (217,393)
                                                                       ------------    ------------    ------------

Income/(loss) before income taxes                                         1,083,238      (1,052,134)     (1,316,828)

Income tax expense/(benefit)                                                307,580        (201,700)       (497,387)
                                                                       ------------    ------------    ------------

Net income/(loss)                                                           775,657        (850,434)       (819,441)

Other comprehensive income/(loss) (net of tax):
     Unrealized holding gains/(losses) arising during period                  8,240            --              --
     Less: Reclassification adjustment for realized gains
           included in net income                                              --              --              --
                                                                       ------------    ------------    ------------

     Total other comprehensive income                                         8,240            --              --
                                                                       ------------    ------------    ------------

Comprehensive income/(loss)                                            $    783,897   $   (850,434)   $   (819,441)
                                                                       ============    ============    ============

Net (loss) per share - basic and diluted                               $       0.27   $      (0.30)   $      (0.29)
                                                                       ============    ============    ============


Weighted average number of shares                                         2,847,000       2,847,000       2,847,000
                                                                       ============    ============    ============


                                   The accompanying notes are an integral part of these statements
                                                                 F-5


                                       Nutrition Management Services Company and Subsidiaries
                                                      CONSOLIDATED STATEMENT OF
                                                        STOCKHOLDERS' EQUITY
                                                         For the three years
                                                         ended June 30, 2005

                          Class A Common Stock        Class B Common Stock
                          --------------------        --------------------
                                                                                               Accumulated
                                                                                                  Other
                          Number of                    Number                   Retained      Comprehensive
                           Shares        Amount       of Shares      Amount     Earnings         Income

Balance-June 30, 2002     2,747,000   $ 3,801,926       100,000      $  48     $ 2,997,147    $      --

Net loss                       --            --            --            --       (819,441)          --
                          ---------   -----------       -------      --------  -----------    -------------

Balance-June 30, 2003     2,747,000   $ 3,801,926       100,000      $  48     $ 2,177,706           --

Net loss                       --            --            --            --       (850,434)          --
                          ---------   -----------       -------      --------  -----------    -------------

Balance June 30, 2004     2,747,000   $ 3,801,926       100,000      $   48      1,327,272           --

Net Income                     --            --            --            --        775,657          --
Other
Comprehensive Income           --            --            --            --            --           8,240
                          ---------   -----------       -------      --------  -----------    -------------

Balance-June 30, 2005     2,747,000   $ 3,801,926       100,000      $   48    $ 2,102,929    $     8,240
                          =========   ===========       =======      ========  ===========    ==============



                                     Treasury Stock
                                     --------------
                                                                        Total
                                     Number                         Stockholders'
                                     of Shares        Amount           Equity

Balance-June 30, 2002                (253,000)     $  (499,563)     $ 6,299,558

Net loss                                 --               --           (819,441)
                                     --------      -----------      -----------

Balance-June 30, 2003                (253,000)     $  (499,563)       5,480,117

Net loss                                 --               --           (850,434)
                                     --------      -----------      -----------

Balance June 30, 2004                (253,000)     $  (499,563)       4,629,683

Net Income                               --               --            775,657
Other
Comprehensive Income                     --               --              8,240
                                     --------      -----------      -----------
Balance-June 30, 2005                (253,000)     $  (499,563)       5,413,580
                                     ========      ===========      ===========


                                   The accompanying notes are an integral part of these statements
                                                                 F-6


                                       Nutrition Management Services Company and Subsidiaries
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                         Year ended June 30,

                                                                          2005            2004             2003
                                                                     -------------    ------------     ------------
Operating activities
Net income/(loss)                                                    $   (92,938)     $  (850,434)     $  (819,441)
Adjustments to reconcile net income/(loss) to net cash
         provided by operating activities
     Depreciation and amortization                                       576,902          620,199          775,057
     Amortization of bond costs                                           14,568           14,567           14,566
     Provision for bad debts                                             165,000          585,000          389,262
     Expense/(benefit) for deferred taxes                                167,727         (201,700)        (436,565)

Changes in assets and liabilities
     Accounts receivable                                                (978,026)          14,682        2,290,854
     Inventory                                                            30,232           (3,236)          74,293
     Prepaid and other                                                    48,286          (45,506)         (81,121)
     Income tax refund                                                    19,618             --            (63,348)
     Accounts payable                                                    687,320          420,451         (590,628)
     Accrued expenses                                                    411,830          (17,229)        (139,727)
     Accrued payroll                                                      35,143          (24,446)         (14,239)
     Other                                                               (85,398)          42,415           45,786
                                                                     -----------      -----------      -----------

         Net cash provided by operating activities                     1,868,859          554,763        1,444,749

Investing activities
     Purchase of property and equipment                                   (2,961)         (80,314)         (74,800)
     Purchase of marketable securities                                   (38,660)        (202,969)            --
     Sale of marketable securities                                        36,308             --               --
     Repayments by employees and officers                                  1,000             --             88,207
                                                                     -----------      -----------      -----------
         Net cash Provided by (Used In)                                   (4,313)        (283,283)          13,407

Financing activities
     Restricted cash                                                        --           (250,000)            --
     Proceeds from long-term borrowings                                  436,000        4,225,000        1,775,900
     Repayment of long-term borrowings                                  (203,000)      (4,084,783)      (2,129,866)
     Repayment of note payable                                          (154,453)        (575,686)        (336,988)
                                                                     -----------      -----------      -----------

         Net cash Provided by/(Used in)                                   78,547         (685,469)        (690,954)
                                                                     -----------      -----------      -----------

NET (DECREASE)/INCREASE IN CASH AND
              CASH EQUIVALENTS                                         1,943,093         (413,989)         767,202

Cash and cash equivalents - beginning of year                            946,523        1,360,512          593,310
                                                                     -----------      -----------      -----------
Cash and cash equivalents - end of year                              $ 2,889,616      $   946,523      $ 1,360,512
                                                                     ===========      ===========      ===========

Supplemental disclosures of cash flow information
     Cash paid during the years for
         Interest                                                    $   217,764      $   185,000      $   213,625
         Income taxes                                                $     3,014      $     2,040      $     6,475


                                   The accompanying notes are an integral part of these statements
                                                                 F-7



             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - ORGANIZATION AND BUSINESS

     Nutrition  Management  Services  Company (the  "Company")  was organized on
     March 28,  1979,  to provide  professional  management  expertise  and food
     services to  continuing  care and health care  facilities  in the  domestic
     United States.  The Company competes mainly with regional and national food
     service  management  companies as well as self-managed  departments.  Apple
     Management   Services   Company  ("Apple   Management"),   a  wholly  owned
     subsidiary,  was  organized  on November 25,  1991,  to provide  management
     service  expertise.  The  Collegeville  Inn Conference and Training Center,
     Inc.   ("Collegeville   Inn"   located   in  Lower   Providence   Township,
     Pennsylvania),  a wholly owned subsidiary, was organized on April 29, 1994.
     This  facility  opened in  September  1997,  and is used as a showroom  for
     prospective customers and a comprehensive training facility. Effective June
     27, 2005, the Company closed the buffet  restaurant at the Collegeville Inn
     to make the entire  facility  available  for  catered  events.  Apple Fresh
     Foods,  Ltd.  ("Apple  Fresh Foods") was organized on November 14, 1997, to
     develop a cook-chill food  preparation  technology for use in the Company's
     food  service  business.  Apple Fresh Foods  operations  are located at the
     Collegeville Inn.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     1.  Basis of Financial Statement Presentation
         -----------------------------------------

     The accompanying  consolidated financial statements include the accounts of
     the Company and its wholly owned  subsidiaries.  Intercompany  transactions
     and balances have been eliminated in consolidation.

     2.  Cash and Cash Equivalents
         -------------------------

     Cash equivalents are comprised of certain highly liquid investments with an
     original  maturity of three months or less when purchased.  Restricted cash
     is comprised of a  certificate  of deposit  which is pledged as  additional
     collateral against the revolver note.

     3.  Marketable Securities
         ---------------------

     The  Company  classifies  its  investments  in  marketable   securities  as
     available for sale,  which are carried at the lower of cost or market based
     upon  the  quoted  market  prices  of  those  investments  at  period  end.
     Accordingly,  net unrealized  gains of $8,240 on marketable  securities are
     included in accumulated other comprehensive income as of June 30, 2005.

     As of June 30, 2005, marketable securities consist of the following:

                                    Gross        Unrealized
                               Unrealized Gain      Loss              Fair Value
                               ---------------   ----------           ----------

            Common Stock          $  13,793       $    --             $ 213,561

     As of June 30, 2004, marketable securities consist of the following:

                                    Gross        Unrealized
                               Unrealized Gain      Loss              Fair Value
                               ---------------   ----------           ----------

            Common Stock          $     --        $    --             $ 202,969

     During the years ended June 30,  2005,  2004 and 2003,  sales  proceeds and
     gross realized  gains and losses on securities  classified as available for
     sale were as follows:

                                           2005           2004           2003
                                         ---------      ---------      ---------

          Sales proceeds                 $  36,308      $    --        $    --
                                         =========      =========      =========

          Gross realized gains           $    --        $    --        $    --
                                         =========      =========      =========

          Gross realized losses          $    --        $    --        $    --
                                         =========      =========      =========


                                       F-8


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     4.  Accounts Receivable and Allowance for Doubtful Accounts
         -------------------------------------------------------

     The Company's  accounts  receivable  are primarily  related to food service
     management  fees.  Credit is extended  based on prior  experience  with the
     customer and  evaluation  of a  customer's  financial  condition.  Accounts
     receivable are generally due within thirty days. The allowance for doubtful
     accounts represents an estimate of amounts considered  uncollectible and is
     determined based on specifically  identified  amounts that we believe to be
     based on historical  collection  experience,  adverse  situations  that may
     affect the customer's ability to repay and prevailing economic  conditions.
     If our actual collections  experience  changes,  revisions to our allowance
     may be  required.  The  Company  believes  it  will  be  successful  in its
     collection efforts related to its outstanding balances.

     5.  Inventory
         ---------

     Inventory, which consists primarily of food, is stated at the lower of cost
     (first-in,  first-out method) or market.  The Company records inventory for
     contracts which require goods to be owned by the Company. For the remaining
     customers, the Company purchases inventory on their behalf and a payable or
     receivable is recorded for the change in the value of these goods, which is
     then  collected  from or paid to  customers.  As of June 30, 2005 and 2004,
     inventory is $100,611 and $159,181,  respectively.  As of June 30, 2005 and
     2004,   inventory  receivable  from  customers  is  $  19,324  and  $17,186
     respectively,  while  inventory  payable  to  customers  is  $8,289  and $0
     respectively.

     6.  Revenue Recognition
         -------------------

     The Company  recognizes  revenue when  services  have been rendered and the
     contract price is determinable,  and collectibility is reasonably  assured.
     Revenue is generated  primarily  from fees for food service  management and
     facilities  management at continuing care and health care  facilities,  and
     the  Collegeville  Inn restaurant.  Revenue is recognized when services are
     performed.  Revenues are recorded net of discounts and rebates. The Company
     has no other  obligation  with  respect to its services  once  services are
     performed.

     7.  Property and Equipment
         ----------------------

     Property and equipment are stated at cost.  Depreciation  and  amortization
     are provided using the straight-line method over the estimated useful lives
     of the related assets or the remaining lease term, if less.

     8.  Bond Issue Costs
         ------------------------

     Bond issue costs incurred in connection with the bonds payable are deferred
     and amortized, using the interest method, over the term of the related debt
     and are classified as other assets on the balance sheet.

     9.  Accounting for Stock-Based Compensation
         ---------------------------------------

     The Company accounts for stock-based  compensation  utilizing the intrinsic
     value method in accordance  with the  provisions  of Accounting  Principles
     Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES"
     and  related  Interpretations.  Accordingly,  no  compensation  expense  is
     recognized  because the exercise  prices of these  employee  stock  options
     equal or exceed the estimated fair market value of the underlying  stock on
     the dates of grant.

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 123R, "SHARE-BASED
     PAYMENT".  SFAS No.  123R is a revision of SFAS No.  123,  "ACCOUNTING  FOR
     STOCK BASED  COMPENSATION",  and supersedes APB 25. Among other items, SFAS
     123R  eliminates  the  use of APB 25 and  the  intrinsic  value  method  of
     accounting,  and  requires  companies  to  recognize  the cost of  employee
     services  received in exchange for awards of equity  instruments,  based on
     the grant date fair value of those awards, in the financial statements. The
     effective date of SFAS 123R is the first annual  reporting period beginning
     after June 15, 2006. SFAS 123R requires companies to adopt its requirements
     using a "modified  prospective"  method.  Under the "modified  prospective"
     method, compensation cost is recognized in the financial


                                       F-9


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued


     9.  Accounting for Stock-Based Compensation-continued
         -------------------------------------------------

     statements  beginning with the effective date, based on the requirements of
     SFAS 123R for all share-based  payments  granted after that date, and based
     on the  requirements  of SFAS 123 for all unvested  awards granted prior to
     the effective date of SFAS 123R. The "modified  retrospective"  method also
     permits entities to restate financial  statements of previous periods based
     on proforma disclosures made in accordance with SFAS 123.

     The Company  currently  utilizes a standard  option  pricing  model  (i.e.,
     Black-Scholes)  to  measure  the fair  value of stock  options  granted  to
     employees.  While SFAS 123R  permits  entities  to  continue  to use such a
     model,  the standard also permits the use of a "lattice" model. The Company
     has not yet determined which model it will use to measure the fair value of
     employee stock options upon the adoption of SFAS 123R.

     SFAS  123R  also  requires  that  the  benefits  associated  with  the  tax
     deductions  in excess of  recognized  compensation  cost be  reported  as a
     financing  cash flow,  rather  than as an  operating  cash flow as required
     under current  literature.  The Company has not yet determined what effect,
     if any, this change will have on future periods.

     The Company  currently  expects to adopt SFAS 123R  effective July 1, 2006;
     however,  it has  not yet determined which of the  aforementioned  adoption
     methods it will use.

     10. Income Taxes
         ------------

     The Company  determines  its provision for income taxes using the asset and
     liability  method.  Under this method,  deferred tax assets and liabilities
     are  recognized  for the future tax  effects of  temporary  differences  of
     existing assets and liabilities and their respective tax bases.  Future tax
     benefits  of tax loss and  credit  carryforwards  also  are  recognized  as
     deferred tax assets.  When necessary,  deferred tax assets are reduced by a
     valuation   allowance  to  the  extent  the  Company   concludes  there  is
     uncertainty  as to their  ultimate  realization.  Deferred  tax  assets and
     liabilities  are measured using enacted tax rates in effect for the year in
     which those temporary  differences are expected to be recovered or settled.
     The  effect on  deferred  taxes of a change in tax rates is  recognized  in
     income in the period that the change is enacted.

     As of June 30, 2005 and 2004,  the Company  maintained a deferred tax asset
     of $1,456,114 and $1,623,841,  respectively. The Company has not provided a
     valuation allowance against its deferred tax asset after consideration of a
     future gain on the  disposal of certain land  adjacent to its  Collegeville
     facility and anticipated future profitable operating results.  However, the
     amount  realizable may be reduced if future taxable income is reduced or is
     insufficient  to utilize  the  entire  deferred  tax asset.  See Note F for
     additional information.

     11. Accumulated Other Comprehensive Income/(Loss)
     -------------------------------------------------

     Based  on  the  Company's  current   activities,   the  only  component  of
     accumulated  other   comprehensive   income  consists  of  changes  in  the
     unrealized gains or losses of marketable securities.

                                            For the year ended June 30,
                                              2005               2004
                                            ---------          ---------
               Beginning balance             $   --            $   --
               Current period change           13,733              --
               Tax effect                      (5,493)             --
                                             --------          ---------
               Ending balance                $  8,240          $   --
                                             ========          =========


                                      F-10

             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     12. Earnings/(Loss) Per Share
         -------------------------

     The Company has adopted the  provisions of SFAS No. 128. Basic earnings per
     share is computed by dividing  income  available to common  stockholders by
     the weighted average number of common shares outstanding during the period.
     SFAS No.  128 also  requires  a dual  presentation  of  basic  and  diluted
     earnings  per  share on the face of the  statement  of  operations  for all
     companies  with  complex  capital  structures.  Diluted  earnings per share
     reflects the amount of earnings  for the period  available to each share of
     common stock outstanding  during the reporting period,  while giving effect
     to all dilutive  potential common shares that were  outstanding  during the
     period, such as common shares that could result from the potential exercise
     into common stock.

     The  computation of diluted  earnings per share does not assume exercise of
     securities  that would  have an  antidilutive  effect on per share  amounts
     (i.e.,  increasing  earnings  per share or reducing  loss per  share).  The
     dilutive effect of outstanding  options are reflected in dilutive  earnings
     per share by the application of the treasury stock method which  recognizes
     the use of  proceeds  that could be obtained  upon  exercise of options and
     warrants in  computing  diluted  earnings  per share.  It assumes  that any
     proceeds would be used to purchase common stock at the average market price
     during  the  period.  Options  will have a  dilutive  effect  only when the
     average  market  price of the common  stock  during the period  exceeds the
     exercise price of the options.  Options that may have a dilutive effect are
     listed in Note J.

     13. Advertising Costs
         -----------------

     It is the Company's  policy to expense  advertising  costs in the period in
     which they are incurred.  Advertising  expense for the years ended June 30,
     2005, 2004 and 2003 was $78,789, $112,404 and $53,196, respectively.

     14. Reclassification
         ----------------

     Certain  2004 and 2003  items  have been  reclassified  to  conform  to the
     current year presentation.

     15. Use of Estimates
         ----------------

     In preparing the Company's financial statements,  management is required to
     make estimates and assumptions  that affect the reported  amounts of assets
     and liabilities, the disclosure of contingent assets and liabilities at the
     date of the financial statements,  and the reported amounts of revenues and
     expenses  during the  reporting  period.  Actual  results could differ from
     those estimates.

     16.  Fair Value of Financial Instruments
          -----------------------------------

     The Company used the following  methods and  assumptions  in estimating our
     fair value disclosures for financial instruments:

     Cash and cash equivalents: The carrying amounts the Company has reported in
     the accompanying  balance sheet for cash and cash  equivalents  approximate
     their fair values.

     Investments:  The Company estimates the fair values of investments based on
     quoted market prices. The carrying amounts are reported in the accompanying
     balance sheet for investments in contracts approximate their fair values.

     Long- and  short-term  debt:  The  Company  bases  the fair  values of debt
     instruments on quoted market prices. Where quoted prices are not available,
     the Company bases the fair values on the present value of future cash flows
     discounted as estimated  borrowing rates for similar debt instruments or on
     estimated prices based on current yields for debt issues of similar quality
     and terms. The carrying  amounts are reported in the  accompanying  balance
     sheet for debt  approximate  their fair values.  See footnote E for further
     discussion.


                                      F-11

             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     17. Impairment or Disposal of Long Lived Assets
         -------------------------------------------

     The Company adopted SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
     LONG-LIVED  ASSETS" ("SFAS 144").  Under the  requirements of SFAS 144, the
     Company assesses the potential impairment of property,  plant and equipment
     whenever  events or changes in  circumstances  indicate  that the  carrying
     value may not be recoverable.  An asset's value is impaired if management's
     estimate  of the  aggregate  future cash  flows,  undiscounted  and without
     interest  charges,  to be generated by the asset are less than the carrying
     value of the  asset.  Such cash flows  consider  factors  such as  expected
     future  operating income and historical  trends,  as well as the effects of
     demand and  competition.  To the extent  impairment has occurred,  the loss
     will be measured as the excess of the carrying amount of the asset over the
     fair value of the asset.  Such  estimates  require the use of judgment  and
     numerous subjective assumptions,  which, if actual experience varies, could
     result in material differences in the requirements for impairment charges.

     18. Research and Development
         ------------------------

     The  Company  incurred  research  and  development  costs  related  to  the
     Company's Cook-Chill food preparation technology in the amounts of $98,083,
     $159,893 and  $138,605  for the years ended June 30,  2005,  2004 and 2003,
     respectively.

     19. New Accounting Pronouncements
         -----------------------------

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
     SFAS  No.  151,  "INVENTORY  COSTS  - AN  AMENDMENT  TO ARB NO.  43."  This
     statement  provides guidance to clarify the accounting for abnormal amounts
     of idle facility  expense,  freight  handling  costs,  and wasted  material
     (spoilage),  among other production costs.  Provisions of ARB No. 43 stated
     that  under  some  circumstances,  items  such  as idle  facility  expense,
     excessive  spoilage  and  other  costs  may be so  abnormal  as to  require
     treatment as current period  charges.  This  statement  requires that those
     items be recognized as current  period  charges  regardless of whether they
     meet the criterion of "so  abnormal."  In addition,  SFAS 151 requires that
     allocation  of fixed  production  overheads to the costs of  conversion  be
     based on the normal capacity of the production facilities.  The adoption of
     this statement is required for fiscal years  beginning after June 15, 2005.
     Adoption of the Statement is not expected to have a material  impact on the
     financial statements of the Company.

     In November 2004, the FASB issued SFAS No. 152  "ACCOUNTING FOR REAL ESTATE
     TIME-SHARING  TRANSACTIONS  - AN  AMENDMENT  OF SFAS NO.  66 AND 67".  This
     Statement  amends SFAS No. 66  "ACCOUNTING  FOR SALES OF REAL  ESTATE",  to
     reference the financial  accounting and reporting  guidance for real estate
     time-sharing  transactions  that is provided in AICPA Statement of Position
     (SOP) 04-2,  Accounting  for Real Estate  Time-Sharing  Transactions.  This
     Statement also amends SFAS No. 67, "ACCOUNTING FOR COSTS AND INITIAL RENTAL
     OPERATIONS  OF  REAL  ESTATE  PROJECTS,"  to  state  the  guidance  for (a)
     incidental  costs and (b) costs incurred to sell real estate  projects does
     not apply to real estate  time-sharing  transactions.  The  accounting  for
     those  operations  and costs is subject to guidance in SOP 04-2,  effective
     for financial  statements  with fiscal years beginning after June 15, 2005.
     Adoption of this Statement is not expected to have a material impact on the
     financial statements of the Company.

     In November 2004,  the FASB issued SFAS No. 153,  "EXCHANGES OF NONMONETARY
     ASSETS - AN AMENDMENT TO APB NO. 29." This Statement  amends Opinion No. 29
     to eliminate the exception for nonmonetary  exchanges of similar productive
     assets  and  replaces  it  with  a  general   exception  for  exchanges  of
     nonmonetary  assets that do not have  commercial  substance.  A nonmonetary
     exchange  has  commercial  substance if the future cash flows of the entity
     are  expected  to change  significantly  as a result of the  exchange.  The
     adoption of this  statement is required for fiscal  years  beginning  after
     June  15,  2005.  Adoption  of this  statement  is not  expected  to have a
     material impact on the financial statements of the Company.

     In December 2004, the FASB issued SFAS No. 123 (Revised 2004)  "SHARE-BASED
     PAYMENT." The statement  requires  that the  compensation  cost relating to
     share-based  payment  transactions  be recognized in financial  statements.
     That  cost  will be  measured  based on the fair  value  of the  equity  or
     liability   instrument  issued.  The  statement  covers  a  wide  range  of
     share-based compensation  arrangements including share options,  restricted
     share plans,  performance-based  awards,  share  appreciation  rights,  and
     employee share purchase  plans.  The Company will be required to adopt SFAS
     123 (R) as of July 1, 2006.  The adoption of this statement is not expected
     to have a material impact on the consolidated  financial  statements of the
     Company.

                                      F-12


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     19. New Accounting Pronouncements-continued
         ---------------------------------------

     In May 2005,  the FASB  issued SFAS No. 154  "ACCOUNTING  CHANGES AND ERROR
     CORRECTIONS".  This  Statement  replaces  APB  Opinion  No. 20,  Accounting
     Changes, and FASB Statement No. 3, "Reporting Accounting Changes in Interim
     Financial Statements",  and changes the requirements for the accounting for
     and reporting of a change in accounting  principle.  This Statement applies
     to all  voluntary  changes  in  accounting  principle.  It also  applies to
     changes  required by an accounting  pronouncement  in the unusual  instance
     that the  pronouncement  does not include specific  transition  provisions.
     When  a  pronouncement  includes  specific  transition  provisions,   those
     provisions  should be followed.  Adoption of this statement is required for
     fiscal  years  starting  after  December  15,  2005.  The  adoption of this
     statement  is not  expected to have a material  impact on the  consolidated
     financial statements of the Company.

NOTE C - BUSINESS CONDITIONS

     The  Company's  primary  sources of  revenues  are the  management  fees it
     receives  from  contracts  to provide  food and  housekeeping  services  to
     continuing care facilities,  hospitals, and retirement communities, as well
     as the  Collegeville Inn which includes the Conference and Training Center,
     Catering  facilities and the Cook Chill operations.  See Note O for segment
     reporting information.  The Company has a business plan in place to improve
     the operating  results from the Collegeville Inn. The agreement of sale for
     the land dated  September  8, 2004 has been  terminated  and the Company is
     currently exploring several alternatives for the land,  including,  but not
     limited  to, the sale of the land.  Effective  June 27,  2005,  the Company
     closed the buffet  restaurant at the  Collegeville Inn to make the facility
     available for catered events.

     The  Company is  exploring  all  reasonable  alternatives  to  improve  its
     operating  results,  including but not limited to,  increasing food service
     revenues with targeted marketing efforts, increasing revenues from the sale
     of the Company's Cook Chill  products,  the sale or lease of all or part of
     the  Collegeville  Inn,  sale of excess  land at the  Collegeville  Inn and
     reduction  of  operating  expenses.  There  can be no  assurance  as to the
     success of any or all of these alternatives.

     Management believes that operating cash flow, proceeds from the sale of the
     land,  available  cash and available  credit  resources will be adequate to
     make repayments of  indebtedness,  meet the working capital needs,  satisfy
     the needs of its operations,  and to meet anticipated capital  expenditures
     during the next twelve months ending July 1, 2006.

     At June 30, 2005 the Company was in compliance with its bank covenants. The
     Company has amended its agreement with the bank that has extended the terms
     of  the  Company's  credit  line  through  July  1,  2006.  See  Note E for
     additional information.

NOTE D - PROPERTY AND EQUIPMENT

     The following details the composition of property and equipment.

                                           Estimated
                                          useful lives     2005         2004
                                          ------------ ------------- -----------
     Property and equipment
     Land                                       --     $   497,967   $   497,961
     Building                                     40     7,491,984     7,491,984
     Machinery and equipment                   2 - 8     3,864,266     3,864,941
     Furniture and fixtures                    2 - 8       749,434       749,434
     Other, principally autos and trucks      2 - 10       410,753       407,117
                                                       -----------   -----------
                                                        13,014,404    13,011,443
          Less: accumulated depreciation                 6,024,777     5,447,875
                                                       -----------   -----------
                                                       $ 6,989,627   $ 7,563,568
                                                       ===========   ===========


                                      F-13


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE E - LONG- TERM DEBT

     Long-term debt consisted of the following:                                                          2005                2004
                                                                                                      ----------          ----------
     Bank  revolving  credit,  interest due monthly at the National  Consumer
          rate minus .25% (effectively  6.0% as of June 30, 2005), secured by
          all corporate assets and limited  personal  guarantee of the Chief
          Executive  Officer;  matures on July 1, 2006                                                $3,224,921          $2,846,921
     Industrial Revenue Bonds (Collegeville Inn Projects) (see bonds payable)                          1,835,000           1,940,000
     Industrial Revenue Bonds (Apple Fresh Foods Projects) (see bonds payable)                           695,000             735,000
                                                                                                      ----------          ----------
                                                                                                       5,754,921           5,521,921
     Less: current maturities                                                                            150,000             145,000
                                                                                                      ----------          ----------
                                                                                                      $5,604,421          $5,376,921
                                                                                                      ==========          ==========

     In February 2001,  the Company  executed a loan agreement with a bank for a
     revolving   credit  and  two  irrevocable   letters  of  credit  issued  in
     conjunction  with the issuance of the Industrial  Revenue  Bonds,  totaling
     $4,000,000  and  $3,065,000,  respectively.  In October  2003,  the Company
     entered into an amended credit agreement  whereby the $4,000,000  Revolving
     Credit Loan Facility was reduced to $3,500,000 and $500,000 was placed in a
     cash collateral  account and pledged as additional  collateral  against the
     revolving  credit line. A portion of the cash  collateral  account has been
     released  and  as of  June  30,  2005  and  2004,  the  Company  maintained
     restricted cash balances of $250,000, respectively, which was not available
     for operating purposes.

     At June 30, 2005,  the Company had available  approximately  $275,079 under
     the revolving  credit.  Advances  under the  revolving  credit are used for
     working capital purposes.

     These credit  agreements  contain  covenants that include the submission of
     specified  financial  information and the maintenance of insurance coverage
     for the pledged  assets during the term of the loans.  The  covenants  also
     include  the  maintenance  of a certain  consolidated  fixed  debt  service
     coverage  ratio,  ratio of total  consolidated  liabilities to consolidated
     tangible net worth,  and minimum  working  capital.  At June 30, 2005,  the
     Company was in compliance with these covenants.

     Bonds Payable - In December  1996, the Company,  through its  subsidiaries,
     authorized two industrial revenue bond issues.

     Issue #1
     --------

         Title - Montgomery County Industrial Development Authority,  $2,500,000
         aggregate   principal   amount,   federally   taxable   variable   rate
         demand/fixed rate revenue bonds  ("Collegeville Inn Project") Series of
         1996

         Rate - Variable,  to a maximum of 17%  (Variable  Rate at June 30, 2005
         was 3.45%)

         Term - 20 years (2016)

         Purpose - Rehabilitate, furnish and equip the Collegeville Inn

     Issue #2
     --------

         Title - Montgomery County Industrial Development Authority,  $1,000,000
         aggregate   principal   amount,   federally   taxable   variable   rate
         demand/fixed  rate revenue bonds ("Apple  Fresh Foods,  Ltd.  Project")
         Series of 1996

         Rate - Variable, to a maximum of 15% (Variable Rate at June 30, 2005 was 2.45%)

         Term - 20 years (2016)

         Purpose - Develop a cook-chill food preparation technology

     Each  series  of  bonds  is  guaranteed  by the  Company  and  each  of its
     subsidiaries.  The assets of  Collegeville  Inn and Apple  Fresh  Foods are
     pledged as collateral for both series of bonds.


                                      F-14


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE E - LONG-TERM DEBT - continued

     The Company's bank has issued irrevocable letters of credit in favor of the
     bond trustee for the full amount of both bond issues. The letters of credit
     have a term of four  years and can be  renewed  on an  annual  basis by the
     bank.  The bank holds the  mortgage on the  Collegeville  Inn  building and
     property. The letters of credit are guaranteed by the parent company.


     The sinking fund requirements of the bonds are as follows:

                                  Collegeville       Apple Fresh
                                      Inn               Foods            Total
                                  ------------       -----------        --------

                      2005          $105,000          $ 45,000          $150,000
                      2006           115,000            50,000           165,000
                      2007           120,000            50,000           170,000
                      2008           130,000            50,000           180,000
                      2009           135,000            55,000           190,000

     Maturities of principal due in the following years are set forth below:

               Year ending June 30,
               --------------------

                      2006          $  165,000
                      2007           3,394,921
                      2008             180,000
                      2009             190,000
                      2010             275,000
                      Thereafter     1,550,000
                                    ----------
                                    $5,754,921
                                    ==========

NOTE F - INCOME TAXES

  The components of income tax
  (benefit)/expense are:                      Year Ended June 30,
                                              -------------------
                                    2005              2004             2003
                                ------------      ------------     -------------
     Current
          Federal               $   139,853       $         0       $   (47,422)
          State                           0                 0           (13,400)
                                -----------       -----------       -----------
                                    139,853                 0           (60,822)
                                -----------       -----------       -----------
     Deferred
          Federal                   156,584          (157,662)         (345,191)
          State                      11,143           (44,038)          (91,374)
                                -----------       -----------       -----------
                                    167,727          (201,700)         (436,565)
                                -----------       -----------       -----------

                                $   307,580       $  (201,700)      $  (497,387)
                                ===========       ===========       ===========


                                      F-15


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F - INCOME TAXES-continued

     The tax  effects of  temporary  differences  that give rise to  significant
     portions  of the  deferred  tax assets and  deferred  tax  liabilities  are
     approximately:

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

     Deferred tax assets
          Provision for doubtful accounts                   $  412,242     $1,095,349
          Excess of tax over financial statement
               basis of investments in contracts               147,970        147,970
          Vacation accrual                                     109,349        114,956
          Bonus accrual                                          2,150           --
          Charitable contribution carryforward                  26,294         36,690
          Federal net operating loss                           871,616        324,893
          Other                                                 96,937        107,879
                                                            ----------     ----------
     Total deferred tax assets                               1,666,358      1,827,737
                                                            ----------     ----------

     Deferred tax liabilities
          Depreciation                                         210,244        203,896
                                                            ----------     ----------

              Net deferred tax assets                       $1,456,114     $1,623,841
                                                            ==========    ===========

     The deferred tax amounts are classified on the balance sheet as follows:

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

          Current asset                                     $     --       $  405,320
          Non-current asset                                  1,456,114      1,218,521
                                                            ----------     ----------
                                                            $1,456,114     $1,623,841
                                                            ==========    ===========

     The Company also has a federal net operating loss carry forward of $855,042
     expiring on December  31,  2017.  The Company has  charitable  contribution
     carry  forwards  in the  amount of  $61,419,  which  begin to expire in the
     fiscal year 2005.

     The Company has not provided a valuation allowance against its deferred tax
     assets after consideration of a future gain on the disposal of certain land
     adjacent  to  the  Collegeville  Inn  and  anticipated   future  profitable
     operating results.


     The  following  reconciles  the tax provision  with the U.S.  statutory tax
     rates:


                                                         Year Ended June 30
                                                         ------------------
                                                     2005      2004       2003
                                                    ------    ------     ------
          Income taxes, at U.S. statutory rates      34.0%    (34.0)%    (34.0)%
          States taxes, net of federal tax benefit   (1.0)      4.2       (5.3)
          Nondeductible expenses                      8.9      10.2        3.5
          Other                                     (13.6)       .4       (2.0)
                                                    ------    ------     ------
                                                     28.3%    (19.2)%     (37.8)%
                                                    ======    ======     ======



                                      F-16


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE G - RELATED PARTY TRANSACTIONS

     The Company leases its corporate  offices,  located at 725 Kimberton  Road,
     Kimberton,  Pennsylvania, which consists of approximately 8,500 square feet
     from Ocean 7, Inc., a corporation controlled by the Chief Executive Officer
     of the Company,  The initial term of the lease expired on June 30, 2003 and
     continues  on a month to month  lease based on terms  generally  similar to
     those prevailing to unrelated parties. The Company leases an apartment from
     the same company to accommodate visiting clients and employees.  See Note H
     for additional information.

     Joseph V.  Roberts,  Chief  Executive  Officer and Director of the Company,
     received  long  term  advances  of  which  $374,373  and  $375,373  remains
     outstanding as of June 30, 2005 and 2004,  respectively.  Kathleen A. Hill,
     President,  Chief Operating  Officer and Director of the Company,  received
     long term advances of which $59,910 remains outstanding as of June 30, 2005
     and 2004,  respectively.  As of June 30,  2005 the  Company  did not have a
     written  agreement with Mr. Roberts or Ms. Hill regarding  repayment of the
     outstanding balances.  The advances are non-interest bearing.

NOTE H - COMMITMENTS AND CONTINGENCIES

     1.  Operating Leases
         ----------------

     The Company  leases real estate  facilities  from a corporation  owned by a
     principal stockholder under month-to-month  operating leases, including its
     corporate  office  building  under a  month-to-month  lease  based on terms
     management  believes  to  be  generally  similar  to  those  prevailing  to
     unrelated  parties.  During the years ended June 30,  2005,  2004 and 2003,
     rent expense paid to the related party was $259,758, $261,766 and $232,259,
     respectively.

     The Company is also obligated under various  operating leases for operating
     equipment for periods  expiring  through 2007.  During the years ended June
     30, 2005, 2004 and 2003, rent expense was $390,341,  $287,440 and $260,698,
     respectively, for all operating leases.

     Minimum annual rentals under non-cancelable  operating leases subsequent to
     June 30, 2005, are as follows:

                                                         Operating
          Year ending June 30,                           equipment
          --------------------                          -----------

                2006                                    $  44,545
                2007                                       22,065
                2008                                            0
                2009                                            0


     2.  Litigation
         ----------

     On February 7, 2001, the Company filed a suit against a major client in the
     Court  of  Common  Pleas  of  Chester  County,   Pennsylvania,   which  was
     subsequently  removed to the United States  District  Court for the Eastern
     District of Pennsylvania.  On February 25, 2005,  judgment was entered on a
     jury  verdict  in favor of the  Company,  in the  amount of  $2,500,000  in
     damages  related to its claims,  including  but not  limited to,  breach of
     contract and lost profits.  The client's  counterclaim was dismissed by the
     judge. The Company filed an appeal of the jury's failure to award interest.
     Fees due to the Company's legal counsel in the amount of $340,000 have been
     placed in escrow  pending the outcome of the appeal.  The former client did
     not appeal the jury verdict and the Company received  $2,500,000 on June 1,
     2005. For the year ended June 30, 2005, the jury award is reported as Other
     Income, net of legal fees and related expenses in the amount of $378,762.

     The  Company is  involved  in  litigation  with a  construction  contractor
     related to the  renovations  of  Collegeville  Inn. The Company  denies the
     claims and has asserted offsets against the amounts claimed. The case is in
     discovery.

     Although it is not possible to predict with  certainty the outcome of these
     unresolved  legal  actions or the range of possible  loss or recovery,  the
     Company  believes these  unresolved  legal actions will not have a material
     effect on its financial position or results of operations.

     In addition to the litigation  described  above,  the Company is exposed to
     asserted  and  unasserted  claims.  In  the  opinion  of  management,   the
     resolution of these matters will not have a material  adverse effect on the
     Company's financial position, results of operations or cash flows.


                                      F-17


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I - STOCKHOLDERS' EQUITY

     1.  Class A Common Stock
         --------------------

     The  Company is  authorized  to issue  10,000,000  shares of Class A Common
     Stock,  no par value,  of which  holders  of Class A Common  Stock have the
     right  to cast  one  vote for each  share  held of  record  in all  matters
     submitted to a vote of holders of Class A Common Stock.  The Class A Common
     Stock and  Class B Common  Stock  vote  together  as a single  class on all
     matters  on which  shareholders  may  vote,  except  when  class  voting is
     required by applicable law.

     Holders of Class A Common Stock are entitled to  dividends,  together  with
     the holders of Class B Common Stock, pro rata based on the number of shares
     held.  In the event of the  liquidation,  dissolution  or winding up of the
     affairs of the Company, all assets and funds of the Company remaining after
     the payment to creditors and to holders of Preferred  Stock,  if any, shall
     be distributed, pro rata, among the holders of the Class A Common Stock and
     Class B Common Stock.

     2.  Class B Common Stock
         --------------------

     The Company has authorized  100,000 shares of Class B Common Stock,  all of
     which were issued to the Chief Executive  Officer and majority  shareholder
     of the  Company,  in exchange for 100,000  shares of Class A Common  Stock.
     Each  share of  Class B Common  Stock  is  entitled  to seven  votes on all
     matters  on  which  shareholders  may  vote,   including  the  election  of
     directors.  The Class A Common Stock and Class B Common Stock vote together
     as a single  class on all matters on which  shareholders  may vote,  except
     when class voting is required by applicable law.

     Each share of Class B Common Stock also is convertible at any time upon the
     option of the holder into one share of Class A Common  Stock.  There are no
     preemptive,  redemption,  conversion or cumulative voting rights applicable
     to the Class B Common Stock.

     3.  Preferred Stock
         ---------------

     The Company is authorized to issue 2,000,000  shares of Preferred Stock, no
     par value, of which no shares have been issued.  The Preferred Stock may be
     issued by the Company's Board of Directors from time to time in one or more
     series.

NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

     1.  Stock Options
         -------------

     In September  1991, the Company adopted the 1991 Stock Option Plan ("Plan")
     for  officers,  directors  and key  employees  to receive  incentive  stock
     options.  The options are exercisable for a period up to 10 years from date
     of grant at an exercise price not less than fair market value of the common
     stock at date of grant. The Plan expired in September 2001. The Company has
     reserved 500,000 shares of common stock for the Plan.

     The following is a summary of transactions:

                                                          Number
                                                        of options                   Non-                                 Weighted
                                                       outstanding                qualified                               average
                                                        incentive                   stock                                 exercise
                                                      stock options                options               Total            price ($)
                                                     ----------------        ----------------        -------------     -------------
         Outstanding at June 30, 2003                      37,750                    45,000            82,750               4.00
         Exercisable at June 30, 2003                      37,750                    45,000            82,750               4.00

         Outstanding at June 30, 2004                      37,750                    45,000            82,750               4.00
         Exercisable at June 30, 2004                      37,750                    45,000            82,750               4.00

         Outstanding at June 30, 2005                      37,750                    45,000            82,750               4.00
         Exercisable at June 30, 2005                      37,750                    45,000            82,750               4.00


                                                                F-18


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - continued

     1.  Stock Options-continued
         -----------------------

     All options were granted at exercise prices above market price. In addition
     the Company has not granted any stock options since 1998.

     The remaining  contractual  life of outstanding and exercisable  options is
     approximately  four years with respect to the  incentive  stock options and
     three years with respect to non-qualified stock options.

     2.  Employee Stock Purchase Plan
         ----------------------------

     The Company has a stock purchase plan that allows  participating  employees
     to purchase,  through payroll  deductions,  shares of the Company's  common
     stock at 85 percent of the fair market  value at specified  dates.  At June
     30, 2005, all employees were eligible to participate in the plan. A summary
     of stock purchased under the plan is shown below.

                                               2005          2004          2003
                                             --------      --------      --------

          Aggregate purchase price            $ --          $ --          $  720
          Shares purchased                      --            --           4,235
          Employee participants                 14            14              14

     The Company  accounts for employee  stock plans under the  intrinsic  value
     method prescribed by Accounting Principles Board ("APB") No. 25. The effect
     of the  pro-forma  information  in  accordance  with  Financial  Accounting
     Standards Board SFAS No. 123,  "ACCOUNTING  FOR STOCK-BASED  COMPENSATION,"
     was determined immaterial.

NOTE K - DEFINED CONTRIBUTION PENSION PLAN

     The Company  sponsors a 401(k) plan for all employees who have attained the
     age of  twenty-one  and  have  completed  one  year  of  service.  Eligible
     employees  may  contribute  up to 15% of their annual  compensation  to the
     plan.  The  Company  can  match  100% up to the first 6% of  employee  plan
     contributions.  Participants  are  vested  20% for  each  year  of  service
     beginning  after year three and are fully vested after seven service years.
     During the years ended June 30, 2005, 2004 and 2003, Company  contributions
     to the plan,  which were charged to expense,  amounted to $12,886,  $23,889
     and $23,649, respectively.

NOTE L - CONCENTRATION OF CREDIT RISK

     Financial   instruments,   which   potentially   subject   the  Company  to
     concentrations  of  credit  risk,  consist  principally  of cash  and  cash
     equivalents and accounts receivable. A substantial portion of the Company's
     revenues are dependent upon the payment by customers who are dependent upon
     third-party  payers,  such as state  governments,  Medicare  and  Medicaid.
     Generally,  the Company does not require  collateral  or other  security to
     support customer receivables.  The Company routinely assesses the financial
     strength of its customers  and, based upon factors  surrounding  the credit
     risk of its customers,  establishes an allowance for uncollectible accounts
     and, as a consequence,  believes that its accounts  receivable  credit risk
     exposure beyond such allowances is limited.

     As of June 30,  2005,  the  Company  had  cash  balances  of  approximately
     $2,400,000  subject  to credit  risk  beyond  insured  amounts  at  various
     financial  institutions having high credit standings.  The Company believes
     that its  exposure  to credit risk loss is  limited.  The Company  does not
     require  collateral  and other  security to support  financial  instruments
     subject to credit risk.


                                      F-19


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE M - MAJOR CUSTOMERS

     The Company's Food Service  Management Segment had sales to three customers
     representing  approximately  29%,  21%  and  11%,  respectively,  of  total
     revenues  for the year ended June 30,  2005.  For the years  ended 2004 and
     2003,  the  Company's  Food  Service  Management  Segment  had sales to one
     customer  representing   approximately  28%  and  26%  of  total  revenues,
     respectively.  The loss of any such customer could have a material  adverse
     effect on the Company's future results of operations.

NOTE N - MAJOR SUPPLIERS

     For the years ended June 30, 2005, 2004 and 2003, respectively, the Company
     purchased the following  percentages of its food and non-food products from
     two vendors:

                                        Years ending June 30,
                                        ---------------------
                                    2005        2004        2003
                                    -----       ----        ----
            Vendor A:                45%         40%         37%
            Vendor B:                19%         18%         18%

     In the event of a disruption in the Company's relationship with this vendor
     or any  disruption  in the  vendor's  business,  the Company has  alternate
     sources of supply for its food and non-food products.

NOTE O - BUSINESS SEGMENTS

     The Company follows the disclosure  provisions of SFAS No. 131, DISCLOSURES
     ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED  INFORMATION.  This  management
     approach  focuses  on  internal  financial  information  that  is  used  by
     management to assess performance and to make operating decisions.  SFAS No.
     131 also requires  disclosures about products,  services,  geographic areas
     and major customers.

     The financial  information of the Company's  reportable  segments have been
     compiled utilizing the accounting policies described in Note A Organization
     and  Business.  The  Company's  reportable  segments  are (1) food  service
     management and (2) training and conference  center.  Deferred taxes are not
     allocated to segments.  The  management  accounting  policies and processes
     utilized in compiling segment  financial  information are highly subjective
     and, unlike financial accounting,  are not based on authoritative  guidance
     similar to accounting principles generally accepted in the United States of
     America.  As  a  result,  reported  segment  results  are  not  necessarily
     comparable with similar information reported by other similar companies.


                                      F-20


                                 NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE O - BUSINESS SEGMENTS - continued
                                                                                     Training and
                                                              Food Service            Conference
                                                               Management               Center                Total
                                                              -------------          ------------          ------------

     As of and for the year ended June 30, 2005:
         Food service revenue                                 $ 25,736,139          $    866,022          $ 26,602,161
         Depreciation and amortization                              78,034               498,868               576,902
         Income/(loss) from operations                             673,250            (1,444,051)             (770,801)
         Interest expense                                         (168,476)             (110,769)             (279,245)
         Interest income                                            12,045                  --                  12,045
         Income/(loss) before tax expense/(benefit)              1,581,374              (498,137)            1,083,237
         Net income/(loss)                                       1,273,794              (498,137)              775,657
         Total assets                                            8,839,079             7,351,555            16,190,634
         Capital expenditures                                       25,139                15,266                40,405

     As of and for the year ended June 30, 2004:
         Food service revenue                                 $ 27,074,155          $    925,750          $ 27,999,905
         Depreciation and amortization                             123,192               497,007               620,199
         Income/(loss) from operations                             568,029            (1,424,886)             (856,851)
         Interest expense                                         (117,525)              (69,175)             (186,699)
         Interest income                                             9,564                  --                   9,564
         Loss before tax expense/(benefit)                        (623,018)             (429,116)           (1,052,134)
         Net loss                                                 (421,318)             (429,116)             (850,434)
         Total assets                                            6,427,248             7,852,047            14,279,295
         Capital expenditures                                       60,785                19,529                80,314

     As of and for the year ended June 30, 2003:
         Food service revenue                                 $ 26,462,980          $    843,050          $ 27,306,030
         Depreciation and amortization                             253,328               521,729               775,057
         Income/(loss) from operations                             452,565            (1,552,000)           (1,099,435)
         Interest expense                                         (116,558)              (95,395)             (211,953)
         Interest income                                             9,763                  --                   9,763
         Loss before tax expense/(benefit)                        (726,133)             (590,695)           (1,316,828)
         Net loss                                                 (228,746)             (590,695)             (819,441)
         Total assets                                            6,881,864             8,260,850            15,142,714
         Capital expenditures                                       40,392                34,408                74,800


                                                          F-21


             NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following quarterly financial data is unaudited,  but in the opinion of
     management  includes all necessary  adjustments for a fair  presentation of
     the interim results.

                                                                          Fiscal 2005
                                                 ----------------------------------------------------------------
                                                 September 30,     December 31,      March 31,         June 30,
                                                 -------------    -------------    -------------    -------------

          Revenues                                $6,769,547       $6,610,033       $6,627,280       $6,595,301
          Gross profit                             1,303,312        1,344,259        1,048,082        1,218,915
          Net income (loss)                         (209,533)         (48,852)        (445,892)       1,479,934
          Net income (loss) per share
               - basic and diluted                $     (.07)      $     (.02)      $     (.16)      $      .52

     The  Company's  net income for the quarter ended June 30, 2005 includes the
     proceeds,  net of legal and related  expenses from the jury verdict related
     to the litigation discussed in Note H.

                                                                          Fiscal 2004
                                                 ----------------------------------------------------------------
                                                 September 30,     December 31,      March 31,         June 30,
                                                 -------------    -------------    -------------    -------------

         Revenues                                 $6,706,854       $7,175,557       $7,141,972       $6,975,522
         Gross profit                              1,313,334        1,339,557        1,341,253        1,263,376
         Net income (loss)                          (125,956)        (116,649)        (120,378)        (487,451)
         Net income (loss) per share - basic
              and diluted                         $    (0.04)      $    (0.04)      $    (0.04)      $    (0.18)

     The  Company's  net loss for the quarter  ended June 30, 2004  includes the
     increase in reserve for  allowance for doubtful  accounts of $330,000.  See
     Note  B-Accounts   Receivable  and  Allowance  for  Doubtful  Accounts  for
     additional information. In addition, an adjustment to recorded income taxes
     amounting to $201,700 was also recorded in the fourth quarter.  See Note F-
     Income Taxes for additional information.


                                      F-22


                            SUPPLEMENTAL INFORMATION






             Nutrition Management Services Company and Subsidiaries
                         SCHEDULE OF VALUATION ACCOUNTS
                     For the three years ended June 30, 2005

The following sets forth the activity in the Company's valuation accounts:

                                                                 Allowance for
                                                               Doubtful Accounts
                                                               -----------------

Balance at June 30, 2002                                          $1,774,753

     Provision for bad debts                                         389,262

     Recovery, net of write-offs                                     128,321
                                                                  ----------

Balance at June 30, 2003                                           2,292,336

     Provision for bad debts                                         585,000

     Write-offs                                                           --
                                                                  ----------

Balance at June 30, 2004                                           2,877,336

     Provision for bad debts                                         165,000

     Recoveries, net of write-offs                                 2,083,634
                                                                  ----------

Balance at June 30, 2005                                          $  958,702
                                                                  ==========


                                      F-23



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Ticker: NMSCA
CIK: 879303
Form Type: 10-K Annual Report
Accession Number: 0000921895-05-001612
Submitted to the SEC: Wed Sep 28 2005 5:26:26 PM EST
Accepted by the SEC: Wed Sep 28 2005
Period: Thursday, June 30, 2005
Industry: Retail Eating Places

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