EMPLOYMENT AGREEMENT 

        TheEmployment Agreement dated as of October 4, 2004 (the “Effective Date”) is byand between National Medical Health Card Systems, Inc., a Delaware corporation (the“Company”), and Bill Masters (the “Executive”). 

        WHEREAS,the Company is engaged in providing comprehensive prescription benefit management servicesto the general commercial market; and 

        WHEREAS,the Company desires to employ the Executive pursuant to the terms and conditions set forthherein; and 

        WHEREAS,The Executive desires to enter into employment with the Company on the terms andconditions set forth herein. 

        NOW,THEREFORE, in consideration of the mutual promises, terms, covenants and conditions setforth herein, and the performance of each, the parties, intending legally to be bond,hereby agree as follows: 

AGREEMENTS 

         Section 1.        Definitions.  For purposes of the Agreement, the following terms have the meanings set forth below:

        “BaseSalary” has the meaning set forth in Section 4.1. 

        “Board”means the Board of Directors of the Company as the same is constituted from time to time. 

        “Cause” means(a) the commission by the Executive of any act, on or after the date of the Agreement,constituting, as to any cash funds or other receipts of the Company, or any materialproperty of the Company or any other Person, (i) theft, (ii) embezzlement, (iii) fraud,(iv) misappropriation of material property under applicable law, or (v) wilfulnon-disclosure and misappropriation of any corporate opportunity, (b) the arrest orindictment of the Executive of a crime resulting in material injury to the business orproperty of the Company or of moral turpitude , (c) the performance by the Executive ofhis duties pursuant to this Agreement in a manner that is to be negligent or (d) thematerial breach by the Executive of the Agreement, including but not limited to thefailure by the Executive to follow all reasonable and lawful directions of the Board orthe Chairman of the Company as to any material matter or the taking of any action by theExecutive that would be reasonably likely to cause material injury to the Company or thatwould be in conflict with any material interest to the Company. 

        “Changeof Control” means any consolidation or merger of the Company with or into anothercompany where the Company is not the survivor or the conveyance of all or substantiallyall of the assets of the Company to another company or a change of ownership of more than50% of the Company’s common stock. 

        “ConfidentialInformation” means information that is not generally known to the public and thatwas or is used, developed or obtained by the Company in connection with its business,including (a) products or services, (b) fees, costs and pricing structures, (c) designs,(d) analyses, (e) drawings, photographs and reports, (f) computer software, includingoperating systems, applications and program listings, (g) flow charts, manuals anddocumentation, (h) data bases, (i) accounting and business methods, (j) inventions,devices, new developments, methods and processes, whether patentable or unpatentable andwhether or not reduced to practice, (k) customers and clients and customer or clientlists, (l) other copyrightable works, (m) all technology and trade secrets, and (n) allsimilar and related information in whatever form or medium. Confidential Information doesnot include any information that has been published in a form generally available to thepublic prior to the date of disclosure or use of such information. Information will not bedeemed to have been published merely because individual portions of the information havebeen separately published, but only if all material features comprising such informationhave been published in combination. 

        “EmploymentPeriod” has the meaning set forth in Section 2 and Section 5 of the Agreement. 

        “Executive”meansBill Masters. 

        “IntellectualProperty” has the meaning set forth in Section 7 of the Agreement. 

        “PBMServices” shall mean, services associated with the prescription benefitmanagement business, including but not limited to: (i) claims administration, (ii)establishment and administration of a pharmacy network and benefits, (iii) mail orderpharmacy services (by phone, fax or internet), (iv) drug utilization review, (v) diseasestate management and delivery of specialty pharmacy benefits, (vi) formulary creation andadministration, (vii) rebate negotiation and administration, and (viii) therapeuticsubstitution programs. 

        “PermanentDisability” shall have occurred if as a result of physical or mental incapacity,the Employee shall have been incapable of performing Employee’s essential dutieshereunder for a period in excess of 13 consecutive weeks in any calendar year, or anaggregate of 26 weeks in any 12 month period. 

        “Person”means an individual, a partnership, a corporation, a limited liability company, anassociation, a joint stock company, a trust, a joint venture, an unincorporatedorganization and a governmental entity or any department, agency or political subdivisionthereof. 

        “ReimbursableExpenses” has the meaning set forth in Section 4.5 of the Agreement. 

        “Subsidiary”means, with respect to any Person, any corporation, partnership, limited liabilitycompany, association or other business entity of which (a) if a corporation, a majority ofthe total voting power of shares of stock entitled (without regard to the occurrence ofany contingency) to vote in the election of directors, managers or trustees thereof is atthe time owned or controlled, directly or indirectly, by that Person or a combinationthereof, or (b) if a partnership, limited liability company, association or other businessentity, a majority of the partnership or other similar ownership interests thereof is atthe time owned or controlled, directly or indirectly, by that Person or one or moreSubsidiaries of the Person or a combination thereof. For purposes of the Agreement, aPerson or Persons will be deemed to have a majority ownership interest in a partnership,limited liability company, association or other business entity if such Person or Personsare allocated a majority of partnership, limited liability company, association or otherbusiness entity gains or losses or control the managing director or member or generalpartner of such partnership, limited liability company, association or other businessentity. 

        Section2.Employment. The Company hereby employs the Executive, and the Executivehereby accepts employment with the Company, upon the terms and conditions set forth in theAgreement, for the period provided in Section 5 (the “Employment Period”). 

      Section3.     Position and Duties.

        3.1Position. During the Employment Period, the Executive will serve as ChiefInformation Officer of the Company and will perform such executive and management dutiesas may, from time to time, be determined and assigned to the Executive by the ChiefExecutive Officer of the Company or his designee. 

        3.2Performance of Duties; Other Activities. The Executive shall devote his full andbest efforts, attention and skills toward performing his duties on behalf of the Company,and his full business and professional time to fully and faithfully perform such dutiesand responsibilities to the best of his abilities in a diligent, trustworthy, businesslikeand efficient manner. The Executive shall do such traveling as may reasonably be requiredin connection with the performance of his duties and responsibilities hereunder. 

       Section4.      Base Salary and Benefits.

        4.1Base Salary. During the Employment Period, the Executive’s base salary will beat the rate of $210,000 per annum (the “Base Salary”), plus annual increasesapproved by the Chief Executive Officer and the Compensation Committee based upon anevaluation of Executives achievements and contributions in the sole discretion of theChief Executive Officer and the Compensation Committee. Base Salary will be payable by theCompany in regular installments in accordance with the general payroll practices of theCompany as in effect from time to time. 

        4.2Bonus. In addition to the Base Salary, the Executive shall be eligible for annualbonuses (the “Bonus”), in accordance and payable with the Company’sExecutive Management Bonus Plan. 

    (a)                 You will be eligible to receive 35% of base pay as an annual cash incentive if          100% of predetermined corporate performance targets are achieved. Annual          performance targets are established by the Board each year and are typically          measured by factors that include, sales growth as compared to target, net income          as compared to target, return on equity as compared to target, as well as          “personal” objectives which will be established by the CEO. 

    (b)                 Pursuant to the Company’s Long Term Incentive Plan (as such may be amended          or modified by the Board of Directors or the Compensation Committee from time to          time), Executive shall be eligible to receive annual long term incentive          compensation equal to up 50% of Executive’s Base Salary. 50% of such long          term incentive compensation shall be paid through the issuance of stock options          to purchase common stock of the Company and the remaining 50% of such long term          incentive compensation shall be paid through the issuance of either performance          based or performance accelerated restricted stock of the Company, as determined          by the Company in its sole discretion, in accordance with the terms of the          Company’s 2000 Restricted Stock Grant Plan. Notwithstanding the foregoing,          the form and mix of long term compensation may be changed by the Board of          Directors or the Compensation Committee, in their sole discretion. 

        4.3Benefits. In addition to the Base Salary and Bonus described above, the Executiveshall be entitled to the following further benefits during the Employment Period: 

    (a)                 such major medical, dental, life insurance and disability insurance coverage          (collectively, “Benefits”) as is, or may from time to time during the          Employment Period, be provided for other executive officers of the Company          (provided that nothing herein contained shall be deemed to require the Company          to maintain any particular plan or policy); and, in connection herewith, the          Executive shall, upon commencement of his full-time employment hereunder, be          immediately enrolled in the Company’s current benefit plans (a 30 day          waiting period applies to the Company’s 401K plan); and 

    (b)                 four (4) weeks of paid vacation per year during the Employment Period (to be          taken at mutually convenient times so as not to unduly interfere with the          business of the Company); and 

    (c)                 provision of temporary housing at one of the NMHC corporate homes located within          a short distance from the Company’s headquarters. 

        4.5Expenses. The Company shall reimburse the Executive for any and all reasonableexpenses incurred by him in the course of performing him duties under the Agreement whichare consistent with the Company’s policies in effect from time to time with respectto travel, entertainment and other business expenses (“Reimbursable Expenses”),subject to the Company’s requirements with respect to reporting and documentation ofexpenses. Moreover, Executive shall be reimbursed for travel related to and fromExecutives home in Kentucky consistent with the Company’s travel policies. 

        4.6Employee Stock Options. On the Effective Date (as defined herein), Executive shallbe granted stock options of the Company (“Initial Option Grant”) pursuant to theCompany’s 1999 Stock Option Plan. The Stock Option Agreement regarding the InitialOption Grant is attached hereto as Exhibit A. All Stock Options granted under thisAgreement are intended to qualify as incentive stock options under Section 422 of theInternal Revenue Code of 1986, as amended (the “Code”), subject to thelimitations of Section 422 of the Code. 

      Section5.      Term and Termination.

        5.1Term. The Executive’s full-time employment hereunder shall commence upon the(the “Effective Date”), and, unless renewed or modified by written agreementbetween the Company and the Executive, the Employment Period will terminate on the firstanniversary following the Effective Date (the “Term”); provided, that (a)the Employment Period shall terminate prior to such date upon the Executive’sresignation, death or Permanent Disability and (b) the Employment Period may be terminatedby the Company at any time prior to such date, if such termination shall be for Cause.Notwithstanding the foregoing, this Agreement shall automatically be renewed forsuccessive additional terms of one (1) year each (upon the expiration of the Term) unlesseither party, upon thirty days written notice, notifies the other of its intention not torenew the Agreement. The renewal term shall be subject to the right of either party toterminate this Agreement by giving not less than thirty (30) days prior written notice oftermination to the other prior to the commencement of any renewal term, such terminationto be effective at the conclusion of the term or such renewal term. 

        5.2Unjustified Termination. Except as otherwise provided in Section 5.3 below, if theEmployment Period shall be terminated by the Company for any reason otherthan (a) for Cause, (b) as a result of the Executive’s resignation, or (c) asa result of the death or Permanent Disability of the Executive, (collectively, an“Unjustified Termination”), the Executive shall be entitled to receive (i) anamount equal to the Executive’s then current Base Salary and the benefits to beprovided to Executive, as set forth in paragraph’s 4.1 and 4.3 (a) hereof, for a sixmonth period (“Severance Period”) following the Unjustified Termination(“Severance Pay”), so long as the Executive has not breached and does not breachthe provisions of Sections 6, 7, 8 or 9 of the Agreement and has executed a release in aform mutually agreeable to both parties. Such Severance Pay shall immediately be reduceddollar for dollar by the amount of any salary or other compensation received by theExecutive during the Severance Period from any other entity or Person. 

        5.3Justified Termination. If the Employment Period shall be terminated by the Companyfor (a) Cause, (b) as a result of the Executive’s resignation, or (c) as a result ofthe death or permanent disability of the Executive (collectively, a “JustifiedTermination”), the Executive shall be entitled to receive his Base Salary through thedate of termination and reimbursement of all Reimbursable Expenses incurred by theExecutive prior to the termination of the Employment Period. A termination for Cause shallbecome effective on the date designated by the Company. In the case of JustifiedTermination, Executive shall not be eligible to receive, and the Company shall not berequired to pay, any Severance Pay pursuant to Section 5.2 hereof. 

        5.4Benefits. Except as otherwise required by law, all of the Executive’s rightsto benefits under the Agreement, if any, accruing after the termination of the EmploymentPeriod as a result of a Justified Termination will cease upon such Justified Termination. 

        Section6.      Nondisclosure and Non-Use of Confidential Information. The Executive willnot at any time disclose or use any Confidential Information of which the Executive is orbecomes aware, during the term of his Employment and for two years thereafter, whether ornot such information is developed by him, except to the extent that such disclosure or useis directly related to and required by the Executive’s performance of duties assignedto the Executive pursuant to the Agreement. The Executive will take all appropriate stepsto safeguard Confidential Information and to protect it against disclosure, misuse,espionage, loss and theft. 

        Section7.      Ownership of Intellectual Property.In the event that the Executive, as partof his activities on behalf of the Company or any Subsidiary of the Company, generates,authors, or contributes to any service, design, new development, device, product, method,trade secret or process (whether or not patentable or reduced to practice or compromisingConfidential Information) or any other form of Confidential Information relating directlyor indirectly to the business of the Company or any Subsidiary as now or hereinafterconducted (collectively, “Intellectual Property”), the Executive acknowledgesthat such Intellectual Property is and shall be the sole and exclusive property of theCompany and its Subsidiaries, and hereby assigns all right, title and interest in and tosuch Intellectual Property to the Company. Any copyrightable work prepared in whole or inpart by the Executive will be deemed “a work made for hire” under Section 201(b)of the Copyright Act of 1976, as amended, and the Company will own all of the rightscomprised in the copyright herein. The Executive will promptly and fully disclose allIntellectual Property and will cooperate with the Company and its Subsidiaries to protectthe Company’s interests in and rights to such Intellectual Property (includingproviding reasonable assistance in securing patent protection and copyright registrationsand executing all documents as reasonably requested by the Company or its Subsidiaries),whether such requests occur prior to or after termination of the Executive’semployment hereunder. 

        Section8. Delivery of Materials upon Termination of Employment. As requested by theCompany from time to time and upon the termination of the Executive’s employment withthe Company for any reason, the Executive will promptly deliver to the Company all copiesand embodiments, in whatever form or medium, of all Confidential Information orIntellectual Property in the Executive’s possession or within his control (including,without limitation, any written records, notes, photographs, manuals, notebooks,documentation, program listings, flow charts, projections, customer or supplier lists,magnetic media, disks, diskettes, tapes and all other materials containing anyConfidential Information or Intellectual Property) irrespective of the location or form ofsuch material and, if requested by the Company, will provide the Company with writtenconfirmation that all such materials have been delivered to the Company. 

        Section9.      Non-Competition. The Executive covenants and agrees that during hisemployment by the Company, and for a period of two (2) years following the termination forany reason of such employment either directly or indirectly, without the prior writtenconsent of the Company, on his own behalf or in the service or on behalf of others serveanywhere in the United States as an owner, manager, stockholder (except as a holder of nomore than l% of the issued and outstanding stock of a publicly traded company),consultant, director, officer or employee of any business entity that provides, developsor sells PBM Services that are similar to or competitive to those provided, offered orsold by the Company; and for a period of two (2) years following the termination for anyreason of such employment the Executive shall not, either directly or indirectly (i)solicit or divert or appropriate to or for any competing business, or (ii) attempt tosolicit, divert or appropriate to or for any competing business, any PBM Services offered,sold or provided by the Company to or from those entities who are now clients of theCompany, joint venturers, or partners with the Company or parties to which Company hassubmitted a proposal to offer any products or services to customers of Third Party Clientswithin six (6) months prior to such termination. As used herein, “Third PartyClients” shall mean those institutions and businesses whose clients, customers ormembers are solicited by the Company for the purchase of PBM services. 

        Section10.      Agreement Not to Solicit Employees.The Executive covenants and agrees thatduring his employment by the Company, and for a period of three (3) years followingtermination, for any reason, of such employment, he will not, either directly orindirectly, on his own behalf or in the service or on behalf of others, solicit, divert orhire away, or attempt to solicit, divert or hire away, to any competing business anyperson employed by the Company, whether or not such employee is a full-time employee or atemporary employee of the Company, and whether or not such employment is pursuant towritten agreement and whether or not such employment is for a determined period or is atwill. 

        Section11.      Affiliates; Equitable Relief. It is expressly understood that theprovisions and limitations of Sections 6, 7, 8, 9 and 10 above shall apply to and withrespect to any and all Confidential Information, Intellectual Property, employees andbusinesses of the Company and any of their subsidiaries or affiliates, as if such Personsand their Confidential Information, Intellectual Property, employees and businesses wereexpressly named and described herein. The Executive acknowledges that a breach orthreatened breach by his of any of his covenants contained in Sections 6, 7, 8, 9 or 10 ofthe Agreement could cause irreparable harm to the Company and their respective affiliates,for which it or they would have no adequate remedy at law. Accordingly, and in addition toany remedies which the Company or their affiliates may have at law, in the event of anactual or threatened breach by the Executive of his covenants contained in Sections 6, 7,8, 9 or 10 of the Agreement, the Company and their affiliates shall have the absoluteright to apply to any court of competent jurisdiction for such injunctive or otherequitable relief as such court may deem necessary or appropriate in the circumstances. 

        Section12.      No Prior Agreements. The Executive hereby represents and warrants to theCompany that the execution of the Agreement by Executive, his employment by the Company,and the performance of his duties hereunder will not violate or be a breach of anyagreement with a former employer, client, or any other Person. Further, Executive agreesto indemnify and hold harmless the Company and its officers, directors, andrepresentatives for any claim, including, but not limited to, reasonable attorney’sfees and expenses of investigation, of any such third party that such third party may nowhave or may hereafter come to have against the Company or such other persons, based uponor arising out of any non-competition agreement, invention, secrecy, or other agreementbetween Employee and such third party that was in existence as of the date of theAgreement. To the extent that Employee had any oral or written employment agreement orunderstanding with the Company, the Agreement shall automatically supersede such agreementor understanding, and upon execution of the Agreement by Employee and the Company, suchprior agreement or understanding automatically shall be deemed to have been terminated andshall be null and void. 

      Section13.      Miscellaneous.
        13.1Remedies. The Company and the Executive will have all rights and remedies set forthin the Agreement, all rights and remedies which the Company has been granted at any timeunder any other agreement or contract and all of the rights which the Company has underany law. The Company will be entitled to enforce such rights specifically, without postinga bond or other security, to recover damages by reason of any breach of any provision ofthe Agreement and to exercise all other rights granted by law or available in equity. 

        13.2Waivers and Amendments. The provisions of the Agreement may be amended or waivedonly by a written agreement executed and delivered by the Company and the Executive. Noother course of dealing between the parties to the Agreement or any delay in exercisingany rights hereunder will operate as a waiver of any rights of any such parties. 

        13.3Successors and Assigns. All covenants and agreements contained in the Agreement byor on behalf of any of the parties hereto will bind and inure to the benefit of theparties and their respective heirs, executors, administrators, personal representatives,successors and assigns, whether so expressed or not; provided that the Executivemay not assign his rights or delegate his obligations under the Agreement without thewritten consent of the Company. 

        13.4Severability. Whenever possible, each provision of the Agreement will beinterpreted in such manner as to be effective and valid under applicable law, but if anyprovision of the Agreement is held to be prohibited by or invalid under applicable law,such provision will be ineffective only to the extent of such prohibition or invalidity,without invalidating the remainder of the Agreement. 

        13.5Counterparts. The Agreement may be executed simultaneously in two or morecounterparts, any one of which need not contain the signatures of more than one party, butall of which counterparts taken together will constitute one and the same agreement. 

        13.6            Descriptive Headings.   The descriptive headings of the Agreement are inserted for convenience only and do notconstitute a part of the Agreement. 

        13.7Notices. All notices, demands or other communications to be given or deliveredunder or by reason of the provisions of the Agreement will be in writing and will bedeemed to have been given when delivered personally to the recipient, two business daysafter the date when sent to the recipient by certified or registered mail, return receiptrequested and postage prepaid. Such notices, demands, and other communications will besent to the Executive and to the Company at the addresses set forth below. 
  * Ifto the Executive:*