EMPLOYMENT AGREEMENT


        THIS EMPLOYMENT  AGREEMENT  (this  "Agreement") is made and entered into
this  3rd  day  of  September,   1996  by  and  between  MERIT  BEHAVIORAL  CARE
CORPORATION,  a Delaware corporation (the "Company"),  and Terry R. Thompson, an
individual  with an address  at 327  Allison  Way,  Wyckoff,  New  Jersey  07481
("Employee").

     WHEREAS,  the  Company  desires  to engage  Employee  to  provide  services
     pursuant to the terms of this Agreement;

     WHEREAS,  Employee desires to provide such services to the Company pursuant
     to this Agreement; and

     WHEREAS,  both parties hereto acknowledge that the services to be performed
     by Employee under this Agreement  shall require a high degree of diligence,
     creativity  and  responsiveness   appropriate  to  the  Company's  business
     intentions;

     NOW,  THEREFORE,  in consideration of the premises and the mutual covenants
     contained in this Agreement, the parties agree as follows:


SELECTED DEFINITIONS

     1.1 Defined Terms. As used herein, the terms below shall have the following
     meanings:

                      "Affiliate" shall mean a subsidiary of the Company and any
               other business entity controlled by, controlling, or under common
               control with, the Company from time to time.

                      "Board" shall mean the Board of Directors of the Company.

                      "Business"  shall mean the  business of the Company and it
               subsidiaries,  including,  without  limitation,  the  business of
               providing and  arranging  for the provision of behavioral  health
               (including  mental  health  and  substance  abuse)  managed  care
               programs,  behavioral health care delivery services, and employee
               assistance programs.

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                    "CEO" shall mean the Chairman of the Board and Chief  
               Executive  Officer of the Company.

                      "Common Stock" shall mean the common stock, par value $.01
               per share, of the Company.

                      "Compensation  Committee" shall have the meaning such term
               is given in Section 4.1 hereof.

                      "Confidential  Information"  shall have the  meaning  such
               term is given in Section 5.1 hereof.

                      "Consideration  Date" shall have the meaning  such term is
               given in Section 2.1(b) hereof.

                      "Developments"  shall have the meaning  such term is given
               in Section 5.2 hereof.

                      "Disability Termination Right" shall have the meaning such
               term is given in Section 3.5 hereof.

                      "Employee  Note" shall have the meaning such term is given
               in Section 4.4 hereof.

                      "Employment  Period"  shall have the meaning  such term is
               given in Section 3.1 hereof.

                      "Initial Shares" shall have the meaning such term is given
               in Section 4.4 hereof.

                      "1995 Option Plan" shall mean the 1995 Stock  Purchase and
               Option Plan for employees of Medco  Behavioral  Care  Corporation
               and Subsidiaries.

                      "Non-Competition  Period" shall have the meaning such term
               is given in Section 5.3 hereof.

                      "Option  Agreement"  shall have the  meaning  such term is
               given in Section 4.3(a) hereof.

                      "Options"  shall mean  non-qualified  options to  purchase
               newly issued shares of Common Stock.


                                                                         

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                      "Stockholder's Agreement" shall have the meaning such term
               is given in Section 4.4 hereof.

                      "Subsequent  Shares"  shall have the meaning  such term is
               given in Section 4.4 hereof.

                      "Termination  for Cause"  shall have the meaning such term
               is given in Section 3.2 hereof.

                      "Termination  for Good Reason" shall have the meaning such
               term is given in Section 3.4 hereof.

                      "Territory"  means  the  United  States  of  America,  its
               territories and possessions (including Puerto Rico).

                      "Total Base Compensation" shall have the meaning such term
               is given in Section 4.1 hereof.

SECTION 2.  EMPLOYMENT

        2.1  Title;  Duties.  (a) The  Company  agrees  to  employ  Employee  as
Executive Vice President,  Business Operations of the Company for the Employment
Period, and Employee hereby accepts such employment. In such position,  Employee
shall  report  to  Albert  S.  Waxman,  Ph.D.,  Chairman  of the  Board and CEO;
provided,  that if Dr.  Waxman is no longer  employed by the  Company,  Employee
shall report to the then current CEO.  Employee shall be responsible  for, among
other  areas,   the   following   operations:   Information   Systems,   Network
Administration,  Claims and Human Resources,  as well as other areas assigned to
Employee by the CEO.  Employee  also shall perform such other duties with regard
to the Business as are generally performed by such an employee of a company, and
such other duties as may from time to time be reasonably requested by the CEO or
the Board.

               (b) (i) The Company  agrees  that,  not later than six (6) months
after the date of this Agreement (the  "Consideration  Date"), the Company shall
consider Employee for promotion to the position of President and Chief Operating
Officer of the Company.  It is understood that any such promotion is entirely at
the  discretion  of the CEO and the  Board,  and that the  Company  shall not be
obligated to promote Employee to such position.

         (ii)  If the Company offers to promote Employee to such position on or
prior to the  Consideration  Date,  and Employee  accepts such  promotion,  then
Employee  shall  continue to report to the CEO. If Employee  receives such offer
and accepts such  promotion,  Employee also shall perform such other duties with
regard to the  Business  as are  generally  performed  by such an  employee of a
company,  and such other duties as may from time to time be reasonably requested
by the CEO or the Board. In the event the Company determines to offer to

                                                                        

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promote  Employee to  President  and Chief  Operating  Officer of the Company as
described above, and Employee accepts such promotion, Employee shall be entitled
to receive the additional grant of Options described in Section 4.3(b) hereof.

     (iii) In the event the  Company  does not offer to promote  Employee to the
     position  of  President  and Chief  Operating  Officer of the Company on or
     prior to the Consideration Date:

                      (A)  Employee may elect to terminate  this  Agreement  for
               Good Reason under Section 3.4(d) hereof;  provided, that Employee
               must make such  election  in a written  notice  delivered  to the
               Company  not later than  sixty (60) days after the  Consideration
               Date; or

                      (B) If Employee  does not deliver the notice  described in
               clause (A) above prior to such date,  Employee  shall continue in
               his position as Executive Vice President,  Business Operations of
               the  Company,  subject  to  all  terms  and  conditions  of  this
               Agreement.

        2.2  Performance of Duties.  Employee agrees to devote his exclusive and
full professional time and attention to his duties as an employee of the Company
and to perform such duties in an efficient, trustworthy and businesslike manner.
In  addition,  Employee  agrees that he will not render to others any service of
any  kind  or  engage  in  any  other  business  activity  (including,   without
limitation,   any  involvement  in  any  business  in  which  Employee  has  any
administrative or operating responsibility) which conflicts with the performance
of his duties under this Agreement  (except as to any other activities which are
approved in writing by the Board or the CEO).

        During the term of this  Agreement,  Employee  agrees to devote his full
business time and efforts,  and to otherwise use his best efforts, to manage the
operations  of the  Company and its  subsidiaries,  to  maximize  the  Company's
results of operations  and profits,  to satisfy the  directions of the Board and
the CEO, and to otherwise fulfill the agreements and covenants set forth in this
Agreement.  Employee  acknowledges  that the failure to satisfy any covenant set
forth in this  Agreement may cause the Company  irreparable  harm and shall have
denied the Company and the Affiliates of a substantial and valuable asset.

        2.3    Directorship.  At the next meeting of the Board, Employee shall 
be elected a director of the Company.

SECTION 3.  EMPLOYMENT PERIOD; TERMINATION OF EMPLOYMENT

     3.1  Employment  Period.  Subject at all times to Section 3.3 hereof,  this
     Agreement  and  Employee's   employment   hereunder  shall  continue  until
     terminated by the earliest of (a) the  Company's  discharge of Employee and
     termination of this Agreement pursuant to Sections 3.2,

                                                                         

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3.3 or 3.5 hereof;  (b) Employee's  death; or (c) Employee's  termination of his
employment and this Agreement  pursuant to Section 3.4 hereof. If Employee shall
continue in the employ of the Company beyond the  termination of this Agreement,
such employment shall be deemed to continue on a month-to-month basis terminable
by either  party on thirty (30) days prior  written  notice.  The period  during
which  Employee is employed by the Company under this  Agreement or otherwise is
referred  to  herein  as  the  "   Employment   Period."  In  all  events,   the
post-termination provisions of Section 5 hereof shall survive termination of the
Employment Period and this Agreement.

        3.2  Termination  by the Company for "Cause." The Company shall have the
right to discharge  Employee and terminate  this  Agreement,  by written  notice
provided to Employee not less than thirty (30) days prior to the  intended  date
of  discharge  and  termination,  for any or all of the  following  "causes"  (a
"Termination for Cause"):

        (a)    a finding by the Board that  Employee  has harmed the  Company or
               any  Affiliate  through  a  dishonest,   fraudulent,  willful  or
               reckless act in the  performance  of his  employment  duties,  or
               refusal or failure to perform such  duties,  and such harm is not
               remedied by  Employee  within  twenty  (20) days after  notice to
               Employee from the Company specifying such harm and demanding that
               Employee remedy such problem;

        (b)    Employee's conviction of a crime; or

        (c)    Employee's willful disregard of the lawful policies or procedures
               of the  Company,  or his failure to follow a lawful  direction of
               the Board or CEO,  and such  disregard or failure is not remedied
               by Employee within twenty (20) days after notice to Employee from
               the Company  specifying  such  disregard or failure and demanding
               that Employee remedy such problem.

        3.3 Termination by the Company  without  "Cause." The Company shall have
the right to discharge Employee and terminate this Agreement,  by written notice
provided to Employee  not less than one hundred  eighty  (180) days prior to the
intended date of discharge and  termination,  without "cause" at any time during
the Employment Period, for any reason or for no reason.

        3.4  Termination by Employee for "Good  Reason."  Employee may terminate
his employment with the Company and this  Agreement,  by written notice provided
to the Company not more than one hundred eighty (180) days prior to the intended
date of termination, for any or all of the following reasons (a "Termination for
Good Reason"):

     (a) a  material  adverse  change in the  nature of  Employee's  job  duties
     without his consent;


                                                                        

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     (b) a material reduction in the rate of Employee's Total Base Compensation;

     (c) a material breach by the Company of the Stockholder's Agreement; or

     (d) a determination  by the Company not to offer to promote Employee to the
     position  of  President  and  Chief  Operating  Officer  on or prior to the
     Consideration Date, as provided in Section 2.1(b) hereof.

        3.5  Termination  by the  Company due to  Disability  of  Employee.  The
Company shall have the right to discharge Employee and terminate this Agreement,
by written  notice  provided to Employee not less than thirty (30) days prior to
the intended date of discharge and  termination,  upon the  determination by the
Board in good faith and in its  discretion  that Employee is unable to engage in
activities required by his employment (or reasonable  substitute  employment) by
reason of any medically  determined  physical or mental  impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months (referred to herein as the
"Disability Termination Right").

        3.6    Death.  The Employment Period shall terminate forthwith upon the
death of Employee.

SECTION 4.  COMPENSATION

        4.1  Annual  Salary.  The  Company  shall  pay to  Employee  during  the
Employment  Period base  compensation  at the rate of $350,000  per year ("Total
Base  Compensation"),  payable in equal  installments  pursuant to the Company's
customary  payroll  policies  in  force  at the  time of  payment  (but not less
frequently than monthly),  less required payroll  deductions.  Employee shall be
entitled to annual  increases of Total Base  Compensation  as may be  determined
from time to time by the Board, or any compensation  committee designated by the
Board from its members  (the  "Compensation  Committee"),  in either case in its
sole discretion.

        4.2 Bonus.  In addition to Total Base  Compensation,  Employee  shall be
eligible for a bonus based upon Employee's Total Base  Compensation with respect
to each  calendar year or portion of a calendar year (other than the period from
the date hereof through September 30, 1996) during the Employment  Period.  Such
bonus  shall be awarded  pursuant to the  existing  bonus plan of the Company (a
copy of which has been  provided  to  Employee  prior to the date  hereof)  or a
successor plan  applicable to executive  officers of the Company  adopted by the
Board or the  Compensation  Committee.  For purposes of the existing bonus plan,
Employee's "Target  Percentage" is thirty percent (30%); for any successor plan,
Employee's bonus  percentage  (subject to the applicable terms of the plan) also
shall be thirty percent  (30%).  Employee  acknowledges  and agrees that bonuses
under such existing plan (and any successor plan) are determined by the CEO, the
Board or the Compensation  Committee,  in his or its absolute discretion,  based
upon the attainment of agreed financial targets and other factors, are not

                                                                         

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guaranteed for any calendar year or period or in any specified  amount,  and may
be less than or greater than Employee's "Target Percentage" or bonus percentage,
as applicable, of his Total Base Compensation.

        4.3 Options.  (a) Employee shall be granted Options to purchase  350,000
shares of Common Stock on the date of this  Agreement.  The  exercise  price for
such Options will be $5.00 per share.  Such Options will be granted pursuant to,
and  governed  by, the 1995 Option  Plan (a copy of which is attached  hereto as
Exhibit A) and the  Non-Qualified  Stock  Option  Agreement  to be entered  into
between the Company and Employee on the date of this Agreement  attached  hereto
as Exhibit B (the "Option Agreement").

               (b) In the  event  the  Company  determines  to offer to  promote
Employee to President and Chief  Operating  Officer,  and Employee  accepts that
promotion,  as contemplated in Section 2.1(b) hereof, the Company shall grant to
Employee  Options to purchase an additional  250,000 shares of Common Stock. The
exercise price for such  additional  Options will be established by the Board in
its  reasonable  judgment  on or  shortly  after the  Consideration  Date.  Such
Options, if granted, also will be granted pursuant to the 1995 Option Plan and a
stock option agreement having terms substantially  similar to those contained in
the Option Agreement.

        4.4 Purchase of Common Stock. On the date of this Agreement, the Company
and Employee  will enter into the  Stockholder's  Agreement  attached  hereto as
Exhibit C (the "Stockholder's  Agreement"),  providing for the issuance and sale
by the Company to Employee,  and the purchase by Employee  from the Company,  of
150,000 shares of Common Stock at the price of $5.00 per share.  The purchase of
100,000 of such shares of Common Stock (the "Initial Shares") will take place on
the date of this Agreement.  Employee will effect payment for the Initial Shares
by  delivery  to the  Company  of  Employee's  promissory  note in  favor of the
Company,  attached hereto as Exhibit D, in the principal amount of $500,000 (the
"Employee  Note") in accordance with the terms of the  Stockholder's  Agreement.
The payment of the  principal  amount of, and all  accrued  and unpaid  interest
under,  the  Employee  Note will be  secured by the  pledge by  Employee  of the
Initial Shares.  Such pledge will be made by Employee  pursuant to the Repayment
and Stock Pledge  Agreement  attached  hereto as Exhibit E.  Provided that he is
still  employed by the Company,  Employee  will  purchase the  remaining  50,000
shares of Common Stock (the  "Subsequent  Shares")  not later than  December 31,
1996. As provided in the Stockholder's  Agreement,  Employee will effect payment
for the Subsequent Shares by delivery to the Company of $250,000 in cash.

        4.5  Reimbursement of Expenses.  During the term of this Agreement,  the
Company will reimburse Employee for all ordinary and necessary business expenses
incurred by Employee in  connection  with the  Business.  Reimbursement  of such
expenses  shall  be paid  monthly,  upon  submission  by  Employee  of  vouchers
itemizing  such  expenses  in a  form  satisfactory  to  the  Company,  properly
identifying the nature and business purpose of any expenditures.


                                                                         

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        4.6  Benefits.  During the term of this  Agreement,  the  Company  shall
provide  Employee with such insurance,  medical,  sick leave,  holiday and other
benefits as may be given from time to time to executive  officers of the Company
as set  forth  from time to time by the Board  and  management  of the  Company.
Employee may take such vacation  period or periods  during each year as shall be
consistent, in the Company's judgment, with Employee's  responsibilities and the
Company's  vacation  policies and practices for other executive  officers of the
Company,  but not less than four (4) weeks during any full  calendar year of the
Employment Period.

        4.7 Effect of Termination of Employment.  (a) Termination by the Company
for "Cause,"  pursuant to the Disability  Termination  Right or upon  Employee's
Death.  In the event of termination of Employee's  employment and this Agreement
by the Company  pursuant to Sections  3.2, 3.5 or 3.6 hereof,  Employee  (or, if
applicable,  his estate) shall be entitled to receive only payment of his earned
and  unpaid  compensation  and  benefits  through  the  effective  date  of such
termination.

               (b) Termination by the Company without "Cause" or by Employee for
"Good  Reason." In the event of  termination  of Employee's  employment and this
Agreement by the Company under  Section 3.3 hereof or by Employee  under Section
3.4  hereof,  Employee  shall be entitled  to (i)  continue to receive  from the
Company  Total Base  Compensation  in  accordance  with Section 4.1 hereof for a
period of twelve  (12)  months from the date of  termination,  (ii)  require the
Company to  continue  Employee's  insurance  and  medical  benefits  (or provide
substantially   comparable  benefits  if  Employee  ceases  to  be  eligible  to
participate in the relevant insurance and medical benefit  arrangements) for the
remainder of the term for which Total Base  Compensation  is required to be paid
pursuant to clause (i) above at the same rates as then in effect with respect to
current employees and (iii) subject to the terms of the Stockholder's Agreement,
exercise  all Options  granted in  accordance  with Section 4.3 hereof which are
vested as of the date of  termination  (subject  to and in  accordance  with the
terms of the 1995  Option Plan and the Option  Agreement).  The shares of Common
Stock purchased by Employee as described in Section 4.4 hereof shall continue to
be governed by the provisions of the Stockholder's Agreement.

        4.8 Release. The benefits to Employee described in Section 4.7(b) hereof
may, at the Company's  option,  be  conditioned  upon  Employee's  execution and
delivery of a general  release of the Company  and the  Affiliates,  and its and
their respective directors,  officers,  employees and agents, from any claims or
obligations arising out of this Agreement and the termination hereof, other than
the express  obligations  of the Company to make such  payments and provide such
benefits,  if any,  as are  described  in  Section  4.7(b)  hereof and to pay to
Employee his earned and unpaid  compensation and other benefits to the effective
date of termination.  Employee acknowledges that the payments and benefits under
Section  4.7(b)  hereof are in lieu of all such  claims that  Employee  may have
against the Company and the  Affiliates  and are  liquidated  damages (and not a
penalty).  Notwithstanding any termination hereunder,  the Company shall have no
obligation to make such payments or continue such benefits  under Section 4.7(b)
hereof,

                                                                         

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and the  Options  shall  terminate  immediately,  in the  event of a  breach  by
Employee of his covenants in Section 5 hereof.


SECTION 5.  CONFIDENTIAL INFORMATION, DEVELOPMENTS,
NON-COMPETITION/NON-SOLICITATION AND RELATED MATTERS

        5.1  Restrictions on Use and  Disclosure.  Employee will not disclose or
use at any time,  for so long as  Employee  is  employed  by the  Company or any
Affiliate  and  for  a  period  of  five  years  thereafter,   any  Confidential
Information (as defined below) of which Employee is or becomes aware, whether or
not such  information  is  developed  by him,  except  to the  extent  that such
disclosure or use is directly related to and required by Employee's  performance
of duties,  if any,  assigned  to Employee  by the CEO or the  Company,  or such
Confidential Information becomes public other than through action of Employee or
is compelled by legal process. As used in this Agreement, the term "Confidential
Information"  means  information  that is not generally  known to the public and
that  is  used,  developed  or  obtained  by the  Company  or any  Affiliate  in
connection  with its  business,  including,  but not limited to: (i) products or
services, (ii) fees, costs and pricing structures,  (iii) designs, (iv) computer
software,  including operating systems,  applications and program listings,  (v)
flow charts,  manuals and  documentation,  (vi) data bases, (vii) accounting and
business methods,  (viii)  inventions,  devices,  new developments,  methods and
processes,  whether  patentable  or  unpatentable  and whether or not reduced to
practice,  (ix)  customers,  clients and  providers,  and  customer,  client and
provider lists,  (x) other  copyrightable  works,  (xi) all technology and trade
secrets,  and (xii) all  similar  and  related  information  in  whatever  form.
Confidential  Information  will  not  include  any  information  that  has  been
published in a form generally available to the public prior to the date Employee
proposes to disclose or use such information.  Employee will perform all actions
reasonably requested by the Company (whether during or after the Non-Competition
Period) to  establish  and  confirm  such  ownership  at the  Company's  expense
(including,  without limitation,  assignments,  consents, powers of attorney and
other instruments).

        5.2 Assignment of Developments.  All  Developments  that are at any time
made, conceived or suggested by Employee, whether acting alone or in conjunction
with others,  during or as a result of Employee's employment with the Company or
any Affiliate,  shall be the sole and absolute property of the Company,  free of
any reserved or other rights of any kind on Employee's part.  During  Employee's
employment  and, if such  Developments  were made,  conceived  or  suggested  by
Employee during or as a result of Employee's  employment with the Company or any
Affiliate,  thereafter, Employee shall promptly make full disclosure of any such
Developments to the Company and, at the Company's cost and expense,  do all acts
and things  (including,  among others,  the execution and delivery under oath of
patent and copyright  applications and instruments of assignment)  deemed by the
Company to be  necessary  or  desirable  at any time in order to effect the full
assignment  to the  Company  of  Employee's  right and  title,  if any,  to such
Developments. For purposes of this Agreement, the term "Developments" shall mean
all data, discoveries, findings, reports, designs, inventions,

                                                                         

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improvements, methods, practices, techniques,  developments,  programs, concepts
and  ideas,  whether  or not  patentable,  relating  to the  present  or planned
activities, or future activities of which Employee is aware, or the products and
services of the Company or any Affiliate.

        5.3  Restriction  on Competitive  Employment.  Employee shall not (as an
individual,  principal, agent, employee,  consultant or otherwise),  directly or
indirectly,  during the period  commencing  on the date hereof and ending on the
first  anniversary  of  termination  of Employee's  employment  with the Company
(whether under this  Agreement or otherwise)  (the  applicable  period being the
"Non-Competition  Period"),  absent the Company's prior written approval, engage
in  activities  in the  Territory  for, on behalf of or  relating  to, or render
services to, or have any equity,  ownership or profit participation  interest in
(other  than  as a 5% or  less  holder  of the  equity  securities  of a  public
company),  any firm or  business  engaged or about to become  engaged in (i) the
Business or (ii) any other  business in which the Company or any  subsidiary  of
the Company was engaged during Employee's  employment with the Company and as to
which Employee had involvement  during such employment or obtained  Confidential
Information.

        5.4 Restriction on Solicitation.  During Employee's  employment with the
Company and until the end of the  Non-Competition  Period,  Employee  shall not,
directly  or  indirectly,  (i)  solicit or contact  for  business  purposes  any
existing customer,  provider or patient,  or prospective  customer,  provider or
patient,  of the Company or any  subsidiary  of the  Company,  (ii)  induce,  or
attempt to induce, any employees,  agents, consultants or providers of or to the
Company or any  subsidiary of the Company to do anything from which  Employee is
restricted by reason of Sections 5.1 through 5.4 hereof,  (iii)  interfere  with
existing or proposed contracts,  business  agreements or other arrangements,  or
knowingly  interfere  with  future  contracts,   business  agreements  or  other
arrangements,  between  the  Company or any  subsidiary  of the  Company and any
individual,  firm or  enterprise  including,  but not  limited  to,  third party
payors,  through disrupting or diverting or attempting to divert such contracts,
business  agreements  or other  arrangements  to any other  individual,  firm or
enterprise  (including  a  competitor  of the Company or any  subsidiary  of the
Company),  or (iv) offer or aid others to offer  employment  to anyone who is an
employee,  agent or  consultant  of or to the Company or any  subsidiary  of the
Company.

        5.5  Equitable  Relief.  Employee  acknowledges  that  a  breach  of the
covenants contained herein, including without limitation the covenants contained
in Sections 5.1 through 5.4 hereof,  may cause irreparable damage to the Company
or one or more of its subsidiaries,  the exact amount of which will be difficult
to  ascertain,  and  that  the  remedies  at law for  any  such  breach  will be
inadequate.  Accordingly,  Employee agrees that, in addition to any other remedy
which may be available at law or in equity,  the Company and any such subsidiary
shall be entitled to specific  performance and injunctive  relief to prevent any
actual, intended or likely breach. The parties acknowledge that the time, scope,
geographic  area and other  provisions  of Sections  5.1 through 5.4 hereof have
been specifically negotiated by sophisticated  commercial parties and agree that
all such provisions are reasonable  under the  circumstances of the transactions
contemplated by this Agreement, including the compensation to Employee described
in Section 4 hereof. In the event that the agreements in Section 5.1 through 5.4
hereof or any

                                                                         

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other provision  contained in this Agreement shall be determined by any court of
competent  jurisdiction to be unenforceable by reason of their extending for too
great a period  of time or over too  great a  geographical  area or by reason of
their being too extensive in any other  respect,  such  agreements or provisions
shall be  interpreted  to extend only over the maximum  period of time for which
they may be enforceable  and/or over the maximum  geographical  area as to which
they may be enforceable and/or to the maximum extent in all other respects as to
which they may be enforceable, all as determined by such court in such action so
as to be  enforceable to the extent  consistent  with then  applicable  law. The
existence  of any claim or cause of action  which  Employee may have against the
Company or any such  subsidiary  of the  Company,  as the case may be, shall not
constitute  a defense  or bar to the  enforcement  of any of the  provisions  of
Sections  5.1 through  5.4 hereof and shall be pursued  through  separate  court
action by Employee.

        5.6 Survival.  Unless otherwise provided, the provisions of Sections 5.1
through 5.5 hereof shall survive the termination of this Agreement.

SECTION 6. INDEMNIFICATION

        During the Employment  Period,  the Company shall provide  Employee with
directors and officers  indemnification as provided in the Company's articles of
incorporation and bylaws and directors and officers liability insurance coverage
as is generally afforded executive officers of the Company.

SECTION 7.  MISCELLANEOUS PROVISIONS

        7.1 Assignment and Successors. The rights and obligations of the Company
under this  Agreement may be assigned,  and shall inure to the benefit of and be
binding upon the  successors  and assigns of the Company.  Employee's  rights or
obligations  hereunder may not be assigned to or assumed by any other person. No
other persons shall have any right, benefit or obligation hereunder.

        7.2  Notices.  Any notice,  request,  instruction  or other  document or
communication  to be given  hereunder shall be in writing and shall be deemed to
have been duly given (i) if mailed,  at the time when  mailed in any  general or
branch office of the United States Postal  Service,  enclosed in a registered or
certified postage-paid envelope, (ii) if sent by facsimile transmission, when so
sent and receipt acknowledged by an appropriate  telephone or facsimile receipt,
or (iii) if sent by other means,  when  actually  received by the party to which
such  notice has been  directed,  in each case at the  respective  addresses  or
numbers set forth  below or such other  address or number as such party may have
fixed by notice:


                                                                         

<PAGE>




               If to the Company:

               Merit Behavioral Care Corporation
               One Maynard Drive
               Park Ridge, NJ 07656
               Attn: Executive Vice President and General Counsel
               Fax: (201) 573-1324

If to Employee:

Terry A. Thompson
327 Allison Way
Wyckoff, NJ   07481

With a copy to:

Cohn Lifland Pearlman Herrmann & Knopf
Park 80 Plaza West-One
Saddle Brook, NJ   07662
Attention:  Albert L. Cohn, Esq.
Fax:  (201) 845-9423

        7.3 Severability. If any provision or portion of this Agreement shall be
or become illegal,  invalid or unenforceable in whole or in part for any reason,
such  provision  shall be  ineffective  only to the  extent of such  illegality,
invalidity  or  unenforceability  without  invalidating  the  remainder  of such
provision or the remaining provisions of this Agreement. Upon such determination
that any term or other  provision  is  invalid,  illegal or  incapable  of being
enforced,  the  parties  hereto  shall  negotiate  in good faith to modify  this
Agreement  so as to effect  the  original  intent of the  parties  as closely as
possible in an  acceptable  manner to the end that the  agreements  contemplated
hereby are fulfilled to the extent possible.

        7.4 Amendment.  This Agreement  constitutes the entire agreement between
the  parties  hereto  with  respect  to the  subject  matter  hereof  and may be
modified,  amended or waived only by a written instrument signed by both parties
hereto.

        7.5   Counterparts.   This  Agreement  may  be  executed  and  delivered
(including by facsimile  transmission) in one or more  counterparts,  and by the
different  parties  hereto  in  separate  counterparts,  each of  which  when so
executed and delivered shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement.

        7.6  Interpretation.  The headings  contained in this  Agreement are for
reference  purposes  only  and  shall  not  affect  in any  way the  meaning  or
interpretation of this Agreement.

                                                                         

<PAGE>



The  language  in all parts of this  Agreement  shall in all cases be  construed
according to its fair meaning, and not strictly for or against any party hereto.
In this  Agreement,  unless  the  context  otherwise  requires,  the  masculine,
feminine and neuter genders and the singular and the plural include one another.

        7.7 Non-Waiver of Rights and Breaches.  No failure or delay of any party
hereto  in the  exercise  of any  right  given  to such  party  hereunder  shall
constitute a waiver thereof unless the time specified herein for the exercise of
such right has  expired,  nor shall any single or partial  exercise of any right
preclude other or further  exercise thereof or of any other right. The waiver of
a party  hereto of any  default of any other  party  shall not be deemed to be a
waiver of any subsequent default or other default by such party, whether similar
or dissimilar in nature.

        7.8 Governing Law;  Consent to  Jurisdiction.  THIS  AGREEMENT  SHALL BE
GOVERNED BY, AND  CONSTRUED  IN  ACCORDANCE  WITH,  THE LAWS OF THE STATE OF NEW
JERSEY  APPLICABLE  TO CONTRACTS  EXECUTED IN AND TO BE PERFORMED IN THAT STATE.
Each party hereby  irrevocably (i) submits to the jurisdiction of any New Jersey
State or federal court sitting in the City of Newark,  New Jersey,  with respect
to matters arising out of or relating  hereto;  (ii) agrees that all claims with
respect to such action or  proceeding  may be heard and  determined  in such New
Jersey State or federal court; (iii) waives, to the fullest possible extent, the
defense of an inconvenient forum; (iv) consents to service of process upon it by
mailing or delivering such service,  in the case of the Company, as specified in
Section 7.2 hereof or, in the case of Employee,  to CT Corporation System as his
agent (the costs of which agent  shall be borne by the  Company),  and  Employee
authorizes  and directs his agent to accept such service;  and (v) agrees that a
final  judgment in any such action or proceeding  shall be conclusive and may be
enforced in other  jurisdictions  by suit on the judgment or in any other manner
provided by law.

                                           EXECUTION

        The parties,  intending to be legally bound,  executed this Agreement as
of the date first above  written,  whereupon it became  effective in  accordance
with its terms.

MERIT BEHAVIORAL CARE CORPORATION


   /s/Albert S.Waxman
        Albert S. Waxman, Ph.D.
        Chairman of the Board and
        Chief Executive Officer


 /s/Terry R. Thompson
        Terry R. Thompson

                                                                         

<PAGE>




                                           EXHIBITS


        A.     1995 Option Plan (previously filed)

        B.     Non-Qualified Stock Option Agreement (previously filed)

        C.     Stockholder's Agreement (previously filed)

        D.     Employee Note

        E.     Repayment and Stock Pledge Agreement



                                                                         

<PAGE>



                                  Exhibit D -- Employee Note

                                     SECURED PROMISSORY NOTE

$500,000.00                                              Park Ridge, New Jersey
                                                              November 15, 1996

        FOR VALUE RECEIVED, the undersigned hereby  unconditionally  promises to
pay to the order of Merit Behavioral Care  Corporation  (the "Company"),  at its
office at One Maynard Drive, Park Ridge, New Jersey 07656 in lawful money of the
United States,  FIVE HUNDRED  THOUSAND  DOLLARS  ($500,000.00).  The undersigned
promises to pay  interest  in like money at such office on the unpaid  principal
amount hereof from time to time  outstanding from the date hereof at the rate of
6.5% per annum.  Interest shall be calculated annually on the basis of a 365 day
year and the number of actual days elapsed.

        All accrued and unpaid interest hereunder shall be due and payable as of
the first day of each  calendar  year  commencing  January  1,  1997.  Except as
otherwise provided herein or in the Repayment and Stock Pledge Agreement between
the  Company and the  undersigned  dated the date  hereof  (the  "Pledge"),  the
principal  amount  hereof  and any  accrued  and unpaid  interest  and all other
amounts owing hereunder shall be due and payable in full on December 31, 2000.

        Notwithstanding  the foregoing,  the unpaid principal amount hereof, all
accrued and unpaid  interest  hereunder and all other  amounts  owing  hereunder
shall be due and payable in full on the date which is two months  after the date
of termination of the  undersigned's  employment  with the Company or any of its
subsidiaries,  provided,  however, this paragraph shall have no force and effect
in the event the Company has not elected to repurchase  the shares  purchased by
the undersigned pursuant to this Note.

        This Note is issued in connection  with the purchase by the  undersigned
of shares of Common Stock of the Company and the execution by the undersigned of
the Stockholder's  Agreement (the  "Stockholder's  Agreement") and the pledge of
such Stock and other  collateral  (the  "Pledged  Securities")  pursuant  to the
Pledge.

        The undersigned shall have the right to prepay this Note, in whole or in
part,  at any time  without  notice and  without  penalty  and,  notwithstanding
anything to the contrary herein, this Note shall be prepaid, in whole or in part
and from  time to time,  from the  proceeds  from any  sale,  transfer  or other
disposition  of Pledged  Securities.  Any partial  prepayments  shall be applied
first to accrued and unpaid interest and then to principal.

        Notwithstanding  the existence of the Pledged Securities as security for
repayment of the Note, the undersigned  remains personally liable to the Company
for any deficiency which the Pledged Securities do not cover.


                                                            
<PAGE>



        If an Event of Default (as defined in the  Pledge)  shall have  occurred
and be continuing,  then, at such time, the unpaid principal amount hereof,  all
accrued and unpaid  interest  hereunder and all other  amounts  owing  hereunder
shall  be  and  become  immediately  due  and  payable  without  notice  to  the
undersigned.

        The Company shall have all of the rights of a secured creditor under the
New York  Commercial  Code with  respect to the  Pledged  Securities  pledged as
security hereunder.

        The  undersigned  promises  to pay all  costs  and  expenses,  including
reasonable  attorney's fees, incurred by the Company in collecting or attempting
to collect the indebtedness under this Note.

        If any payment of  principal  or  interest on this Note  becomes due and
payable on a day other than a business  day,  such payment  shall be made on the
next succeeding  business day. As used herein, the term "business day" means any
day other than a Saturday, Sunday or other day on which banks in the City of New
York, New York are authorized by law to close.

        Except as otherwise  provided herein,  presentment for payment,  demand,
notice of  dishonor,  protest  and notice of  protest  are  hereby  waived.  All
notices,  declarations and other  communications  hereunder shall be in writing,
hand delivered (including delivery by a courier service) as follows:

        If to the Company

        Merit Behavioral Care Corporation
        One Maynard Drive
        Park Ridge, New Jersey   07656
        Attn:  General Counsel

        If to the undersigned:

        Terry R. Thompson
        327 Allison Way
        Wyckoff, New Jersey  07481

or to such other  address as the Company or the  undersigned  may deliver to the
other party from time to time in writing in like manner.


                                                            

<PAGE>



        This Note shall not be  assigned  by the  undersigned  without the prior
written consent of the Company.  This Note may be assigned by the Company at any
time.

        THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.

                                   /s/ Terry R. Thompson
                                    ------------------------------------
                                    Terry R. Thompson

                                                            
<PAGE>



                        Exhibit E -- Repayment and Stock Pledge Agreement

                              REPAYMENT AND STOCK PLEDGE AGREEMENT

               THIS REPAYMENT AND STOCK PLEDGE AGREEMENT dated as of
November 15, 1996 is made and entered into by and between Merit  Behavioral Care
Corporation (the "Company"), and Terry R. Thompson (the "Pledgor").

                                            RECITALS

               A. The Company has entered into a Stockholder's Agreement,  dated
as of September 3, 1996 with the Pledgor (the "Stockholder's Agreement") whereby
the  Company  has agreed to issue and sell to Pledgor  certain  shares of Common
Stock of the  Company,  and has  granted or may in the  future  grant to Pledgor
options to purchase Common Stock of the Company.

               B. As the purchase price for 100,000 shares of the Purchase Stock
(as defined in the  Stockholder's  Agreement),  the Pledgor is delivering to the
Company  the  promissory  note of the  Pledgor  dated  November  15, 1996 in the
principal amount of $500,000.00 (the "Note").

               C. The Pledgor wishes to grant further  security and assurance to
the  Company  in order to secure the  payment of the Note and to that  effect to
pledge to the Company the Stock (as defined in the  Stockholder's  Agreement) to
be acquired pursuant to the Stockholder's Agreement.

                                            AGREEMENT

               NOW,  THEREFORE,  in consideration of the foregoing and for other
good and  valuable  consideration,  the receipt and  adequacy of which is hereby
acknowledged, the parties hereto agree as follows:

               i.            Pledge.

                      (a) As security  for the payment  and  performance  of all
        obligations  of the  Pledgor on the Note,  including  the payment of the
        principal  of and  interest  on the  Note,  and in order to  secure  the
        Pledgor's  obligations  under  the  Stockholder's   Agreement  and  this
        Agreement, the Pledgor hereby delivers, pledges and assigns the Stock to
        the  Company  and  creates  in the  Company a security  interest  in the
        Pledged Securities (as defined below).

                      (b) The  Pledged  Securities  under this  Agreement  shall
        consist of the Stock and all  securities,  certificates  and instruments
        representing   or  evidencing   ownership  of  the  Pledged   Securities
        hereunder,  and all  proceeds  and  products of any  Pledged  Securities
        hereunder, including, without limitation, stock, cash, property or other
        dividends, securities, rights and other property now or hereafter at any
        time or from time


                                                        

<PAGE>



        to time received,  receivable or otherwise  distributed or distributable
        in respect of or in exchange for any or all of such  Pledged  Securities
        including  proceeds  delivered to the Pledgee  pursuant to Section 2 and
        any substituted or additional Pledged Securities required to be supplied
        under the terms of this Agreement.

     ii.  Repayment.  The Pledgor  hereby agrees that at any time if the Pledgor
     shall have received any cash payment or other  distribution  in respect of,
     or upon transfer,  sale or other  disposition  of, the Pledged  Securities,
     then and in each case until the Note is paid in full (including  interest),
     the Pledgor shall immediately deliver to the Company such amount in partial
     or full payment of the principal and interest on the Note.

     iii.  Administration of Security. The following provisions shall govern the
     administration of the Pledged Securities:

     (a) So long as no Event of Default (as defined  below) has  occurred and is
     continuing,  the  Pledgor  shall be  entitled  to act with  respect  to the
     Pledged Securities in any manner not inconsistent with this Agreement,  the
     Stockholder's  Agreement, the Note, or any document or instrument delivered
     or to be  delivered  pursuant to or in  connection  with the  Stockholder's
     Agreement.

     (b) The  Pledgor  shall  immediately  upon  request by the  Company  and in
     confirmation of the security interests hereby created,  execute and deliver
     to the Company such further instruments,  deeds, transfers,  assurances and
     agreements,  in form and substance as the Company shall request,  including
     any financing statement and amendments thereto, or any other documents,  as
     required  under  New York  law and  other  applicable  law to  protect  the
     security interests created hereunder.

     iv. Defaults.  The occurrence of any one or more of the following events or
     conditions shall constitute an "Event of Default" under this Agreement:

     (a) The Pledgor  fails to make any principal or interest  payment  required
     pursuant to the Note within 30 days of the due date therefor.

     (b) The Pledgor  makes or has made,  or  furnishes  or has  furnished,  any
     material written  warranty,  representation  or statement to the Company in
     connection  with  this  Agreement  or the  Note  which  is or was  false or
     misleading when made or furnished.

     (c) Any lien or  encumbrance  other than that created by this  Agreement is
     placed on or any levy is made on the  Pledged  Securities,  or any  portion
     thereof; or the Pledged Securities,  or any portion thereof,  are seized or
     attached  pursuant  to legal  process,  and such lien,  encumbrance,  levy,
     seizure,  or attachment is not removed or released  within thirty (30) days
     from the time such lien or  encumbrance  was  placed  thereon or such levy,
     seizure or attachment was effected.


                                                        

<PAGE>



     (d)  The  Pledgor   commences  or  proposes  to  commence  any  bankruptcy,
     reorganization  or insolvency  proceeding,  or other  proceeding  under any
     federal, state or other law for the relief of debtors.

     (e) The Pledgor  fails to obtain  dismissal,  within  sixty (60) days after
     commencement  thereof,  of any bankruptcy,  insolvency,  or  reorganization
     proceeding  or other  proceeding  for  relief  under  any  bankruptcy  law,
     including,  without limitation, the Federal Bankruptcy Code, or any law for
     the relief of debtors,  instituted against the Pledgor by one or more third
     parties,  fails  to  oppose  actively  such  proceeding,  or,  in any  such
     proceeding  defaults or files an answer admitting the material  allegations
     upon which the proceeding was based,  or alleges its willingness to have an
     order for relief entered or its desire to seek liquidation,  reorganization
     or adjustment of its debts.

     (f) Any receiver, trustee or custodian is appointed by a court of competent
     jurisdiction to take  possession of all or any  substantial  portion of the
     assets of the Pledgor.

     (g) The Pledgor shall fail  generally to pay his debts as such debts become
     due.

     (h) The Pledgor shall effect or there shall  otherwise occur a Transfer (as
     defined in the Stockholder's  Agreement) not otherwise  permitted under the
     Stockholder's Agreement.

               v.            Remedies in Case of an Event of Default.

     (a) In case an Event of Default shall have occurred and be continuing,  the
     Company shall be entitled to vote the Pledged Securities and shall have all
     of the remedies of a secured  party under the New York  Uniform  Commercial
     Code, and, without limiting the foregoing, shall have the right, subject to
     any necessary regulatory  approvals,  to sell, assign and deliver the whole
     or, from time to time, any part of the Pledged Securities,  or any interest
     in any part  thereof,  at any private  sale or at public  auction,  with or
     without demand of performance or other demand,  advertisement  or notice of
     the time or place of sale or adjournment  thereof or otherwise  (except the
     Company  shall give 10 days' notice to the Pledgor of the time and place of
     any sale  pursuant to this  Section  5), for cash,  and credit or for other
     property,  for immediate or future  delivery,  and for such price or prices
     and on  such  terms  as the  Company  shall,  in its  absolute  discretion,
     determine,  the Pledgor  hereby  waiving and releasing any and all right or
     equity of redemption  whether before or after sale  hereunder.  At any such
     sale the  Company  may bid for and  purchase  the  whole or any part of the
     Pledged  Securities  so  sold  free  from  any  such  right  or  equity  of
     redemption.  The Company shall apply the proceeds of any such sale first to
     the payment of all costs and expenses, including reasonable attorneys fees,
     incurred by the Company in enforcing  its rights under this  Agreement  and
     then to the  payment of interest on and  principal  of the Note,  with such
     payments to be applied in the Company's sole discretion.



                                                        

<PAGE>



     (b) The  Pledgor  recognizes  that the  Company  may be  unable to effect a
     public sale of all or a part of the Pledged Securities by reason of certain
     prohibitions  contained  in the  Securities  Act of 1933,  as amended  (the
     "Act"), or in the rules and regulations promulgated thereunder,  but may be
     compelled to resort to one or more private  sales to a restricted  group of
     purchasers who will be obliged to agree, among other things, to acquire the
     Pledged  Securities  for their own account,  for  investment and not with a
     view to the distribution or resale thereof. The Pledgor agrees that private
     sales so made may be at prices  and on other  terms less  favorable  to the
     seller than if the Pledged  Securities  were sold at public sale,  and that
     the Company has no obligation  to delay the sale of the Pledged  Securities
     for the period of time necessary to permit the  registration of the Pledged
     Securities for public sale under the Act. The Pledgor agrees that a private
     sale or sales made  under the  foregoing  circumstances  shall be deemed to
     have been made in a commercially reasonable manner.

     (c) If any consent,  approval or authorization  of any state,  municipal or
     other governmental  department,  agency or authority should be necessary to
     effectuate any sale or disposition by the Company  pursuant to this Section
     5 of the  Pledged  Securities,  or any partial  disposition  of the Pledged
     Securities,  the  Pledgor  will  execute  all such  applications  and other
     instruments  as may be  required  in  connection  with  securing  any  such
     consent, approval or authorization, and will otherwise use his best efforts
     to secure the same.

     (d) Neither  failure  nor delay on the part of the Company to exercise  any
     right,  remedy,  power or privilege provided for herein or by statute or at
     law or in equity shall operate as a waiver thereof, nor shall any single or
     partial exercise of any such right, remedy, power or privilege preclude any
     other or further  exercise  thereof  or the  exercise  of any other  right,
     remedy, power or privilege.

     vi.  Pledgor's  Obligations  Not Affected.  The  obligations of the Pledgor
     under this  Agreement  shall remain in full force and effect without regard
     to,  and shall not be  impaired  or  affected  by:  (a) any  subordination,
     amendment or modification of or addition or supplement to the Stockholder's
     Agreement or the Note, or any assignment or transfer of either thereof; (b)
     any exercise or non-exercise by the Company of any right,  remedy, power or
     privilege  under  or  in  respect  of  this  Agreement,  the  Stockholder's
     Agreement or the Note,  or any waiver of any such right,  remedy,  power or
     privilege; (c) any waiver, consent,  extension,  indulgence or other action
     or inaction in respect of this Agreement,  the  Stockholder's  Agreement or
     the  Note,  or any  assignment  or  transfer  of any  thereof;  or (d)  any
     bankruptcy,   insolvency,   reorganization,    arrangement,   readjustment,
     composition,  liquidation  or the like,  of the Company or its  successors,
     whether or not the  Pledgor  shall have notice or  knowledge  of any of the
     foregoing.

     vii. Transfers by Pledgor.  The Pledgor will not sell, assign,  transfer or
     otherwise dispose of, grant any option with respect to, or mortgage, pledge
     or otherwise encumber the Pledged Securities or any interest therein.


                                                        

<PAGE>




     viii.  Attorney-in-Fact.  The Company or its successor is hereby  appointed
     the  attorney-in-fact  of the Pledgor  for the purpose of carrying  out the
     provisions  of this  Agreement  and taking any  action  and  executing  any
     instrument which the Company  reasonably may deem necessary or advisable to
     accomplish the purposes hereof, including without limitation, the execution
     of the applications and other instruments  described in Section 5(c), which
     appointment  as  attorney-in-fact  is  irrevocable  as one coupled  with an
     interest.

     ix.  Termination.  Upon payment in full of principal of and interest on the
     Note and upon the due performance of and compliance with all the provisions
     of the Note,  this  Agreement  shall  terminate,  and the Pledgor  shall be
     entitled  to the  return  of  such  of the  Pledged  Securities  as has not
     theretofore been sold,  released pursuant to Section 5 or otherwise applied
     pursuant to the provisions of this Agreement.

     x. Notices. All notices or other communications required or permitted to be
     given  hereunder  shall  be  delivered  as  provided  in the  Stockholder's
     Agreement.

     xi. Miscellaneous.  The Company and its assigns shall have no obligation in
     respect of the Pledged  Securities,  except to hold and dispose of the same
     in accordance with the terms of this Agreement.  Neither this Agreement nor
     any  provisions  hereof may be amended,  modified,  waived,  discharged  or
     terminated orally, but only by an instrument in writing signed by the party
     against which enforcement of the amendment, modification, waiver, discharge
     or termination is sought. The provisions of this Agreement shall be binding
     upon the  successors  and  assigns of the  Pledgor.  The  captions  in this
     Agreement  are for  convenience  of reference  only and shall not define or
     limit the  provisions  hereof.  This  Agreement  shall be  governed  by and
     construed  and  enforced  in  accordance  with the laws of the State of New
     York, without regard to the conflicts of laws rules thereof. This Agreement
     may be executed simultaneously in several counterparts, each of which is an
     original, but all of which together shall constitute one instrument.


                                    [signature page follows]


                                                        
<PAGE>


               IN WITNESS WHEREOF, the parties hereto have caused this Repayment
and Pledge  Agreement  to be  executed  and  delivered  on the date first  above
written.


                                    MERIT BEHAVIORAL CARE CORPORATION


                                    By________________________________

                                    Its________________________________


                                    PLEDGOR

                                    ---------------------------------
                                    Terry R. Thompson


                                                        

<PAGE>