EXHIBIT 10.18

# EMPLOYMENT AGREEMENT

The
Employment Agreement dated as of August 30, 2004 (the Effective Date) is by
and between National Medical Health Card Systems, Inc., a Delaware corporation (the
Company), and James F. Smith (the Executive).

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

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

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

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

# AGREEMENTS

Base
Salary 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 material
property of the Company or any other Person, (i) theft, (ii) embezzlement, (iii) fraud,
(iv) misappropriation of material property under applicable law, or (v) wilful
non-disclosure and misappropriation of any corporate opportunity, (b) the arrest or
indictment of the Executive of a crime resulting in material injury to the business or
property of the Company or of moral turpitude , (c) the performance by the Executive of
his duties pursuant to this Agreement in a manner that is to be negligent or (d) the
material breach by the Executive of the Agreement, including but not limited to the
failure by the Executive to follow all reasonable and lawful directions of the Board or
the Chairman of the Company as to any material matter or the taking of any action by the
Executive that would be reasonably likely to cause material injury to the Company or that
would be in conflict with any material interest to the Company, which breach if curable,
shall not have been cured by the Executive within (10) days of receipt of written notice
of said material breach.

Change
of Control means any consolidation or merger of the Company with or into another
company where the Company is not the survivor or the conveyance of all or substantially
all of the assets of the Company to another company or a change of ownership of more than
50% of the Companys common stock.

Confidential
Information means information that is not generally known to the public and that
was 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, including
operating systems, applications and program listings, (g) flow charts, manuals and
documentation, (h) data bases, (i) accounting and business methods, (j) inventions,
devices, new developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (k) customers and clients and customer or client
lists, (l) other copyrightable works, (m) all technology and trade secrets, and (n) all
similar and related information in whatever form or medium. Confidential Information does
not include any information that has been published in a form generally available to the
public prior to the date of disclosure or use of such information. Information will not be
deemed to have been published merely because individual portions of the information have
been separately published, but only if all material features comprising such information
have been published in combination.

Employment
Period has the meaning set forth in Section 2 and Section 5 of the Agreement.

Executive
means James F. Smith.

Intellectual
Property has the meaning set forth in Section 7 of the Agreement.

PBM
Services shall mean, services associated with the prescription benefit
management business, including but not limited to: (i) claims administration, (ii)
establishment and administration of a pharmacy network and benefits, (iii) mail order
pharmacy services (by phone, fax or internet), (iv) drug utilization review, (v) disease
state management and delivery of specialty pharmacy benefits, (vi) formulary creation and
administration, (vii) rebate negotiation and administration, and (viii) therapeutic
substitution programs.

Permanent
Disability shall have occurred if as a result of physical or mental incapacity,
the Employee shall have been incapable of performing Employees essential duties
hereunder for a period in excess of 13 consecutive weeks in any calendar year, or an
aggregate of 26 weeks in any 12 month period.

Person
means an individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political subdivision
thereof.

Reimbursable
Expenses has the meaning set forth in Section 4.5 of the Agreement.

Subsidiary
means, with respect to any Person, any corporation, partnership, limited liability
company, association or other business entity of which (a) if a corporation, a majority of
the total voting power of shares of stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees thereof is at
the time owned or controlled, directly or indirectly, by that Person or a combination
thereof, or (b) if a partnership, limited liability company, association or other business
entity, a majority of the partnership or other similar ownership interests thereof is at
the time owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of the Person or a combination thereof. For purposes of the Agreement, a
Person 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 Persons
are allocated a majority of partnership, limited liability company, association or other
business entity gains or losses or control the managing director or member or general
partner of such partnership, limited liability company, association or other business
entity.

Section
2. Employment. The Company hereby employs the Executive, and the Executive
hereby accepts employment with the Company, upon the terms and conditions set forth in the
Agreement, for the period provided in Section 5.

Section
3. Position and Duties.

3.1
Position. During the Employment Period, the Executive will serve as President and
Chief Executive Officer of Company and will perform such executive and management duties
as may, from time to time, be determined and assigned to the Executive by the Board of
Directors of the Company or its designee.

3.2
Performance of Duties; Other Activities. The Executive shall devote his full and
best 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 duties
and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike
and efficient manner. The Executive shall do such traveling as may reasonably be required
in connection with the performance of his duties and responsibilities hereunder.

3.3
 Reporting. The Executive will report to the Board of Directors of the Company.

Section
4. Base Salary and Benefits.

4.1
Base Salary. During the Employment Period, the Executives base salary will be
at the rate of $325,000 per annum (the Base Salary), plus increases the
Compensation Committee of the Board of Directors approves in its sole discretion from time
to time, which Base Salary will be payable by the Company in regular installments in
accordance with the general payroll practices of the Company as in effect from time to
time.

4.2
Bonus. In addition to the Base Salary, the Executive shall be eligible for annual
bonuses (the Bonus), in accordance and payable with the Companys
Executive Management Bonus Plan.

(a)       
          Executive shall be eligible to receive 75% of Base Salary as an annual cash
          bonus, provided 100% of predetermined performance targets have been achieved.
          Performance targets are established by the Compensation Committee and by the
          Board of Directors of the Company each year. Factors that will typically be
          considered are sales growth, net income, return on equity and new positions of
          leadership created by Executive within the Company. Moreover, Executive may earn
          up to 112% of Executives Base Salary for accomplishing extraordinary
          achievements. For the purposes of this section extraordinary achievements shall
          mean achievement of 150% of Board of Directors predetermined performance
          targets performance or other achievements as determined by the Board of
          Directors in its sole discretion; and

(b)       
          Pursuant to the Companys Executive 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.

4.3
Benefits. In addition to the Base Salary and Bonus described above, the
Executive shall 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)       
          a car allowance in the amount of $600.00 per month; and

(d)       
          A relocation bonus of $5,000 to cover the cost of moving incidentals and other
          out-of pocket expenses; and

(e)    
          reimbursement of relocation expenses as follows:

(i)       
          Full reimbursement for packing and transportation of household goods.

(ii)       
          Provision of temporary housing at one of the NMHC corporate homes located within
          a short distance from the Companys headquarters, for up to six months, or
          longer if agreed to by the Company.

(iii)       
          Reimbursement of house hunting trips for Executive and spouse, to include
          travel, lodging, meals and any other forms of out-of-pocket expenses, consistent
          with the Companys expense policy.

(iv)       
          Full reimbursement for any real estate brokerage commission paid by Executive in
          connection with the sale of his primary residence. However, in the event that
          Executive, for whatever reason, is no longer employed by the Company prior to
          the second anniversary of this Agreement, Executive shall reimburse to the
          Company the amount of the commission paid to Executive or broker in connection
          with this paragraph.

(v)       
          Company shall gross-up reimbursements made pursuant to this
          paragraph (e) if, for federal and state tax purposes, such reimbursements are
          imputed as income to Executive.

4.5
Expenses. The Company shall reimburse the Executive for any and all
reasonable expenses incurred by him in the course of performing him duties under the
Agreement which are consistent with the Companys policies in effect from time to
time with respect to travel, entertainment and other business expenses (Reimbursable
Expenses), subject to the Companys requirements with respect to reporting and
documentation of expenses.

4.6
Employee Stock Options. O>n the Effective Date (as defined
herein), Executive shall be granted stock options of the Company (Initial Option
Grant) pursuant to the Companys 1999 Stock Option Plan. The Stock Option
Agreement regarding the Initial Option Grant is attached hereto as Exhibit A. All Stock
Options granted under this Agreement are intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (the Code),
subject to the limitations of Section 422 of the Code.

Section
5. Term and Termination.

5.1
Term. The Executives full-time employment hereunder shall commence upon the
Effective Date, and, unless renewed or modified by written agreement between the Company
and the Executive, the Employment Period will terminate on the second anniversary
following the Effective Date (the Employment Period) provided, that (a) the
Employment Period shall terminate prior to such date upon the Executives
resignation, death or Permanent Disability and (b) the Employment Period may be terminated
by 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 for
successive additional terms of one (1) year each (upon the expiration of the Employment
Period) unless either party, upon thirty days written notice, notifies the other of its
intention not to renew the Agreement. The renewal term shall be subject to the right of
either party to terminate this Agreement by giving not less than thirty (30) days prior
written notice of termination to the other prior to the commencement of any renewal term,
such termination to be effective at the conclusion of the term or such renewal term.

5.2
Unjustified Termination. Except as otherwise provided in Section 5.3 below,
if the Employment Period shall be terminated by the Company for any reason other than (a)
for Cause, (b) as a result of the Executives resignation, or (c) as a result of the
death or Permanent Disability of the Executive, or (d) if the Company fails to renew this
Agreement as provided for in Section 5.1 (collectively, an Unjustified
Termination), the Executive shall be entitled to receive (i) an amount equal to the
Executives then current Base Salary and the benefits to be provided to Executive, as
set forth in paragraphs 4.1 and 4.4 (a) hereof, for a two (2) year period
(Severance Period) following the Unjustified Termination (Severance
Pay), so long as the Executive has not breached and does not breach the provisions
of Sections 6, 7, 8 or 9 of the Agreement and has executed a release in a form mutally
agreeable to both parties.

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

5.4
Benefits. Except as otherwise required by law, all of the Executives
rights to benefits under the Agreement, if any, accruing after the termination of the
Employment Period as a result of a Justified Termination will cease upon such Justified
Termination.

Section
6. Nondisclosure and Non-Use of Confidential Information. The Executive will not at any time disclose or use any Confidential
Information of which the Executive is or becomes aware, during the term of his Employment
and for two years thereafter, 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 the
Executives performance of duties assigned to the Executive pursuant to the
Agreement. The Executive will take all appropriate steps to safeguard Confidential
Information and to protect it against disclosure, misuse, espionage, loss and theft.

Section
7. Ownership of Intellectual Property.In the event that
the Executive, as part of 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 compromising Confidential Information) or any other form of Confidential
Information relating directly or indirectly to the business of the Company or any
Subsidiary as now or hereinafter conducted (collectively, Intellectual
Property), the Executive acknowledges that such Intellectual Property is and shall
be the sole and exclusive property of the Company and its Subsidiaries, and hereby assigns
all right, title and interest in and to such Intellectual Property to the Company. Any
copyrightable work prepared in whole or in part 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 rights comprised in the copyright herein. The
Executive will promptly and fully disclose all Intellectual Property and will cooperate
with the Company and its Subsidiaries to protect the Companys interests in and
rights to such Intellectual Property (including providing reasonable assistance in
securing patent protection and copyright registrations and executing all documents as
reasonably requested by the Company or its Subsidiaries), whether such requests occur
prior to or after termination of the Executives employment hereunder.

Section
8. Delivery of Materials upon Termination of Employment. As requested by the Company from time to time and upon the
termination of the Executives employment with the Company for any reason, the
Executive will promptly deliver to the Company all copies and embodiments, in whatever
form or medium, of all Confidential Information or Intellectual 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 any Confidential Information or Intellectual
Property) irrespective of the location or form of such material and, if requested by the
Company, will provide the Company with written confirmation that all such materials have
been delivered to the Company.

Section
9. Non-Competition. The Executive covenants and agrees that during his
employment by the Company, and for a period of two (2) years following the termination for
any reason of such employment or for the period of time Executive is receiving severance
or compensation from the Company, whichever is longer, either directly or indirectly,
without the prior written consent of the Company, on his own behalf or in the service or
on behalf of others serve anywhere in the United States as an owner, manager, stockholder
(except as a holder of no more than l% of the issued and outstanding stock of a publicly
traded company), consultant, director, officer or employee of any business entity that
provides, develops or sells PBM Services that are similar to or competitive to those
provided, offered or sold by the Company; and for a period of two (2) years following the
termination for any reason 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 to solicit, 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 the Company, joint venturers, or partners with the Company or parties to which
Company has submitted a proposal to offer any products or services to customers of Third
Party Clients within six (6) months prior to such termination. As used herein, Third
Party Clients shall mean those institutions and businesses whose clients, customers
or members are solicited by the Company for the purchase of PBM services.

Section
10. Agreement Not to Solicit Employees. The Executive covenants and agrees that during his employment by the Company, and for a period
of two (2) years following termination, for any reason, of such employment, he will not,
either directly or indirectly, on his own behalf or in the service or on behalf of others,
solicit, divert or hire away, or attempt to solicit, divert or hire away, to any competing
business any person employed by the Company, whether or not such employee is a full-time
employee or a temporary employee of the Company, and whether or not such employment is
pursuant to written agreement and whether or not such employment is for a determined
period or is at will.

Section
11. Affiliates; Equitable Relief. It is expressly
understood that the provisions and limitations of Sections 6, 7, 8, 9 and 10 above shall
apply to and with respect to any and all Confidential Information, Intellectual Property,
employees and businesses of the Company and any of their subsidiaries or affiliates, as if
such Persons and their Confidential Information, Intellectual Property, employees and
businesses were expressly named and described herein. The Executive acknowledges that a
breach or threatened breach by his of any of his covenants contained in Sections 6, 7, 8,
9 or 10 of the 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 to any remedies which the Company or their affiliates may have at law, in the
event of an actual 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 absolute right to apply to any court of competent jurisdiction for such injunctive or
other equitable relief as such court may deem necessary or appropriate in the
circumstances.

Section
12. No Prior Agreements. The Executive hereby represents and
warrants to the Company 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 any agreement with a former employer, client, or any other Person. Further,
Executive agrees to indemnify and hold harmless the Company and its officers, directors,
and representatives for any claim, including, but not limited to, reasonable
attorneys fees and expenses of investigation, of any such third party that such
third party may now have or may hereafter come to have against the Company or such other
persons, based upon or arising out of any non-competition agreement, invention, secrecy,
or other agreement between Employee and such third party that was in existence as of the
date of the Agreement. To the extent that Employee had any oral or written employment
agreement or understanding with the Company, the Agreement shall automatically supersede
such agreement or understanding, and upon execution of the Agreement by Employee and the
Company, such prior agreement or understanding automatically shall be deemed to have been
terminated and shall be null and void.

Section
13. Miscellaneous.

13.1
Remedies. The Company and the Executive will have all rights and remedies
set forth in the Agreement, all rights and remedies which the Company has been granted at
any time under any other agreement or contract and all of the rights which the Company has
under any law. The Company will be entitled to enforce such rights specifically, without
posting a bond or other security, to recover damages by reason of any breach of any
provision of the Agreement and to exercise all other rights granted by law or available in
equity.

13.2
Waivers and Amendments. The provisions of the Agreement may be
amended or waived only by a written agreement executed and delivered by the Company and
the Executive. No other course of dealing between the parties to the Agreement or any
delay in exercising any rights hereunder will operate as a waiver of any rights of any
such parties.

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

13.4
Severability. Whenever possible, each provision of the Agreement will be
interpreted in such manner as to be effective and valid under applicable law, but if any
provision 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.

13.5
Counterparts. The Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one party, but
all 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 not constitute a part of the Agreement.

13.7
Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of the Agreement will be in writing and
will be deemed to have been given when delivered personally to the recipient, two business
days after the date when sent to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands, and other communications
will be sent to the Executive and to the Company at the addresses set forth below.

|If to Executive: | Mr. James F. Smith 
  417 Wickford Point Rd.  North Kingstown, RI 02852
|---------------- | -----------------------------------------------------------------------

|If to the Company: | National Medical Health Card Systems, Inc. 
  26 Harbor Park Drive  Port Washington, New York 11050 Attn: Jonathan Friedman, Esq.
|------------------ | ---------------------------------------------------------------------------------------------------------------------------------

|With a copy to (which shall not constitute notice:) | National Medical Health Card Systems, Inc. 
  26 Harbor Park Drive  Port Washington, NY 11050 Attn: Joseph Fallarino
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------

Or
to such other address or to the attention of such other Person as the recipient party has
specified by prior written notice to the sending party.

13.8
No Third Party Beneficiary. The Agreement will not confer any
rights or remedies upon any person other than the Company, the Executive and their
respective heirs, executors, administrators, personal representatives, successors and
permitted assigns.

13.9
Entire Agreement.  The Agreement constitutes the entire agreement
among the parties and supersedes any prior understandings, agreements or representations
by or among the parties, written or oral, that may have related in any way to the subject
matter hereof.

13.10
Construction. The language used in the Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rule of strict
construction will be applied against any party. Any reference to any federal, state, local
or foreign statute or law will be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The use of the word
including in the Agreement means including without limitation and
is intended by the parties to be by way of example rather than limitation.

13.11
Survival. Sections 6, 7, 8, 9, 10 and 11 of the Agreement will survive and
continue in full force in accordance with their terms notwithstanding any termination of
the Employment Period.

13.12
Governing Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF NEW YORK.

IN
WITNESS WHEREOF, the parties hereto have executed the Agreement as of the date first above
written.

| |  | NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.BY: /S/ JAMES J. BIGL
JAMES J. BIGLPRESIDENT & CEO
| |  | ----------------------------------------------------------------------------------------------------------

| |  | 
James F. Smith
| |  | -----------------------------

---

# EXHBIT A

STOCK OPTION AGREEMENT made as
of the August __, 2004 between NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC., a
Delaware corporation (the Company), and James Smith (Optionee).

WHEREAS, the Optionee is an
employee of the Company or a subsidiary thereof;

WHEREAS, the Company desires
to provide to the Optionee an additional incentive to promote the success of the Company;

NOW, THEREFORE, in
consideration of the foregoing, the Company hereby grants to the Optionee (the
Grant) the right and option to purchase Common Shares of the Company under and
pursuant to the terms and conditions of the 1999 Stock Option Plan (the Plan)
and upon and subject to the following terms and conditions:

1.       
          GRANT OF OPTION. The Company hereby grants to the Optionee the right and
          option (the Option) to purchase One Hundred Thousand Common Shares
          of the Company (the Option Shares) during the following periods:

(a)       
          All or any part of twenty thousand (20,000) common Shares shall become vested on
          the date hereof and exercisable through the close of business on July __, 2014
          (the Expiration Date). Notwithstanding, the foregoing, the Options
          granted in this paragraph 1(a) shall not become exercisable until the one year
          anniversary of the date hereof. Provided however, if the Executive is subject to
          an Unjustified Termination, the Options granted in this paragraph 1(a) shall
          become immediately exercisable.

(b)       
          All or any part of twenty thousand (20,000) Common Shares may be purchased
          during the period commencing one year from the date hereof and terminating at
          5:00 P.M. on July __, 2014 (the Expiration Date).

(c)       
          All or any part of twenty thousand (20,000) Common Shares may be purchased
          during the period commencing two years from the date hereof and terminating at
          5:00 P.M. on the Expiration Date.

(d)       
          All or any part of twenty (20,000) Common Shares may be purchased during the
          period commencing three years from the date hereof and terminating at
          5:00 P.M. on the Expiration Date.

(e)       
          All or any part of twenty (20,000) Common Shares may be purchased during the
          period commencing four years from the date hereof and terminating at
          5:00 P.M. on the Expiration Date.

2.       
          NATURE OF OPTION. All Stock Options granted under this Agreement shall
          qualify as incentive stock options under Section 422 of the Internal Revenue
          Code of 1986, as amended (the Code), subject to the
          limitations of Section 422 of the Code.

3.       
          EXERCISE PRICE. The exercise price of each of the Option Shares shall be
          ___ ($ ) dollars (the Option Price).

4.    
          EXERCISE OF OPTIONS. The Option shall be exercised in accordance with the
          provisions of the Plan. As soon as practicable after the receipt of notice of
          exercise (in the form annexed hereto as Exhibit A) and payment of the Option
          Price as provided for in the Plan, the Company shall tender to the Optionee
          certificates issued in the Optionees name evidencing the number of Option
          Shares covered thereby.

5.       
          TRANSFERABILITY. The Option shall not be transferable other than by will
          or the laws of descent and distribution and, during the Optionees
          lifetime, shall not be exercisable by any person other than the Optionee.

6.       
          CHANGE OF CONTROL. In the event of a Change in Control (as defined in the
          Employment Agreement), any Options granted hereunder which have not vested as of
          the date of the Change in Control shall automatically vest on such date,
          provided that no acceleration of exercisability shall occur with respect to an
          outstanding Option if and to the extent such Option is, in connection with the
          Change in Control, to be assumed or otherwise continued in full force or effect
          by the successor entity (or parent thereof) pursuant to the terms of the Change
          in Control transaction.

7.       
          INCORPORATION BY REFERENCE. The terms and conditions of the Plan are
          hereby incorporated by reference and made a part hereof.

8.       
          NOTICES. Any notice or other communication given hereunder shall be
          deemed sufficient if in writing and hand delivered or sent by registered or
          certified mail, return receipt requested, addressed to the Company, 26 Harbor
          Park Drive, Port Washington, New York 11050, Attention: Jonathan Friedman and to
          the Optionee at the address indicated below. Notices shall be deemed to have
          been given on the date of hand delivery or mailing, except notices of change of
          address, which shall be deemed to have been given when received.

9.       
          BINDING EFFECT. This Agreement shall be binding upon and inure to the
          benefit of the parties hereto and their respective legal representatives,
          successors and assigns.

10.       
          ENTIRE AGREEMENT. This Agreement, together with the Plan, contains the
          entire understanding of the parties hereto with respect to the subject matter
          hereof and may be modified only by an instrument executed by the party sought to
          be charged.

IN
WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first
above written.

| |  | NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.BY: /S/ JAMES J. BIGL
JAMES J. BIGLPRESIDENT & CEO
| |  | ----------------------------------------------------------------------------------------------------------

| |  | 
JAMES SMITH
| |  | --------------------------

# EXHIBIT A

# NATIONAL MEDICAL
HEALTH CARD SYSTEMS, INC.

a.    
          OPTION EXERCISE FORM

The
undersigned hereby irrevocably elects to exercise the within Option dated
__________________ to the extent of purchasing___________________ Common Shares of
National Medical Health Card Systems, Inc. The undersigned hereby makes a payment of
$______________ in payment therefor.

| |  | 
JAMES SMITH
| |  | --------------------------

| |  | 
ADDRESS
| |  | ----------------------